People start their own businesses to be in the driving seat, to take control. They are their own boss. However, this may be deceptive, because if they have allowed their business to develop in certain ways, they may find that, due to its structure, true control of it is no longer in their hands.
This means the business has, at its heart, a structural weakness, because it has developed key dependencies which, effectively, take it out of the owner’s control.
“If you come to value your business so you can sell it on, you might find that your one key customer or supplier will be the thing that means you’ll fail to achieve the price you’re looking for,” points out Paul Dodgshon of Uscita Solutions.
“What if you lost your biggest customer, your key client, or your most important supplier? What would your business look like then and how would it survive?
Eggs in One Basket
Some risks are easier to identify than others. Many SMEs trade on relationships with just a few customers or suppliers, or even just one.
What if a business has all of its eggs in one basket?” Paul asks. “If you’re looking at what that business is worth, you’re going to look at whether it’s structured in such a way that it controls risk, or if its position is potentially precarious.”
“This happens in food manufacturing, for example,” offers Paul, “where a supplier wins a contract to supply one sizeable retailer.”
“What happens is that the business builds itself to meet this demand,” Paul continues. “But what happens if the retailer suddenly scales down its order, or seeks an alternative supplier?”
It can also happen in the supply chain, where a business depends on one key supplier, to the extent where essentially the supply chain controls the business.
Adapt to Build Business Value
“For a business to build value, it must be structurally sound,” Paul explains. “Where a structural weakness shows up from the business being too dependent on one customer or supplier, this will ring a potential buyer’s alarm bells.”
“The implications are far-reaching,” he says. “If you’re not diverse enough, you won’t have an alternative strategy, should your key customer or supplier relationship break down, or end”.
“Relationships with customers or suppliers are crucial, but build more of them, rather than focusing on just a handful.”
“Any buyer of a business will look at its potential for growth, which is why it is vital to address any issues around over-dependency on customers or suppliers earlier rather than later”
“Just because your one key relationship works now doesn’t mean it’ll always work,” Paul concludes. “You only build business value by ensuring you have a robust but adaptable structure.”