How To Become Unstoppable With These 5 X-Factors That Increase Enterprise Value (#79)

[00:00:05] Jeffrey Feldberg: Welcome to the Sell My Business Podcast. I'm your host Jeffrey Feldberg.

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Welcome to episode 79 of the Sell My Business Podcast.

In today's episode, we're going to do a deep dive of step number two of the nine-step roadmap which is called X-Factors that insanely increase enterprise value. So, before we begin, you may be asking what the heck is an X-Factor?

An X-Factor is an area that you are world-class in when it comes to your business. Now, most business owners assume that what they're doing the competition is doing and is nothing special. It couldn't be further from the truth. Every business has at least three to five X-Factors.

And what's been amazing as participants go through the Deep Wealth Experience and we help them find their hidden X-Factors, we start to see incredible transformations that start to happen. So, let's now talk about X-Factors, what they are, what you can do, and how you can leverage them to increase your enterprise value.

So, one of the first X-Factors and this is a big one that increases enterprise value. It includes having a strong management team. One of my favorite questions that I love to ask business owners and it's a simple yes or no question. Does your business run without you?

And again, it's a simple yes or no. There's no, maybe there's no, but, it's no one day. It's yes or no. And unfortunately for most business owners, the question of does your business run without you? It's a no. And by the way, whether you have a management team or you don't have a management team,

For many business owners, the answer is still no. Obviously, you don't have a management team, the business doesn't run without you, but at the same time, there are so, many business owners that have a very capable management team. But that management team is impeded by the business owner. Because the business owner has such a tight control over the business that the business owner is still the one that's making the decisions and ultimately having everything run through the business owner.

So, why is having a strong management team an X-Factor? Well, let's do what we do a lot in the nine-step roadmap of preparation in the Deep Wealth Experience. We're going to tune in to the world's favorite radio station. WII.FM, which stands for the what's in it for me radio station for your buyer.

So, what does a buyer really want? What a buyer wants is to minimize risk at all costs. And this is why a buyer will ask for that E word. We don't use that word at Deep Wealth, but I'll just share it with you at the earn-out word. And that's why there's going to be escrows and there's going to be reps and there's going to be warranties.

So, what a buyer wants to do is to minimize risk. And the fact of the matter is as a business owner, you are the biggest risk to the business. Now, I know you may be saying, hey, wait a minute. How can I be the biggest risk to the business? I started the business. I grew the business. I know everything about the business.

And that's the problem. In the buyer's mind, the buyer sees the day after the closing. And one of two things is going to happen. Either the buyer has asked you not to be there or shortly after the closing, or perhaps you're there, but the buyer is smart enough to know that it may be a situation of lights on nobody’s home.

And if we're honest about it, you now have a closing. You have all these zeros in your bank account. The business is now being run by the new owner. And the business is likely going to be run in a way that's different than what you do. For most business owners this is the perfect recipe for unhappiness and they check out of the business. So, your buyer knows that there's going to come a day sooner than later, where you're no longer involved in the business.

And when that day happens, the buyer is concerned that the business simply isn't going to function. So, if you don't want to have that E word an earnout, and if you want to have your life back. And if you want to have a business that's actually better and thriving and more profitable because you have a management team. That's what you have to do. And here's the irony that most business owners don't realize. When you follow the nine-steps of preparation for your business, you're actually prepping your business for growth and market disruption today.

And you'll benefit tomorrow when it comes time for your liquidity event. Because think about it when your business runs without you, you get the most precious commodity back. You get your time back, you get your time back to figure out brand new problems that you can solve into new markets, where you can take your business into where you're not into right now.

Or you can figure out new visions and missions for your business. So, all kinds of things that you can do, but you must have that management team. So, strategy number one is X-Factors that increase enterprise value includes a strong management team.

So, what's the second strategy when it comes to X-Factors that increase enterprise value?

Well, the second one, and please don't take offense when I say this. Why your business model sucks and what you can do about it. Now I want you to think for just a moment what's your business model? And for most business owners, the answer is, well, I charge my customers when they come and that's about it.

And that's the more traditional business model. And while the business model has been around for many, many years, it's not the best business model, both for your business. And also when it comes to your liquidity event and enterprise value. There are three components that make up an incredibly powerful and strong business model that catapults your enterprise value to the next level. So, let's talk about what those three areas are. The first area would be recurring revenue. And when it comes to recurring revenue, I want you to think about, perhaps you have a favorite movie streaming service, or you have a favorite music service.

That's recurring revenue. Each month you're paying a subscription. And you know exactly what you're paying, you know exactly what it's going to cost throughout the 12 months. You can budget for it. When we take it now to the business side? When you have recurring revenue, this is where the magic begins to happen.

For starters your customers they're able to budget. They can tell exactly what they're going to be spending, what they're getting for it and there are no surprises. And the wonderful thing about recurring revenue is you now have some insights. You have some clarity into, on a per-customer basis what you can expect. The days of wondering if that customer going to come back or not, or when that's all gone. So, recurring revenue creates a win-win for both you and for your customers.

The second area. And this is one that if you can do it, it would be terrific. It's to have long-term contracts, but not any kind of long-term contract. Ideally, it's a long-term contract that's exclusive.

Why do you want long-term exclusive contracts? Well, as you may imagine, when you have a long-term contract, that's exclusive, you're now locking your client into doing business with you for a period of time. So, what would be a long-term contract?

It's a great question. And depending on who you speak to, you'll hear different answers. In my online business Embanet before we had our liquidity event, one of the attractive parts of Embanet was that we had 10-year long-term exclusive contracts.

The buyer loved it. Why? Let's go back to what I shared a little bit earlier about what a buyer wants. We remove the risk for the buyer. So, when the buyer purchased Embanet the buyer now knew that there were many years left on that contract. And at the same time, when you know that you have your customers there for a longer period of time, you can do things that you're probably not able to do right now.

You can put more into R and D. You can do different types of initiatives with that customer because you know, they're going to be there and you're investing in that business relationship. So, let's now talk about the third component of a really strong business model. And remember we talked about recurring revenue was number one. Long-term exclusive contracts, number two. And the holy grail of a business model, which is the number three part of it. This is now revenue sharing.

How do you get a customer to revenue share with you? Now openly, this may not be possible in all instances, but if you can figure it out and you can do it, you have the best of the best business models. In my online business Embanet, we were able to do revenue sharing. And the reason that we're able to do revenue sharing is that we had such a painful problem for our clients. And we solved it in such an elegant way that it was more painful for our clients, not to work with us, to not revenue share with us than it was to say, you know what, we're better off revenue sharing with Embanet than we are just doing it on her own.

And just to give you a little bit of context. The painful problem that we solved for our clients, which were universities, we cracked the code on how to fill the seats with many, many students.

And we were able to demonstrate to the universities how we could fill those seats in a manner that was quicker, but also more cost-effective than what they could do. And we also took the risk off the table because we incurred all the costs for them. So, if you think about this, you're now the president of the university and you have a proposition in front of you where you don't pay a dollar for any expenses. And in fact, it's the opposite. The first student that enrolls into a program you're actually profitable through revenue sharing.

So, the value proposition was so, high that for the university, it was a no-brainer and they threw their hat in the ring and we worked with them. And at Embanet we had all three components. So, we had recurring revenue. We had these 10-year long-term exclusive contracts and we had revenue sharing.

So, before that, we had a traditional business model that, well, yeah, it sucked. It was the one that everyone was using. But once we transformed and we leveraged these three powerful components of a business model, we never looked back. And a market disruption occurred, enterprise value went up, it just took us to a whole other level and it was a win-win-win for everyone.

So, that wraps up the second strategy, why your business model sucks, and what you can do about it when it comes to X-Factors. So, what would be the third one?

The third X-Factor is why you need to look to a blue ocean as one of the X-Factors that increases enterprise value. Now, most businesses are in a red ocean. So, why don't we take a step back? What's a red ocean. What's a blue ocean. What does it mean?

Chances are you're in a red ocean. A red ocean is where you have lots of competition. You're all fighting with each other over the same customers. There are price pressures. Price goes down. Margin goes down. It's very difficult to do R and D to do innovation. Profits are anyone's guess and it's just a terrible situation to be.

What you can picture in your mind with a red ocean. Picture you have a very small area of water and you now have all these fishing boats that are there. Everyone's competing for a small number of fish, and it just becomes very difficult. If we flip to a blue ocean, so, what's a blue ocean?

Let's go back to that analogy that I used earlier of the ocean. Imagine you're in an ocean and you're the only fishing boat in the ocean. Nobody else is around. You're looking all over the place. You can't see anybody. You now are the only one that's fishing in the ocean. And you can catch and get whatever you want because you don't have competition.

So, if we translate this to the business world, the blue ocean is a new category that you've created for yourself. It doesn't exist. You found this painful problem. No, one's really addressing it or solving it. You have a world-class solution and you now create a brand-new category for you to go into.

Now, if you think back over the years of some of the Titans of business. They did this. They found a painful problem. And instead of trying to fit it into a category where other people were in, they created a brand-new category. They're the first one there. They had time to really dominate it, make the most of it. And even down the road, many years later when other competitors would come in, it was too late because they were known they were the trusted brand.

And that's really what you want to do. These strategies, by the way, come from the book Blue Ocean Strategy. It's a wonderful book and it really is a game-changer. So, when you understand what a blue ocean is and what a red ocean is, what you want to begin to do is to look at your business and begin to ask the question. Number one, what's a painful problem that I can solve? And then number two, once I solve it, what can be a brand-new category that I create?

And once you create that category, you go into it, you dominate it, you create a market disruption. And by the way, that market disruption, as you know, that's going to catapult your revenues, your profits, and as a result, your enterprise value. So, that wraps up the third X-Factors strategy of looking to a blue ocean as one of the X-Factors that increases enterprise value.

Let's move on to the fourth X-Factors strategy.

Why a rich and thriving culture is one of the X-Factors that increases enterprise value.

What's amazing about culture is that it's unique. It's like a fingerprint. Your competition and even your future buyer, they can deploy their capital to copy just about everything that you're doing. They can copy the same technology that you're using. They can use their capital to hire away some of your top people, but what money cannot buy is your culture.

And your culture is unique as you, and again, when we tune into our favorite radio station for the buyer WII.FM it's your culture. That's an attractor for the buyer because your buyer is looking to your culture of what's giving you a competitive edge. So, what would make a culture rich and thriving?

Well, one of the things that makes a culture rich and thriving are your key performance indicators or your KPIs. Some of the most powerful cultures in the world in business have KPIs for each and every position. And because you have KPIs and you're measuring them you also have transparency. And part of that culture is embracing, hey, we're going to talk about performance and it's nothing personal. We're going to ask questions about why a KPI went up or down. If that's a good thing or not a good thing, what changed, what we need to do to get it back to where it was if that was better.

Perhaps what we can even do to make it better, to take it to the next level. So, when you have a culture that has transparency and you have KPIs it puts you in a very unique situation. And having KPIs isn't just enough for your culture. Your culture also has to have the ability for people to make changes on the fly. They need autonomy. They need power within their own role to be able to adjust things. If you have a culture where perhaps a KPI is going in the wrong direction. Somebody has to run it up the command chain. Can I do this? Meetings have to happen. You've lost it. And it's why bother. So, really what you want is it's great to have KPIs and it's great to have transparency, but that third factor that you need is the ability for your employees, for your team, to be able to make adjustments, which fix the problem, which get the KPIs going back in the right direction.

And then with that, you have one other area for a culture that really makes a difference. And this is your mission statement and your vision statement. And I know when I say those two words a lot of business owners roll their eyes and say, yeah, why bother? We've all been in these businesses where you see this plaque on the wall. It has all these meaningless words. They don't mean anything. There are many, many sentences.

And you're thinking I don't get it. What's this all about? And you're absolutely right. And that's part of the issue of a culture that really isn't working is when the stakeholders, which would be your clients, your suppliers, your vendors, your customers, your team members, your employees. When they don't know what your mission is when they don't know what your vision is, that's a big problem.

So, one of the takeaways from here is to think about a vision, a big picture that's inspiring. That gets people passionate about this, that gets people out of bed to want to either come to work for you or want to do business with you. And the key here with your culture is to live it, to breathe it that all of your employees and your team members know it.

So, from your frontline employees all the way through to the CEO, everyone knows what your vision is. But it doesn't just stop there. If you were to speak to your clients and you asked your clients what your vision is, they're going to say the same thing that your team members are going to be saying. That's a rich and thriving culture where everyone knows what the company is all about, why you're doing it, why someone's doing business with you.

And that's what moves the dial in terms of having everyone move together, the right kind of culture in a healthy way it almost becomes like a cult. You know, the first four letters of culture is cult and in a healthy way, the right kind of culture has everyone excited about the business. Everyone is raving fans from your clients to your frontline employees all the way through to the CEO. So, a rich and thriving culture is an X-Factor that increases enterprise value. That would be the fourth X-Factors strategy.

As we now begin to round things out with the fifth strategy, why four kinds of clarity are part of the X-Factors that increase enterprise value.

 Let's talk about the four kinds of clarity of where it came from. When you're looking at diamonds, diamonds have four kinds of clarity that they're rated on and the more clarity a diamond has, the more it's worth.

And so, when it comes to business, here are the four kinds of clarity. I'll list the four kinds of clarity and then I'll talk about them.

So, we have abdication versus micromanagement. Number two is structural clarity. Number three is job clarity. And number four is task clarity.

So, let's talk about the first one abdication, which is where your two hands off versus micromanagement where you're too hands-on. And you remember, I started the first X-Factors strategy by asking the question does your business run without you?

And I asked that, whether you have a management team or not? Because again, it may be a situation where you do have a management team. But you're micromanaging. You're just way too hands-on. You're hamstringing everyone. You're really preventing them from doing what they need to be doing, or perhaps you're too hands-off.

So, there's a fine balance there. You know, just because you have a management team that runs the business without you, ideally, you're still going to be involved, but from a much higher level. Think of it more from a board of director position where you're able to give your insights and share your vision and help give some direction for the bigger picture questions that come up about the business.

So, for the four kinds of clarity, the first question you want to ask is for yourself. Are you too hands-on too hands-off? And if you're either one of those extremes, you want to get to a place where you're in more of the center. Where you're supporting a management team.

You're giving them the latitude that they can do what they need to do. And they in turn can do that for your employees. The second part is structural clarity. So, what is structural clarity? Structural clarity is making a clear for everyone what exactly it is that they're doing for that position? How many times you walk into a business, you ask an employee, well, what is it that you're doing? What's your role exactly?

And you just get a stare looking back at you. So, structural clarity is letting the person know how their role fits into what the business is doing. And that ties very closely into job clarity. Because job clarity, which is the third area, this sets the expectation of what each person should and should not be doing. And structural clarity and job clarity they're very close together, but you begin to see how key performance indicators or KPIs become so, critical here. For the structural clarity and the job clarity that's very easy to measure when you have the right KPIs.

When, you know, structurally how this role fits into the company and for the actual role itself, what the expectations are, what you should be doing, what you should not be doing, what your KPIs should be, and where they shouldn't be. It really takes a person and it empowers them to get the most out of the job.

And in fact, it really gamifies an employee's job where they can have fun and enjoy the process of can I do better today than it did yesterday?

And then the fourth area is task clarity. So, what's task clarity? Task clarity is where you're documenting the systems and the processes. And I'll let you in on a little secret. When you document your business when you have your key processes and systems documented that in and of itself is an X-Factor. And why is this important?

Well, when you have everything documented, you stop the situation where every time there's a question an employee has to stop, set up a meeting, speak to someone. It just becomes a big time sink. Training becomes very difficult because if it's not documented, you're now doing one-on-one training and it's not scalable.

If you take the flip side, though, everything's now documented when a new employee comes in, they can be given the documentation. They can go through it. You have a culture where people know before you ask somebody a question, before you phone somebody or email anyone, or call a meeting, you're checking the documentation first to see if the answer is there. And it becomes a self-fulfilling prophecy, because if somebody has a question that's not documented, well, guess what happens?

You clarify the answer and it then gets documented. And why this is important, not just for you when you're running the business, because your productivity will go up. Your culture improves, your profits will go up, but this is a huge thing for your future buyer. Again, your future buyer wants to minimize risk. When your future buyer knows that, hey, everything is documented.

I don't have to worry about this. If someone walks off the job the next day, I have it documented, I know what needs to be done. I know when it comes to training, what has to happen. It's a huge peace of mind for your future buyer, knowing that everything is documented, that there's a system in place, and that everything continues to get documented as new questions arise or new processes or systems come up.

So, four kinds of clarity are part of the X-Factors that increase enterprise value. And you'd definitely want to be there.

So, let's now do a recap. Of the five X-Factors that increase enterprise value.

So, strategy number one, X-Factors that increase enterprise value include a strong management team. And we spoke about how having a management team in and of itself is not enough. You have to have the balance with yourself to allow the management team, to really run the company without you.

The second strategy, why your business model sucks and what you can do about it. And we spoke about how the right business model is a tremendously powerful X-Factor. And the kind of business model that we're speaking about has three components. It has recurring revenue, long-term exclusive contracts, and revenue sharing.

The third X-Factors strategy is looking to a blue ocean as one of the X-Factors that increases enterprise value. And here we spoke about finding a brand-new problem to solve that no one else is solving, become world-class at it, and then create a new category for you to dominate and really make a difference out there. And that in turn will create a market disruption.

The fourth strategy, why a rich and thriving culture is one of the X-Factors that increases enterprise value. And there within the culture, we spoke about how culture can't be bought. It's like a fingerprint. All the money in the world cannot buy your culture. We spoke about how key performance indicators, transparency, and accountability are really key factors for your culture. And then at the same time, we spoke about how a rich and thriving culture ensures that everyone. From your frontline employee to your CEO to your clients, to your vendors, know what your vision is. And it's an inspiring vision. You do what you say. You say what you do, and everyone is excited to be part of this vision that's really making a difference out there.

And then the fifth strategy we spoke about a very powerful concept called the four kinds of clarity and why the four kinds of clarity are part of the X-Factors that increase the enterprise value. And in the four kinds of clarity, as you'll recall, we spoke about not being too hands-off or too hands-on when it comes to your business and your management team. Structural clarity that makes it clear for every role, what it should be doing. Job clarity to set expectations of what each person should be doing and should not be doing. And then task clarity, which is documenting all the systems and processes within the business. And you'll recall that task clarity when you document everything that in and of itself is an X-Factor.

So, those are the five powerful strategies for X-Factors that increase enterprise value. And this is the amazing thing about preparation that never ceases to amaze me. You're doing these things because you're preparing for a liquidity event. And because you're doing it, you're now increasing the performance of your business. And when you do these X-Factors your revenues go up, your profits, go up, your EBITDA goes up. It's just a win-win-win all the way around. And what you have is my favorite scenario. You create a thriving and profitable business, which you can keep forever or you sell it tomorrow, but the choice is yours. And that's why preparation is so, key.

 And on that note, thank you so, much for your time. You could be doing many, many things, but you listened to this episode and that means so, much to me. So, a heartfelt thank you with that. And as always, please stay healthy and safe.

[00:28:00] Sharon S.: The Deep Wealth Experience was definitely a game-changer for me.

[00:28:03] Lyn M.: This course is one of the best investments you will ever make because you will get an ROI of a hundred times that. Anybody who doesn't go through it will lose millions.

[00:28:13] Kam H.: If you don't have time for this program, you'll never have time for a successful liquidity

[00:28:18] Sharon S.: It was the best value of any business course I've ever taken. The money was very well spent.

[00:28:24] Lyn M.: Compared to when we first began, today I feel better prepared, but in some respects, may be less prepared, not because of the course, but because the course brought to light so, many things that I thought we were on top of that we need to fix.

[00:28:40] Kam H.: I 100% believe there's never a great time for a business owner to allocate extra hours into his or her week or day. So, it's an investment that will yield results today. I thought I will reap the benefit of this program in three to five years down the road. But as soon as I stepped forward into the program, my mind changed immediately.

[00:29:02] Sharon S.: There was so, much value in the experience that the time I invested paid back so, much for the energy that was expended.

[00:29:12] Lyn M.: The Deep Wealth Experience compared to other programs is the top. What we learned is very practical. Sometimes you learn stuff that it's great to learn, but you never use it. The stuff we learned from Deep Wealth Experience, I believe it's going to benefit us a boatload.

[00:29:26] Kam H.: I've done an executive MBA. I've worked for billion-dollar companies before. I've worked for smaller companies before I started my business. I've been running my business successfully now for getting close to a decade. We're on a growth trajectory. Reflecting back on the Deep Wealth, I knew less than 10% what I know now, maybe close to 1% even.

[00:29:44] Sharon S.: Hands down the best program in which I've ever participated. And we've done a lot of different things over the years. We've been in other mastermind groups, gone to many seminars, workshops, conferences, retreats, read books. This was so, different. I haven't had an experience that's anything close to this in all the years that we've been at this.

It's five-star, A-plus.

[00:30:11] Kam H.: I would highly recommend it to any super busy business owner out there.

Deep Wealth is an accurate name for it. This program leads to deeper wealth and happier wealth, not just deeper wealth. I don't think there's a dollar value that could be associated with such an experience and knowledge that could be applied today and forever.

[00:30:29] Jeffrey Feldberg: Are you leaving millions on the table?

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As we close out this episode, a heartfelt thank you for your time. And as always, please stay healthy and safe.