Today’s guest will be Chuck Richards the CEO of CoreValue Software. Chuck is going to help us think about what it takes to create a business that has truly sustainable value. He’s developed a software program that helps you evaluate, track and monitor value drivers in your business.
In today’s episode you’re going to learn some of the following things:
- What a value gap is and what you can do about closing it.
- Why there are 18 value drivers and nine are internal and nine are external.
- How to use CoreValue as a mock due diligence instrument so you know what the potential potholes are when it comes time to sell your business.
- How to improve the value of your business so you get a better return while you’re still running it.
Narrator: Welcome to the Sustainable Business Radio Show on podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. The Sustainable Business is all about creating great outcomes.
Here’s your host, certified financial planner, student, entrepreneur and private business expert, Josh Patrick.
Josh: Good afternoon. Today, my guest is Chuck Richards, the CEO of CoreValue Software. Chuck has been involved in a variety of businesses over his life and as a result found that too many businesses were leaving value on the table, both when they were operating their business and when it became time to leave. To solve the problem, Chuck developed CoreValue which helps private business owners think about their business in a holistic manner. After a business owner goes through the CoreValue process, they’ll have a clear understanding of where their business is strong and what they can do to increase its value.
Full disclosure requires me to let you know that I’m a licensee of the software and I use it with my clients. In fact, I also want you to know that I’m not paid by CoreValue and I, in fact, pay them an annual license fee.
I’ve been really looking forward to this conversation with Chuck for quite a while so let’s get right to it and say hi to Chuck. How are you today, Chuck?
Chuck: I’m very good. Thank you, Josh. I’ve been looking forward to this conversation myself.
Josh: Why don’t we start of, or you can just give us a general overview of CoreValue and what it is from your viewpoint?
Chuck: CoreValue has been 30 years of research in the making, 10 years of working in the field with businesses, as you said in the introduction. I’ve been the chairman of over 50 companies and we learned a lot of lessons in that work. Most of it came to the same point which was business owners were leaving value on the table, both as they were operating their businesses. They were leaving growth opportunities on the table. And then when they came to sell their business or transfer to their children, they were running into great difficulties. By using fundamental frameworks and some algorithms, we can help change that. That’s what CoreValue is all about, which is helping business owners to be able to create value and growth, be able to help them work with advisors such as yourself so that they have a framework that people understand. And at the end of the day, were trying to solve a fundamental economic problem in this country which is if you think about private businesses, there are about 6.5 million of them in the U.S. that have jobs. And of those, 70+% are owned by the boomers. So, 70+% of our private businesses are going to be going through a transition event over the next decade or so where there’s close to a 90% failure rate to transfer success. So, if you sort of boil it all down, that means about half our job base is going to be going through an event where the likelihood of failure is huge.
Josh: That seems to be a problem that’s been ongoing for a very, very long time. So if you’re a business owner and you’re unhappy with the results your business was getting, what part of CoreValue would you do first and where would you have a business owner focus his/her attention?
Chuck: The very first thing is to start with our Discover Tool. It’s light. It’s fast. It takes about 10 minutes. What it does is it enables a business owner to be able to see their business as an engine.
So, if you think about a business as an engine and you could open the hood, what you want to know is where’s that engine weak and where it’s strong because fundamentally the value of your business or the value of that engine its ability to generate future revenue and profit. And so, that’s what business owners care about. They care about the operating side of their business. And what CoreValue does is be able to measure that.
Josh: How does it go about doing that? I mean, how do you measure it? Can you talk a bit about your algorithm because I actually find that pretty interesting.
Chuck: Sure. Way back when, when we were thinking about the business as an engine, we understood that the output of that engine is revenue and profit which can be measured very effectively thanks to gap and the framework that the financial folks use. But what wasn’t being measured was the ability of that engine to generate future revenue and profit. So, we took a page out of the financial world book and said, “What we need is a set of standards like gap on the operational side.”
Josh: Can I ask you to define Gap because I’m sure lots of our listeners really don’t know what that is?
Chuck: Sure. When we think about a gap, we’re thinking about the difference between what the business is worth today and what it could be worth if they fix certain things. If they took their weaknesses and they focused in on the weaknesses and fixed them, what’s the value of that fix? The value of that fix, we call the ‘value gap’.
Josh: Ah, that makes sense.
Chuck: Basically, to measure that engine effectively – the operating engine, we needed a framework or set of standards so that we could make it reliable so that if one business owner was talking to another business owner, if an advisor wants to talk to a business owner, they have the same frame of reference – very similar to what you do on the financial side.
Out of that, two years of work came these 18 drivers of value. Think of them as 18 gears within the engine. And if we can measure those effectively, which we can, we can know where the business is weak and where it’s strong. Out of those 18 gears, we measure them, we come up with a single number. And that single number is called the CoreValue rating of the business. That’s from 0 to 100. So, if it’s closer to 0, it’s not a very strong engine, its ability to generate future revenue and profit is at risk. If it’s closer to 100, it’s a very strong engine and its ability to generate future revenue and profit is pretty assured.
Josh: I hate to interrupt you but this sort of fits in with the theme of this podcast which is sustainability. We’re not talking about environmental sustainability; we’re talking about business sustainability.
Josh: At what level would you consider a business sustainable? On 0 to 100 scale, using CoreValue, where does a business move from being something that’s not likely to survive to something that has a pretty good chance to survive.
Chuck: It’s probably around 60. It’s just north of the midline. When we measure businesses, we’re exactly worrying about sustainability. A piece of that is called transferability because businesses will never be sustainable if it can’t be transferred to somebody else; because if it isn’t transferable, then it’s just a very good job for the owner. It’s not really a business. It doesn’t have value as a working asset. So, the most important thing around sustainability or value is that the owner can leave and be replaced by another owner who can run the business and generate equal or more revenue and profit.
Josh: If you were thinking about selling your business, how would you go about using CoreValue to help you do that?
Chuck: The simple way to think about it is it’s pre-due diligence. What you want to know is where your business is weak and where it’s strong so that when you go to market with it, you’re able to say, “Okay. Who’s the buyer that I care about?” You want a buyer who’s strong where the business is weak and weak where the business is strong and then you get this perfect match. That’s what you’re trying to create, is this understanding.
The other reality is that businesses that go to market – those who have a letter of intent or an offer on them, they have to go through due diligence and 50% of the businesses that go into due diligence never get the deal done. And so, if you understand that the key to successfully go through due diligence is to do it yourself first. To understand what the buyer is going to look at so that you can either fix something if it’s broken or upfront, before they make the offer, you are able to basically disclose them.
Let me give you a really quick story. We were selling a business that I was involved in. We used this framework. We looked at the business. We were very, very strong on the market side. We had great sales and marketing. We could sell products wonderfully – all good stuff. But on the other side, on the operational delivery side, we were maxed out. We could not add any more product in their system. We really needed to build a new factory. We needed to bring new machinery in. And we really didn’t have the desire to do that.
We did a search. We searched for a business that was really weak on the product, marketing and sales side but was really strong on the delivery or the manufacturing side. We found a business, believe it or not, across the Ocean, in Finland. They had a factory which was full of workers and machinery and they didn’t have enough products flowing through it. So, the deal we did was a great deal for us and a great deal for them because they were strong where we were weak and vice-versa.
Josh: That’s a really interesting thing. I never even thought about that before. But if you take a business and you can match up your strengths with their weaknesses, your investment banker should be able to get you significantly more money as a result of that.
Chuck: Absolutely. That’s exactly what happened to us. We got two times what we could’ve gotten in the market if we’d just gone out and sold it to somebody else because somebody else will say, “Boy, I have to invest a lot of money into new equipment, and new machinery, and a factory, and all the rest, and train people” so they would have a great story for paying us less. We got paid double because we knew exactly who the best buyer was and that’s all by understanding the business side of due diligence level.
Josh: So, if you’re an M&A advisor – a mergers and acquisition person and you’re listing to this podcast, I’m going to encourage you to check out CoreValue because it could help you create a better business. At least, I think it could anyhow.
Let’s go to the other side of the ballpark which is where I generally find business owners who speak with me as if they’re generally unhappy with the results of their business. If they’re unhappy, we’ve done Discover and we said, “Look, I’m not happy with my results. I would like to see it get better.” What would you have them do first and where would you have the business owner focus their attention?
Chuck: Well, when they finish Discover, they would use the deeper tool from CoreValue, what we now call Unlock. They go in and they do a deeper assessment. It would take them about 90 minutes. Out of that, they would have the tasks that make up all of the things that they could do or should do to basically capture that value gap to all make it up. Let’s say that the business comes in and its value is at $3.5 million and its gap is about $1.5 million. This deeper level of CoreValue will tell you exactly what to do to capture that $1.5 million.
What we know is the average business has a 27% value gap. We also know that business owners who work with folks like you, Josh, will focus in on the right things, will increase the value of their business an average of 21.5% a year. The reason they can do that is they’re now focusing on the weaknesses. If you think of the 18-driver framework, you see there’s two or three drivers that are making up 30% to 40% of the gap, so you focus in on those. But not only that, we will tell you the exact value of the fix. Let’s say this driver, if you fix it and these pieces of that $1.5 million, it makes up $350,000 of value that you can capture if you fix. And then it becomes, “So, how do I do it?” That’s a discussion between the advisor – someone like yourself, Josh, and the client or the owner.
Josh: That’s very cool. You easily opened your platform for either business owners that go direct and do their own analysis or choose to work with an advisor, what are the advantages and disadvantages of each? Because both have their reasons you should do it and there are some reasons you probably would want to do something else.
Chuck: Well, the reason we did it was we understood from the very beginning, two things, (1) is that if a business owner works with a trusted advisor, they’re more likely than not be successful. In fact, what we found when we were doing the kind of work that you do, Josh, is that 95% of the time, if we brought the right outside advisors into a business, we would be successful. Now, successful was defined as taking the business owner and helping them go wherever they wanted to go with that business. That was the first thing we understood. So, in the beginning, you’re right, we focused on business advisors, of bringing the tool to them and helping them be able to work directly with their clients and new clients.
But the second thing we knew about this marketplace was there’s this demographic line. In general, it’s around 50+. People that are older than 50 or 55 tend to, when they have a problem, pick up the phone and call an advisor. That’s their first act. If on the younger side, their first act tends to be, “I’m going to go and see what I can find on the web. I’m going to go look it up. I want to do it myself.” We realized there was full serve and self-serve type folks out there.
And so, in the beginning, we focused in on the full serve but we were missing the self-serve. It was really important to us to provide the tools for someone to do it themselves first. Now, many of those who then go on to hire an advisor or they’ll go find a consultant or somebody to help them but their first act is to understand and to drill down. That’s why we go both directions. We provide them with our partner advisors such as yourself who we work directly with but we also enable the folks to use it in the field, business owners if they choose, so that they can get an understanding themselves.
Josh: By the way, I think it’s really smart of you to have this open to business owners going direct. I know when I owned my vending company that I would’ve definitely gone direct first and then I would look for an advisor to help me within specific areas where I had weaknesses that needed shoring up. That’s something that if you own a business, don’t feel like you need to go only with an advisor. Take a look at the tool and then decide what you want to do after you take a look at it, if you’re interested.
Let’s move for a second, and this is a big issue that I think that business owners need to understand. Where is it, one or two or three areas, that you see business owners regularly really blow it as far as being able to harvest value from their business?
Chuck: I’ll give you three. The tool also has another set of algorithms that measure things called ‘red flags’. Now, red flags are things that can exist in a business and destroy all of the value. The number one red flag we see, across the system, is we call it the “be-all business owner” – meaning the business owner is an octopus. They have their hands in everything. The business relies on the business owners to such an extent, it really doesn’t have any value. They would say, there’s not management bench underneath them.
The more that the business owner looks like an octopus, the more they have their tentacles in the business everywhere, the less likely it has any value whatsoever. We know that’s about 38% of businesses. The business owner is everything. That’s the number thing to say. It’s being able to sort of extract the business owner to bring people in, to run portions of the business. And by the way, it makes the business owner happier. They tend to be happier. They tend to feel more in control.
We had one business owner, back when we were doing your kind of work, and he said to me as we were helping him transfer the control from himself to his son, “The family’s never taken a vacation together. We’ll never be able to do that. We have to keep our arms around it.” We did CoreValue. We did the same thing, the Discover and then we went deep. Literally, five months later, the entire family left the business for the first family vacation they’ve ever taken together, for 10 days, down fishing off of Mexico.
Josh: That’s a great story. It’s my experience also. We call it ‘helping people become a passive owner’. That’s our term for it, but I like the term octopus. I’m also surprised there’s only 36% or 37% who act that way. In my experience, it’s almost everybody.
Chuck: Well, some of them are already gaining the system but I agree, it’s the number one reason that businesses never transfer. Because, in order to sell you’d have to find an octopus that looks exactly like the other octopus that’s leaving and that’s almost impossible to do.
Josh: I would agree with that. So, you had a couple of other things too, Chuck. What were they?
Chuck: The weakest driver across the board tends to be sales and marketing. Again, when we think about drivers, we think about process and systems because I’m a process engineer by training. So, if you think about sales and marketing, it’s not the fact that you’re selling a lot of stuff, it’s the fact that you have processes and systems so that somebody else can do the same thing. And so, the greatest risk to a business transfer is to transfer that revenue to the new owner. Unless you have a really good sales process, a marketing process and systems in place, the business won’t have much value. I mean, hotshot salespeople look great but they do not make a business valuable. That’s the number one weak driver we find.
Josh: Would that fit in with the recurring revenue bucket?
Chuck: It does. We break the drivers into two buckets. One bucket, we call them market drivers and there’s nine of those. Those are things external to the business. And then we have operational drivers. There’s nine of those. Those are internal to the business. And we, in general, find that businesses are weaker on the market side than on the operational side.
Josh: Yeah, that makes sense to me. Most businesses don’t even understand that sales and marketing are actually two different activities.
Chuck: Yeah. And the other thing is that the drivers that we find that that are very strong, tend to have professions built around them. So finance, okay? Our finance driver, you have accountants in there. There’s a whole industry to make you successful. We have a legal driver. Once again, there’s a whole industry of lawyers to help you make sure you got your house in order. But other drivers such as brand – this is one of our market drivers, if you look at it, there’s really no industry around it. There’s no really well-known framework for doing it so it’s hard. Those are the things that we find, if there’s a lot of experts around a field around the driver, we find that it tends to be stronger. If there’s not, it tends to be weaker – that’s where the greatest bang for your buck is if you’re going to work on a business.
Josh: That’s great information to know. Unfortunately, we’re about out of time. So, Chuck, how would somebody find CoreVAlue and if they want to do Discover, what would they do? Actually I’ll tell you how to do discover but how will they contact you?
Chuck: Go to our website, corevaluesoftware.com, and the very first thing you’ll see on the website will be Discover and it says, “Begin the journey.” You simply click there and it’ll take you right to the product and it’s free.
Josh: If you want to do it on our site, you can go to www.stage2planning.com/core-value-report and you’ll also get the Discover there and if you want you can even end up having a conversation with me about that.
So, Chuck, thanks so much for your time today. I can’t tell you how much I appreciate it. We’re going to have to have you back and dig into CoreVAlue a little bit further.
Chuck: My pleasure. As always, it’s great talking to you, Josh.
Josh: You’ve been listening to the Sustainable Business Podcast where we talk about what you need to do with your business if it was to be here 100 years from now. If you like what you heard and want more information, please contact me at 802‑846‑1264 ext 2 or visit us on our website at www.stage2solution.com or you can send me an e-mail at firstname.lastname@example.org.
This is Josh Patrick and thanks for listening. I hope to see you soon for another edition of The Sustainable Business.