Resilience Talk

Welcome to Resilience Talk hosted by
Paul Spencer of Second Nature Solutions.

Let's dive in.

Paul Spencer: The next topic for the
ownership series is key dependencies.

If you think about what we've talked
about so far, financial performance and

growth potential, we've talked about how
as an owner, it's important to be thinking

about how we're performing financially and
having a rhythm and a process in a mature

way of, um, evaluating our financial.

Prowess, but then also understanding
what is our growth potential.

All within the mindset, which is
the point of this whole series, is

that as an owner, I own an asset, so
I'm not just running the business.

I don't just have a job.

I'm not just doing a hobby.

Anything that I'm doing as part of a
business, as an owner is the aim is for

me to create an asset, and that's the,
that's the point of this conversation

is to get you to start thinking
about building value into your asset.

So we've talked about eight different
aspects that we can be evaluated or are

called key evaluators that a third party
may be using to come in and basically

do an appraisal of your business.

Now these eight aren't the.

Only eight.

Um, some of these will overlap
with some of the things.

If you do a Google search or if
you go out and you talk to chat

GPT or Claude, you'll get a, you'll
get a mix of some of these things.

These are the ones that I've learned
through through my networks, and we're

just gonna review 'em real quick.

The first one is financial performance.

The second one is growth potential.

The third is key dependencies.

The fourth is recurring revenue.

The fifth is right to win, which
basically means that I am a,

uh, player in my market, and so
people choose me over others.

The sixth is corporate structure.

The seventh is key management
and leadership, and the

eighth is owner involvement.

And we'll be going through all of these
through this, uh, through this series.

Today we're gonna focus on key
dependencies, and what that means

is how dependent is your business?

Is your asset on any one employee?

Or supplier or customer, maybe
even, um, a certain product.

And what that means is how malleable,
how fault tolerant is your business.

Now we talk a lot about with key,
um, not key but imposed inputs.

So when we, when we have an
awareness of the system and we know

that sales has inputs, has leads.

Has potential customers,
has budgets, client budgets.

Those are inputs that come into
my system as a salesperson.

And then my salesperson has a process.

And what comes out of that process
would be a closed deal, right?

A new customer revenue, a signed
contract, maybe some legal documents.

Those inputs then go into service.

Or into our product.

And then there's a delivery cycle, right?

So we know that as part of awareness
and when we're thinking about

the inputs, we have chosen inputs
and then we have imposed inputs.

And the chosen ones are, uh,
let's use the sales example.

A chosen input in sales
would be our ideal customer.

We serve, uh, this particular customer
because we enjoy, um, their behaviors,

their attitudes, the type of.

Service that they thrive on or that
they want or they enjoy fits right

in exactly into the type of product
or service that we provide, as

opposed to this customer does not
fit, and we constantly are at odds.

Perhaps the quality or maybe, um,
wanting to change our service or

maybe our values are different.

And so we're always kind of going
at, we're at odds with each other.

That is not an ideal customer.

We get to choose who our ideal
customer is, and we may start over

here where we don't have the, the
best relationship with our customers,

and we learn that, you know what?

Based on how we're interacting and
the, and the services and products

that we're, we're providing.

It's not a match, but if we were to
tweak this and this about our customer,

we would get a more ideal customer.

That is the flow of a chosen input.

Right?

An imposed input is one
where I don't have a choice.

So, um, one that we always
bring up is the weather.

So if we build houses, we're a residential
contractor, uh, developer, if it

starts raining, there's only a certain
amount of things that we can do in

the rain, and that's an imposed input.

And we cannot change the weather.

Now maybe we can build
structure to build a house.

Over our development so that it's
shaded and so that there's, the

weather elements don't, but that's
probably counterproductive, right?

So it sits in the inpost input.

So why do I bring all this up?

Because a key dependency can be
from a buyer's perspective, an

imposed input into your business.

So let's say that you have.

A key production manager who has been
with your business for 15, um, 20 years.

They know the business inside and out,
and they're really good at what they do.

Lots of experience.

Um, they know your customers, they know
how to run all the tooling in the shop.

And what happens as a, as a key dependency
is that if that, and when that person.

Takes any significant time off, we have
a significant drop in either quality

or speed of delivery, or maybe both.

And that's a well-known
thing in our business.

Um, but it doesn't really matter much.

Or we haven't thought that it
mattered much because John is a,

is a dear friend of the family.

He's, uh, really good and loved within
the business and with all the employees,

and the guy just never takes time off.

Why would he?

He loves his job.

He loves what he does.

And he may take a, a Friday off
here and there, but most times

he's here 24 7 because he loves it.

And so we've never even had to
address the issue that when he is

out, 'cause we've had ex experience
times when he's been sick or he's

taken a, a longer, uh, vacation.

So then we, uh, we've noticed
these things, but we haven't.

We haven't spent any time to address it.

That is an imposed input
to an own, uh, to a buyer.

To you.

It's not that big of a deal for me.

If I'm gonna buy your business and John
is the only one who could really dev,

deliver quality and speed of delivery for
your product, then that's a risk for me.

What if I buy the business and John, who
I've already described as a dear friend

of the family says, I'm gonna retire.

Right.

That's, that's a perfect, uh, insight
into an imposed input, which in this

case we're calling a key dependency.

So we, we may have
several, or one, or two.

Typically we have one, two, or
three key employees within our

business that match everything
that I just described about John.

And so we need as owners and as our asset.

As we're building value into our
asset, we need to be aware of that.

And so, uh, we're not gonna push John out.

We're not gonna force him to retire.

We're not gonna, uh, do any of
those, uh, what we would say

manipulation or mean-spirited things.

But we're gonna start strategically
planning for how do we add more

capacity in the pro, in the,
uh, product management side.

Right.

And uh, and so then we starting to
create a little more fault tolerance

and what we're essentially doing
in when we're aware of our system,

right, aware of our how our.

Processes are connected.

We are starting to move that
imposed input into a chosen input.

And from a buyer's perspective,
again, I am adding value to my assets.

So when a buyer comes in and knows
that we tell, we tell them about John.

A key employee, he's really awesome.

Does whatever he does, um, and we
love what he does and we've got

processes built around him and he
has an apprentice, or he has a team

that works very closely with him.

And when John is out for a
week or two, that team is

able to do whatever John does.

That is a chosen input and that reduces
the key dependency on the employee.

Super important.

When you're able to say what I just
said, because you are strategic

about understanding key dependencies,
especially with employees.

Specifically with employees, you
are adding value to your business.

Um, another one that's that's
well known is a customer.

So, um, sometimes we get top heavy,
especially if we are new, um,

new meaning 10 years or younger.

We tend to have some core
accounts, um, that have been

with us for a really long time.

Um, we're able to build out those accounts
and they account for 60, 70, maybe even

80% of our business, of our revenue.

And, uh, uh, sometimes some for
some companies that are still young,

again, 10, 10 years or, or younger,
um, there is only one of those.

So sometimes you may get three
key accounts, um, but a lot of

times it's one primary account.

And again, that's an imposed
input from a buyer's perspective.

There's a lot of risk knowing that sure,
you've got recurring revenue, which

again, is the next, uh, evaluator that
we'll talk about in the next, next topic.

Um, but you might have good
recurring revenue, but if it's

from one, only one customer.

That increases my risk as a buyer.

So again, I need to be aware of that
as the owner and I may be okay, and I

have a great relationship with this,
with this organization, this customer.

Um, and all of those
things feel good to me.

And I'm not in any hurry to need
to diversify or do anything for

lots of various reasons, right?

Um, but the buyer will not buy into that.

Um, so again, another strategic thing
is how do I add more recurring revenue?

How do I diversify my revenue, and
how do I reduce my key dependencies?

With regard to customers and revenue.

Another one, um, could be supplier.

So, uh, we saw a lot of this
recently over the last, uh, since

COVID and especially up until about
23, maybe a little bit into 24.

Um, and even, even, yeah, actually,
even with the tariffs, right?

Recently with, with the Trump
administration applying tariffs, is

that if you have a key dependency on
an international supplier, and that

supply chain is disrupted in any way,
either through tariffs, government

policy, which is imposed input, or
through the health scare, right?

The COVID virus, which
is also an imposed input.

And, uh, there could be other, um,
more kind of like weather related.

Um, there could be infrastructure.

Maybe, um, cargo ships or
railroad, um, disruptions, right?

Any of those things affect supply chain.

And so if I have a key, again,
a key dependency of a supplier

that's international in China,
and I get hit with a multiple

whammy of tariffs, COVID, right?

I cannot get my supplies, I can't
get my product in, in order to build.

The product that I
provide to my customers.

And so there's lots of
ways to evaluate suppliers.

Doesn't need necessarily
need to be international.

It could just be, uh, materials, the
type of material is hard to find,

which we've been talking about also
with, um, the rare earths, right.

Those types of things.

Or maybe even.

Um, your supplier maybe is very
robust or mature in a certain region

of the country, uh, but you're
on the other side of the country.

And so getting shipments, um, may
have long lead times or maybe, uh,

because you're so far away, you
have a lower priority on getting

shipments, all kinds of things.

There's a million variables
that go into that.

But anyway, the supplier side is another
key dependency, an imposed input that

the, that the buyer is going to evaluate.

Now, you may say that part of our
business model is to have a reduced.

Um, to have an increased
quality, um, reduced cost.

And so that's my strategic
model to have some of these

key dependencies on suppliers.

Um, and that's okay, and the
buyer can buy that concept.

Um, but you just need to
be aware that any kind of.

Um, failure mode that you've
built into your business will

reduce the value of your asset.

So, um, any other things around
that that I would encourage you to

be thinking, um, around either key
employees, maybe even your corporate

structure, customers, suppliers, even
raw materials that you may be needing.

Um, if you're in the services business,
you're probably heavily rely on software

and vendor services, vendor software.

So those are all things that
fi fit into your risk analysis

within your key dependencies.

So all good stuff.

I would assume at this point
that you are well on your way on

doing your financial performance.

You've started a, a key, uh, group team.

On understanding your growth
potential, and now you can start

working on your key dependencies.

Have fun.