Final word with Thomas Schinkel

De-risk your business.

With Staples and Office Depot shedding large chunks of their global operations, last year was a tipping point for an industry that is changing fast. Business valuations have dropped down to less than 20% of revenues and market conditions are far from ideal right now. 

Numerous reasons can be given for this condition. First of all is everyone’s favourite bogeyman – Amazon. Another oft-repeated reason is that the digital age has reduced the demand for OP in those offices that have embraced digital technologies in all aspects of their work processes. 

All of this would make a strong case if it weren’t for the fact that some companies in this industry appear to be thriving like never before. Taking a closer look at the entire population of mid-market companies, a pattern emerges that divides these firms into two groups. 

One group is comprised of the ‘sales-centric’ firms where everything is driven by sales, sales and more sales. On the other side of the spectrum are the ‘business model-centric’ companies, meaning firms that define more narrowly what kind of sales they want and which then engineer and implement business processes that achieve their goals. 

The difference in performance is stark. Most of the companies that can be labelled as sales-centric tend to generate an EBITDA that hovers around the 3% range at best, often less. By contrast, the business-model centric ones achieve EBITDA in excess of 7-8%, with some reaching double digits.  

What is it these business-model centric companies are doing that makes them so uniquely successful even in a mature industry? Is it sales? Is it margin? Or is it something else? After all, they’re all competing in the same market, selling the same products. 

Minimising risk

It turns out that everything these companies do – all the major and minor innovations they introduce – can be classified under one common denominator and that is ‘minimising risk’. 

Consistently minimising risk is an entrepreneurial instinct that is not easily recognisable unless you dig deeply into the company’s decision-making process.  

But why is it so important? When it comes to determining a company’s corporate value, increasingly sophisticated buyers don’t just look at growing the top line or EBITDA, they look at ‘risk’ as the central tenet of value that drives their ‘buy’ decision. 

Risk, after all, translates into a certain weighted cost of capital. It is this weighted cost of capital that sets the parameters for the purchase price. De-risking the business is more sensitive to corporate value creation than either increasing sales or improving profits. Attempts to significantly increase sales, or expand margins, without first reducing risk will likely increase risk and decrease value! 

First line of defence

In the M&A world, a risk reduction programme as the first line of defence followed by subsequent strategies to increase sales and expand margins will leverage value due to a lower discount rate applied. The difference from a selling owner’s perspective can be as much as 20-50% in terms of net proceeds from the sale.

So regardless of whether your goal is to sell your company or you want to hold on for future generations, in today’s OP industry, de-risking your business should be your number one priority. To achieve this, it helps to migrate from the said sales-centric organisation to one that reflects more of a business-model centric culture.  

How do you accomplish this? It is not rocket science, but it does require a structured diagnostic process of all the relevant variables and an objective assessment of the business.

Many sales-centric firms are reluctant to engage professional help to achieve this because they feel the cost is too high and it would take too long. However, a comprehensive risk assessment can be made with remarkable speed and accuracy at a budget of under $25,000 for most firms. This should be an investment worth considering. In my experience this approach provides the foundation that allows you to retool your business model in a systematic way and to reach the corporate value that you and your shareholders seek. 

Thomas Schinkel is an internationally-recognised adviser who works with medium and large businesses on strategic issues that include corporate value improvement, exit planning and growth through acquisition.