As the owner of a business, you have two overriding responsibilities and objectives:
- Make sure it’s sellable, and
- Maximize its value.
If you don’t do this, you have a job working for yourself, but you don’t really have a business asset.
For the purposes of this article, let’s assume your business is sellable. You offer decent products and services that people want to buy. You are able to deliver them at a profit. Your people and processes work. Your company is not plunging into an economic abyss. You don’t have an excessive dependence on any one customer, employee, or vendor. There’s no raging litigation and no plume of caustic waste slowly eating its way from your plant toward the earth’s core.
Now what? How do you optimize enterprise value? Only two things matter. Management guru Peter Drucker said it this way: “Because of the nature of business, it has just two functions and only two: Innovation and Marketing. Innovation and Marketing make money. Everything else is just a cost.”
Only two things provide the leverage required to make a case in the marketplace that your business is worth a premium: Innovation and Marketing. The best businesses, the most profitable, the most valuable, the most sustainable, the most enduring businesses are all focused on Innovation and Marketing. These are the businesses that buyers crave and that they’re willing to pay top dollar for.
We’re not talking about Fortune 500 companies, although this is true for them as well. At CrossPointe Capital, our focus is middle market companies with $1,000,000 to $50,000,000 annual revenues, like specialty manufacturers, industrial distributors, design firms, packaging firms, service businesses, sales companies and construction businesses. In other words, companies probably just like yours.
Some people shy away from a discussion of innovation because they automatically assume innovation involves high technology. Not necessarily so. Technology may or may not be involved in the various aspects of innovating your business. Innovation is about consistently making your company better for the benefit of your customers and enhancing the value they receive from doing business with you. Innovation is about improving your business practices so that you set the standard in your industry. Innovation is driven by the quality of questions you ask. For example, explore this question: In what simple, low-tech way might you be able to innovate in regard to your relationships with your vendors, so they support you fully in your efforts to serve your customers? It’s not a trick question, just an example of the kind of challenging inquiry that leads to innovation and to the design of competitive business practices.
There are three main reasons you must innovate your business:
- Customers and Prospects Demand It. This one is obvious. Customers vote with their money. Given a choice, they will buy where they get the best value.
- Competition Necessitates It. This one seems obvious and yet it’s not always so obvious, because there are three kinds of competition: Direct, Indirect and Technological.
- Direct Competitors. These are the folks that you compete against and that want your customers and prospects. 90% of all direct competitors are not much of a problem, assuming you don’t mess up too badly. However, 10% of your direct competitors are a potent threat. The problem is, you don’t always know which competitors are in the 10% you need to take seriously. Things change. Products change, vendors change, staff changes, management changes, motivations change, ownership changes, new relationships form and new tools are developed. So, you must innovate to stay ahead of your direct competitors.
- Indirect Competitors. These are not always easy to see. Indirect competitors are all the various demands and uses of money tugging at your customers and prospects and the alternative ways they have to solve a plethora of problems… besides spending money with you and on the products you offer. So, you must innovate to rise to a place where customers prioritize investing money with you.
- Technology. This is the insidious and most dangerous form of competition. Technology changes the world at a blinding rate. Think about the products, services, businesses and industries that have been severely impacted or that no longer exist because of an advance in technology. Innovate or perish in the face of technological changes.
- Organizations Thrive on Innovation. Innovation is energizing, focusing and fun. People love new things and thrive on learning, growth and new challenges. If you have people in your company that are not learning, growing and challenged, they are “dead” or dying. If people in parts of your company are stagnant, change resistant and low energy, whose fault is it? We say it’s the leader’s fault.
In short, innovation is not optional. To maximize the value and salability of your company, you must innovate constantly in all areas of your business. As you do, your team will be inspired, and engaged, and your business will endure, prosper and grow in value.
Michael Sipe is a local mergers and acquisitions advisor and business coach.