Independence Drives Value
Independence Drives Value
We will sometimes refer to one of the drivers of value for your business as the Switzerland Structure. What is the Switzerland Structure?
Well, in short, as history shows, Switzerland as a country has had this almost obsession with independence on a global scale (until very recently).
This name, this driver of value, is used to define how (in)dependent your business is on any one customer, employee, or supplier.
The businesses that do the best on the Switzerland Structure attribute have found a way to remain INdependent, like the country of Switzerland, from any one of those key stakeholders.
They don’t have an over-reliance on a single customer.
They are not too dependent on a single employee.
They are also not too dependent on a single supplier.
So the valuable companies we see are the ones where the owners, for example, are not the ones dealing directly with just a few customers. In fact, the inverse is true. The most valuable companies that we see are the ones where the owners actually have no personal relationships with the customers because they have good customer diversification. They have hundreds of customers, not dozens of them.
So if we go back to the statistics, we know that the average multiple offered to the business that has gone through the Value Builder scoring assessment is 3.76 their pre-tax profit. but when we isolate those that know each of their customers by the first name, those companies are getting a significant discount – 2.92.
Again, if you know each of your customers by their first name, it is going to be very difficult to extract that business out of the hands of the owner. An acquirer is going to look at that and say “it is too dependent on this one employee, the owner, and there is just a handful of customers, there is too much customer concentration, and too much employee dependence," so it is going to perform low. If you look at those businesses where the owner rarely gets involved in dealing with a single customer, in other words, there is lots of customer diversification, and the owner isn’t personally managing those customers, those businesses are getting much higher values.
A good rule of thumb here is any one customer that accounts for 15% or more of your overall revenue, is too dependent on that customer. So here, you can take your overall revenue, break it down by customer and see if there is an over-reliance on any customers you may have.
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