What is a high-value self-managing business in the first place? It is a business that virtually runs itself or can survive for months without a significant amount of your time (as the business owner) and effort. The vast majority of businesses are not in this fortunate position, they require significant input on a daily basis from the owners.
There are effectively two classes of business:-
- Owner-Centric Businesses.
The vast majority of small businesses are built around the owner of the business and require a significant amount of time and effort from them to operate effectively. These are what I call ‘owner-centric’ businesses. There are a number of reasons why this happens but the most common reason for this is the lack of trust.
- They don’t trust their staff to deliver to their customers the same level of quality (product, service or experience) that they themselves would do.
- They don’t trust their ability to get enough customers on a consistent basis to justify having staff in the first place.
- They don’t trust the future to be consistent in delivering as the past did.
- They don’t trust ideas that are developed by others.
In Owner-centric businesses, it is the owner that dictates how the business operates and ultimately how successful the business is. The problem with this is that if the owner is removed from their central role for a period of time then the business starts to deteriorate. Customers no longer receive the level of service they have become accustomed to, new customers or clients are not onboarded properly and basic business administration is not conducted (e.g. the books are not kept up to date, suppliers may not be paid on time, etc). The whole business ends up in a downward death spiral. This is why owner-centric businesses are worth considerably less than comparable system-centric businesses.
- System-centric businesses.
In system-centric businesses, it’s the systems in the business that operate the business and are responsible for its success of the business. If you have marketing systems that automatically generate and close leads. An operating system that delivers the products or services in a consistent manner. A finance system that automatically monitors the financial performance of the business and a management system that manages the people in your business, the systems in your business and the time in your business. Then the business owner has no need to be central to all the business processes. They can withdraw from the business for a period of time with no detrimental effect.
These businesses are far more valuable than comparable owner-centric businesses because they can be bought and operated without the ongoing commitment of the previous owner. A win-win scenario for both the exiting owner and the new owners, who get to operate the business in a manner of their choosing.
- High Maintenance Low-Value businesses.
A high maintenance low-value business is a business that is both owner-centric and not very profitable. These businesses are typically 1-2 people businesses where they operate with very low margins and a high level of involvement from the business owner. The business owner has to keep operating at a maximum intensity just to stand still. A period of illness or other reasons causing them to be absent from the day-to-day operations leads to significant difficulties for the business and potentially for them personally. This is the worse of all possible positions to be on this matrix. The business has no value other than any fixed assets it may have.
- High Maintenance Higher-Value businesses.
A high-maintenance higher-value business has very similar properties to the last category (high maintenance low value) with the exception of operating in an environment where they have higher margins. The problem for this type of business is that although they have higher margins the business owner does not really get to enjoy the privilege of those higher margins as they are on the proverbial coal face the whole time. I met a plumber who had just an apprentice as an assistant and turned over £130,000 per year (with a profit margin of 60%). In order to do this he worked nearly 70 hours a week and allowed himself just 1 week off a year. No life for anyone I think you can agree. Unfortunately, he’s not a unique example. Many small business owners are stuck in the same position. Again the value of the business is limited to the fixed assets in the business and perhaps a customer list.
- Low-Value Self-Managing.
A low-value self-managing business is one that is well-systemised but operates in a low-margin environment. So although the business functions are automated the profits of the business are low. There is also a lack of future-proofing in this business class, which impacts the value the owner could realistically expect upon a sale. Surprisingly a lot of technology businesses sit in this class. As the technological barriers to entry fall more competitors enter the field and margins are squeezed leading to poor profitability.
- High-Value Self-Managing.
A high-value self-managing business is the nirvana that all business owners should seek. The business will run on automatic delivering a good return to the owner. Very little or no input is required from the owner for the day-to-day management/operations of the business. The owner has the luxury of focusing on the future of the business which is not at the expense of the day-to-day operations. When it comes time for the owner to exit the business they can achieve a good return on their investment. The valuation of the business will be considerably higher than other companies in the same sector that are not as systemised as them. This is because they are more desirable. Let’s be honest as a purchaser of a business you’d be prepared to pay more for one that delivers a predictable and consistent profit that doesn’t require significant day-to-day management from you as the new owner.
Five reasons why you should spend time building a high-value self-managing business.
- They are easier for the business owner to manage and run. You’re not tied to the business 24/7.
- They are less stressful for both the business owner and the staff employed by the business. This means that they are more enjoyable to work for.
- They are more profitable. The nature of systems is that they tend to be a lot more efficient than random operations relying upon human interaction.
- They are better at delivering consistent customer service and satisfaction.
- All of the above means that these types of businesses are more desirable and therefore more valuable to potential purchasers. Hence the title of High-value self-managing businesses.
If you’d like to know more about how to create a high-value self-managing business then the first step is to take a look at our course on the 5-step profit formula. You can check that out here.