Nov 20, 2024 | Communication, Management, Strategy
When thinking about selling your business ensure you spend time and effort identifying the intangible components that could contribute up to 90% of the value of the sale
Almost 6 years ago I wrote a post that identified intangible value at 87% of the Standard and Poor’s index. An update to that index done by Ocean Tomo now puts the number at 90%. While this is a small increase only, it is off an extraordinarily high base, and the index is based on 2020 numbers. Given the run of technology stocks over the last couple of years, I hazard a guess that the number is now well over 90%. It is the last 10% that is, as everyone knows, the hardest to capture.
This is a considerably greater percentage than the other major stock market indices. For example the European S&P at 75%, Shanghai Shenzhen index is at 44%, and the Nikkei sits at 32%.
This wide disparity comes from the makeup of the indices.
The US S&P top ten contains nine technology businesses the outlier being Berkshire Hathaway. In order, on Nov 16, 2024, the top ten and their share of the index is:
NVIDIA 7.2%. Apple 6.8%, Microsoft 6.2% Amazon 3.8%, Meta 2.5%, Alphabet 2.1%, Tesla 1.8%, Broadcom 1.7%, Berkshire Hathaway 1.7%.
Even amongst these behemoths, there is a strong skew to the top three. This top ten constitute 35.4% of the total value of the 500 companies in the S&P index. The Pareto Principle at work, again.
The trend is also clear amongst the other major indices. From much lower bases, they are all heading towards the increasing valuation of intangibles in the total value of their stock.
Ignoring this trend and failing to respond is leaving money on the table.
Over the last few years, I have consulted on several projects where small businesses have been sold. In each case, the sale has been made at a considerable premium to the standard industry multiples that would usually be applied. The driver of the premium has been the effort put into identifying and articulating the value of intangibles to the purchaser. I’ve called it finding the ‘Rembrandts in the roof’, a phrase I picked up somewhere after reading of a dusty Rembrandt was discovered and authenticated in the roof of an old house in Amsterdam 30 years ago.
Are you actively looking to identify and quantify your hidden Rembrandts?
Nov 15, 2024 | Governance, Leadership, Management
We tend to think that the person on the top of the pyramid has the power to do whatever they wish within the boundaries of reason and the law.
To some extent this is true but there remains only five tools they can use.
Volume.
Price.
Costs.
Culture.
Strategy.
Everything in a business stems from these five fundamental tools when they are focused laser-like on customers..
A leader that has at their fingertips a few simple metrics that reflect these five tools, and focuses attention on the drivers will be successful.
The first three are quantitative. The fourth, culture, is much harder to define quantitatively. However, there are measures that will deliver insight, such as staff churn, Surveys into items such as psychological safety, diversity of training, thought, and experience, and team collaborative success.
Strategy is also qualitative, in that it cannot be measured except in hindsight, by which time, it becomes useful only as a lesson, and driver of future strategic choices.
The combination of culture and strategy, when they are mutually reinforcing, and aligned is a potent combination, that drives the quantitative allocation of resources, measured in outcome by revenue, price and costs.
Header generated by the newest shiny thing in a subsection of the toolbox: AI.
Nov 7, 2024 | Analytics, Management, Marketing, Strategy
How do you anticipate the reactions of competitors to your initiatives?
First you must understand them holistically and well. The better you understand them, specifically the strategic and tactical frameworks they work with, the better able you will be to anticipate and respond. You should also reflect on the leadership of your competitors, as their behaviour drives their decision making.
11 questions to ask yourself and your team:
- Will they react at all?
- Will they see and understand the strategic and tactical drivers of your actions?
- Will they feel threatened?
- Will mounting a response be a priority?
- What options will they actively consider?
- Do they have the right mix of resources to respond meaningfully?
- Which option are they most likely to choose?
- How many moves ahead do they look: do they play draughts or chess?
- What metrics do they use that will influence their decision making?
- What are the lead times required to respond effectively?
A final and key question in this volatile environment that is often missed:
- Who might emerge to be a competitor, who could change the dynamics of your market that currently would not be classed as a genuine competitor?
Commercial history is littered with failures to see the possibility of a disruptive new competitor emerging from left field.
Anticipating competitor reactions to your initiatives is a competitive superpower.
It enables you to strike at their weak points, and repel their advances at minimum cost to you, while having them consume resources for no result.
The downside of focusing on competition is that your customers do not see the world as you do. They are looking for the supplier who best addresses their need, solves their problem, or scratches their itch.
Those who spend their time looking over at their competition are risking taking their eyes away from their current and future customers. Lose sight of your customers, and one way or another, you will be eaten!
Oct 21, 2024 | Lean, Management
Seeking highly efficient processes is the holy grail of most operational managers.
Is it the right goal?
‘Garbage in.. Garbage out’ still applies, even if the garbage gets a slick coat of paint on the way through.
The process as implemented might be efficient, optimised, but does it deliver the outcome in the most effective way?
A typical example is from a while ago when the NBN was (compulsorily) connected.
The technician turned up just within the time window, to do the connecting work, and did it quickly and it seemed, efficiently.
After about 45 minutes, he informed me it was all done, all I had to do from there was connect up the modems around the house.
When I expressed surprise, that until everything worked, the job was not complete, I was told: ‘Not my job, I have 7 connections today, and I am behind by almost an hour’.
Clearly there was an optimised process of installation by NBN subcontractors in place, the final few feet being the responsibility of the retailer. However, as far as I was concerned, I had paid the compulsory $172 for ‘connection’ and it was not complete until everything worked.
It may have been an efficient process from the perspective of the NBN, but from the perspective of someone who had paid for a service, it sucked.
The technician was prevailed upon to ensure that the job was complete, to my eyes. The problem for him was he failed to meet the stupid KPI imposed by someone seeking an efficient process, rather than one that optimised the outcome.
Header image is obviously courtesy of AI, and is therefore not optimised by a human.
Aug 8, 2024 | AI, Management
AI promises a multitude of productivity benefits for all enterprises.
For the thousands of SMEs competing with much larger rivals, AI offers the potential for easily accessible, reliable, and credible data on an unprecedented scale.
One such opportunity lies in market research, which has often been out of reach for SMEs due to its high cost.
AI systems are sophisticated probability machines. Given a base to ‘learn’ from and a set of instructions, AI can predict the next letter, word, sentence, illustration, piece of code, or conclusion. Feed it the right data to learn from, prompt that ‘learning’ with instructions, and the probability machine goes to work.
‘Synthetic data’ is the analysed outcome of a well-articulated AI search for relevant data from publicly available sources, potentially enhanced by data from a company’s own resources.
For instance, an FMCG supplier might need ‘attitude and usage’ research to support ranging of a new product in major retailers. Traditionally, they might spend $100-200k on a combined qualitative and quantitative market research project, which could take several months to complete.
Way out of the reach of most SME’s.
Alternatively, they could invest $15-25k in an AI application to scan social media, relevant publicly available statistics, and their own sales and scan data. This AI-generated ‘synthetic data’ might not be quite as accurate as a well-designed and executed market research study. However, it could be produced quickly, relatively cheaply, and be sufficiently accurate to provide compelling market insights and consumer behaviour forecasts.
Suddenly, opportunities previously out of reach for SME’s can be leveraged. Combined with their shorter decision cycles and less risk averse nature, SME’s now have the potential to haul back some of the ground they have lost to deeper pocketed large businesses.
Header illustration is via a free AI tool. it took less than 30 seconds to brief and deliver.
Aug 5, 2024 | Management, Operations
A phrase I am hearing a lot in conversation with my networks is: ‘this business model is capital light‘. It seems to most aspiring entrepreneurs this is preferable to ‘Capital heavy’, for the obvious reason that the upfront cash at start-up is less. However, while useful, it also is only one way of looking at a business model and its associated strengths and weaknesses.
Capital-intensive businesses have high fixed costs compared to variable costs, making them vulnerable to a slowdown, as they are very volume sensitive. Their breakeven point is higher than businesses less capital intensive. However, once they reach that break-even point, most of the rest is profit.
The obvious contrast is between an oil refinery or steel-making plant, to an accounting or law practice. The former needs considerable capital deployed before there is any consideration of the labour, management, and raw material required for conversion. The latter requires just offices and capable personnel.
In effect, Capital Intensity is a measure of how many dollars of capital are required to generate a dollar of sales?
Capital intensity requires that the assets be procured in order to be operational. This can be a mix of cash retained from earnings, or available from shareholders, loans, or ‘outsourcing’ manufacturing to a contractor who has, or will add, capacity for ‘rent’. An additional source is from suppliers so long as your debtor days are less than your creditor days, in which case, your creditors are in effect adding to the funding of your business.
Often you will see the term ROCE or Return On Capital Employed in financial reports. This is simply the ratio of profit to capital. If you generate $1 in profit for every dollar of capital, you will have a capital efficiency ratio of 1:1.
It is a useful macro measure of the efficiency of the capital used in the business, just as it is a valid calculation of the efficiency of a machine: Revenue/Capital cost of the machine.
Successful businesses use capital to generate revenue and profits, the more successful you are, the better you have used the capital deployed.
How much capital is required to generate your profits?
How to Calculate Capital Intensity
The capital intensity formula is:
Capital Intensity = Fixed Assets / Total Revenue
Example
Imagine a company has $100,000 in fixed assets and $1,000,000 in total revenue. The company’s capital intensity would be: $100,000 / $1,000,000 = 0.1
This means that the company needs 10 cents of capital to generate every dollar of revenue.
Increasingly, the capital required early in the life of a business is reducing as digital technology evolves, removing the capital requirement as a barrier to entry to many industry segments. This is leading to a transfer from capital intensive to ‘technology intensive’, which is in turn becoming increasingly complex and expensive as technology evolves at an accelerating rate, and the business cycles become shorter.
As the old saying goes, there is never a free lunch!
