In the book “Built to Sell” John Warrillow explains how approaching your business as if you’re going to sell it will help you to maximize the value of it- regardless of whether you actually intend to sell the business.
Pretend for a moment that you were going to try and sell your business within the next quarter. What would you change?
It’s like getting divorced- all of a sudden you’re on a diet, in the gym, and doing all sorts of stuff that would have kept you from getting divorced.
If you were going to sell, it’s a safe bet that you would clean house:
- Updating systems
- Updating SOPs
- Reevaluating your employees, costs, customers
- And seeing what changes you could make to improve your value
All of this in an effort to appear more valuable… really to be more valuable to a buyer.
The thing is:
The opportunity to be more valuable was always there.
And, as we established in Profit Isn’t the Bottom Line, profit is simply the capture of excess productivity in value creation.
Which means the opportunity to be more profitable has been there too. And by not capitalizing on it you’ve been leaking profit, a loss that compounds as time passes.
This process of cleaning house is largely about efficiency (explained further in The Profit Window.)
Getting more efficient in creating value comes down to getting clear on the value being created and then either mitigating or reinforcing the resources that produce it.
How to Think About Profit in Your Business
Value is Your Paint
Value is to an entrepreneur what paint is to a painter.
You need to have a deep understanding of what customers’ value and what you value in order to identify opportunities to create an excess.
Your Resources Are Your Brushes
There are resources within your business that produce value for you and your customers:
- Physical assets
- Digital assets
- Intangibles (trust, insight, warranties, access, status, etc.)
These are your instruments of value production: like a painter’s brushes.
You Might Be Spending Money Creating Anti-Value
Resources have three kinds of effects in producing value. This can be individually or with other resources as a compound effect.
The three effects:
- They can create a net addition of value in relation to their cost.
- They can create a net subtraction of value in relation to their cost. This is waste.
- They can subtract value on top of their cost. This is anti-value.
This is a bit fractal, as it reflects the overall state of the business’s profitability (profitable, losing value, creating anti-value.)
Examples of the 3 Value Effects
When you understand the value you create, you can survey your resources to evaluate what they’re producing.
An Example from My Business:
We all value cash as entrepreneurs.
In my agency, the lion’s share of cash is created by doing profitable projects and through a support subscription service we offer.
For the support service specifically, what resources produce the most cash are:
- Our marketing pipeline
- Our ticket system
- Our skilled development team
Resources that don’t contribute to this, i.e. waste:
- Service/software subscriptions we don’t regularly use to generate value.
- Marketing that doesn’t deliver both attention and trust.
- Employees that fail to reliably deliver or that don’t substantially contribute to delivery.
- Experiments that haven’t delivered, but are continuing to run without being pivoted or cancelled.
Resources that create anti-value:
- Employees that cause problems for our clients.
- Saving bad fit customers from their mistakes or failures (taking on huge problems and capping their costs because they can’t afford it.)
2 Strategies to Apply to Engineer Profit
You want to squeeze as much value as we can out of the resources that provide them.
There are two strategies to apply to your business system:
We want to reinforce and strengthen resources creating net value and mitigate those that create net waste or anti-value.
Profit is Hidden at The Intersection of Your & Your Customer’s Value
To this point, we’ve only thought about value through one lens- the value created for us.
But business produces value in two ways:
- Value created for you.
- Value created for your customer.
The intersection of these provides a spotlight on opportunities to reinforce or mitigate your resources.
Above, I gave an example of resources for my business creating net value, net waste, and net anti-value using a list.
This is fine at a high level. But when you dive deeper into how resources produce value it’s best understood through a process visualization because you can see the relationships between your resources.
As an example, the above is how our ticket system (resource) produces value for us and for our clients.
From top to bottom:
- Clients need help
- They send an email
- Which creates a ticket
- One of our devs works with them to solve their problem
- This goes into a monthly report
- Which also pulls in maintenance statistics for the month, metrics, and suggestions.
For us, the primary forms of value we receive are:
- Cash. This is a result of the labor cost / # of customers x the average price point.
- Cashflow stability. This is a ratio of labor cost / subscription revenue.
For customers, the forms of value they receive are:
- Access/availability of skilled help whenever they have a problem
- Quick responses when they need help
- Site stability
- Cheaper skilled help than hiring for it
When you overlay the intersection of these two over the process, you come up with questions like:
Do we even need to do monthly reports? Do clients read them or open them? If we do, how comprehensive do they need to be? Could we automate them? (Mitigation)
How could we maximize the number of clients a developer supports (our cash & stability value) without lowering response time (client access / quick response value) (Reinforcement)
Could we raise average prices without losing customers? (Reinforcement)
Could we subcontract maintenance at a cost savings? (Mitigation)
How could we increase the perception of response speed for customers without adding cost? Is a ticket system the best solution? (Reinforcement)
There is a More Profitable Version Hidden Within Your Business
I made the comparison to painting with value and resources, but really this process has more in common with sculpture.
You’re taking away what doesn’t work and adding more of what does to create a highly optimized form of your business.
That perfect form is hidden, but it’s there.
There is an apocryphal story attributed to the artist Michelangelo. Someone asked him about the difficulties sculpting David and he replied, “It’s easy. You just chip away everything that isn’t David.”
That wasn’t really Michelangelo, but he did say something close:
“The best of artists has no conception that the marble alone does not contain within itself.”
Featured image source: https://en.wikipedia.org/wiki/David_(Michelangelo)#/media/File:Michelangelo’s_David.JPG User: https://commons.wikimedia.org/wiki/User:MarcusObal Shared & modified under CC 3.0