Imagine you are house-hunting in South Florida. You’ve narrowed your search down to two waterfront homes.
The first has great curb appeal but was built using standard materials.
The second home also looks good on the outside, but the inside was built using insulated concrete forms (ICF) to withstand 200-mile-per-hour winds. Although it costs a little more, the second home is hurricane-proof.
Which do you buy? Like most buyers, you’d pay a premium for a house that can withstand a storm.
Business acquirers do the same thing. An acquirer will pay more for a durable company built to withstand a storm.
How to Hurricane-Proof Your Business
Look at your business through the eyes of an acquirer. Try to pinpoint your vulnerabilities, and shore them up.
Most of us think about an overreliance on a customer or employee. But a dependency on a supplier can often be even riskier. Suppliers can include raw material vendors and providers of your company’s infrastructure, such as a payment processor.
Think your relationship with a payment processor is inconsequential? Look at the story of American entrepreneur John Whiting. In 2017 Whiting started Digital Kryptonite, a company dedicated to providing qualified leads to businesses. Using LinkedIn, Whiting was quickly able to grow his company from zero to seven figures within a year.
Digital Kryptonite’s infrastructure relied exclusively on Stripe to process customer payments. Despite his entire revenue stream coming from Stripe, Whiting was unfamiliar with their terms and conditions. Whiting had never heard of a dispute rate and wasn’t measuring his. So when Whiting received a message that Stripe had suspended his account because of a high dispute rate, Whiting’s revenue stopped overnight.
Whiting quickly scrambled to move his business to Bank of America’s merchant processing platform, but little did he know that Stripe had placed Whiting on the Match List—akin to an international fugitive being placed on INTERPOL’s list of most wanted criminals. Just like all police agencies have access to INTERPOL’s list, all merchant processors access the Match List.
As soon as Bank of America discovered Whiting was on the Match List, they, too, suspended his account. Whiting had tens of thousands of dollars in expenses and no revenue to cover them.
Whiting’s reliance on Stripe and lack of understanding of its terms and conditions effectively paralyzed his company. In the end, Whiting was able to salvage some value by selling his company to a customer, but as Whiting told John Warrillow in a recent episode of Built to Sell Radio, the experience left him scarred: “If you don’t know the rules of the game, you can’t play the game confidently.”
An over-reliance on a supplier could undermine the value of your business, so cultivate a portfolio of suppliers. Suppose there is a critical piece of your infrastructure and a ready alternative is not apparent. In that case, it’s your job to understand that relationship’s terms and conditions and ensure you are always onside.
