8 Key Drivers Of Company Value (Series) — 8. Hub and Spoke
How would the business perform if the owner were unexpectedly unable to work for a period of three months
This series of articles follows on from an article I published recently, titled “8 Key Drivers Of Company Value That Every Business Owner Should Know”, where I mentioned that I use the Value Builder System™️ to help small business owners grow the overall value of their companies, by focusing on 8 Key Drivers that impact company value.
At the heart of this system is the Value Builder Score, which determines how well a business is performing in each of those 8 key areas. This series of articles provides some deeper insight into each driver with tips on how to improve in those areas.
But ultimately, what makes this important? It’s every business owners dream to be rewarded for all the hard work they put in over the years when they finally decide to exit, so they get to enjoy a long and happy retirement without financial worries.
So, knowing about these drivers and how to improve them, puts business owners on a path to maximizing the value of their companies while giving them the peace of mind to know that they are growing an asset of value before they exit.
Today we’ll look at Hub and Spoke, which looks at how the business would perform if the owner were unexpectedly unable to work for a period of three months.
This is how John Warrillow, the founder of the Value Builder System, explains it:
“Hub and spoke refers to how dependent your company is on you personally. Again, when an acquirer comes in to buy your business, they’re going to want to know how’s this thing operate when you leave. And the more dependent the company is on you personally, the lower you’re going to score on hub and spoke.
The name comes from 20 years ago I was talking to a business owner and he was describing his role in the company. He said, “I’m a hub in a hub and spoke model where all my employees come to me when they’ve got a question. My customers come to me when they need a quote. My suppliers come to me when they want me to buy something.” And he was proud of that operating style saying that that’s what makes his business efficient.
Well, it may be efficient, but if you’ve ever flown through Chicago O’Hare when there’s a snow storm and the hub breaks down, it gets locked up, it’s a disaster. And so the same thing is true of a hub and spoke business owner. When everything is dependent on the hub and spoke, or that hub manager, there’s not much value left in the company.
So the key here is to improve your score on hub and spoke is to make sure your business becomes less dependent on you personally. One of the quick ways you can do that is to start documenting your processes. So if you have ways of doing things, get them down on paper.
Make sure employees are aware of the seven steps to close up at night or the three ways that we change our brand or the things that are important to us as a company, our values and so forth. Make sure all this stuff is not just in your head, but expressed, written down so that employees can read it, digest it, and operate when you’re not there.
One of the fun ways you can measure how you’re doing on hub and spoke is to take a vacation. Start small, take a couple of days, and just see how your business operates when you’re not there. Come back, find out where the breakdowns were and start plugging those holes, again, with training, process improvement, making sure things are documented for employees. Take another vacation, make it a week or two. And, again, see how the business performs because it’s at those points of where the business breaks down you know you’ve got to reinforce before you’re going to score better on hub and spoke.”
John also delves a little deeper into this topic on his “Built to Sell Radio” podcast:
“In this episode, Mark Deutschmann made a successful and sellable real estate brokerage by removing himself from the center of everything. By reducing his involvement in the company to just a third of his previous commitment, he was quickly able to transition out when he sold the firm to his employees, confident they would continue to succeed without him.”
Listen in and find out how Mark reduced his personal involvement in Village Real Estate, down to just a third of his time, giving him the bandwidth to focus on other projects.
So if you’re a business owner who’s planning ahead and considering ways to exit your business on your terms, I hope the information I provide in these articles will help you reach those goals.
If you would like to chat to me about this in person, feel free to book a slot in my calendar and we can discuss it further.
FREE Assessment:
If you want to see how you score in each of the “8 Key Drivers” right now, take 15-minutes to complete this survey and you’ll get a comprehensive 25+ page report benchmarking your business against its peers, plus 49 tips on how to improve those 8 key areas.
Links to all the Key Drivers of Company Value:
- Financial Performance
- Growth Potential
- Switzerland Structure (Key dependencies)
- Valuation Teeter-Totter (Cash flow)
- Recurring Revenue
- Monopoly Control (Key differentiation)
- Customer Satisfaction
- Hub and Spoke (Company structure, systems and processes)