Why did you start your business? Business owners start their businesses for a whole host of reasons. I have come across people who have started their business when they:
- thought they could do better on their own, rather than stay with their employer;
- were made redundant and rather than go back into employment they took a risk and went on their own;
- had an idea to make or do something new and different. A new niche or market encouraged them to take a risk.
For many business owners, that initial reason for starting up is wrapped up with a sense of having more freedom. That could be freedom to make their own decisions, take their own risks. Equally it could be the freedom to work where and when it suits their lifestyles.
Typical Business Owners
Unfortunately, for far too many business owners, that freedom doesn’t come in big measures. That work / life balance is always round the next corner. There’s never enough money to buy free time. The business demands more time and effort than expected. That freedom to make decisions turns out to be regularly reacting to problems that seem to get in the way of growing the business.
And that probably describes the world for many business owners, call them ‘typical owners’. Especially with COVID and a recession, they are aspiring just to survive.
Value Builder Owners
But there are some business owners who aspire for more. The research done by the folk at The Value Builder System, shows there are owners, let’s call them ‘value builders’, who apply 9 principles of business that build solid companies and personal wealth. I’ve been looking at those principles in greater detail over my last few blogs.
The first six principles were:
- Start with the end in mind
- Prioritise value over revenue
- Own your product
- Protect your equity
- Win subscribers not customers
- Build a business that runs without you
- Sell a few things to many
- Run your business like it’s a public company
Principle 9: Leave some market share for the next owner
If running a business were a sport, it would be a marathon: a long slog with lots of twists and turns before the eventual finish line. Most founders end up dragging their tired bodies across the finish line and forget that there is a buyer on the other side of that trade that is starting their marathon.
Value Builders know the buyer is beginning the race and must be enthusiastic about the future to commit to the pain of running the course. The buyer needs to know the outlook is bright for your business and that plenty of future opportunity remains untapped. Most small business owners think market share is desirable, but bigger is not always better.
In fact, there is a point where too much market share can dilute a company’s value because acquirers will reason that there is little left to harvest. Therefore, the Value Builder Business Owner often sells earlier than expected.
Applying This Principle
You may recall me talking about a client of mine, Steve Quinn, who sold his school catering business, Cucina, a few years ago. The business got up to 70 schools in the UK, a tiny player in the schools catering market. There were more schools that would appreciate Cucina’s offer. Yet Steve didn’t keep grabbing market share. He’s an entrepreneur and knew that there were other people who could take the business to another level. So, he worked with a fund manager and a strategic partner to set up the Impact Food Group. He exited the business and has left the new business to keep growing the unique school catering offer he started years ago.
Another Business that left market share behind
Following the Sarbanes-Oxley regulations, Wellington, New Zealand-based Rod Drury realised those big companies would have to do a much better job archiving their email, so he started a company called AfterMail. The business helped Fortune 500 companies archive their corporate disclosures after the introduction of Sarbanes-Oxley made keeping accurate electronic records a matter of law.
Drury convinced two Fortune 500 customers to buy his software, each paying around a million dollars. With revenues of $2 million and a proven product, many business owners would have been keen to build a big business to sell to the other 498 companies on Fortune’s list, all of which needed AfterMail due to the new legislation.
But Drury is a Value Builder and knew that to maximize value, he must show a buyer how they would win from acquiring his company. Drury approached Quest Software, which had virtually all of the Fortune 500 as customers already. He argued that since they already had the relationships and the new legislation required large enterprise organizations to use software like AfterMail, they should buy his company. Drury sold his little $2 million business for $35 million — an outlandishly good multiple, even for a Value Builder.
You can hear Rod’s full story in this interview from John Warrillow’s Built to Sell Radio, a regular podcast revealing the stories and advice of business owners who have sold their businesses. To hear the full interview, click here.
So, are you building value in your business?
Consider the 10/40 rule. Size the potential market for your existing offerings and estimate your current market share. Consider exiting when your market share exceeds 10% (proof of “product/market fit”) but is no more than 40% of the total addressable market.
You can also take the value builder assessment to see where you are in your business now and identify where you need to make improvements.
In the meantime, please get your free copy of the eBook, Famous Or Rich: 9 Ways Value Builders Prioritise Wealth Over Recognition.