Switzerland has pretty mountains, good tennis players and an efficient railway service. But why should I want my business to be more like them?
The answer is independence. The Swiss value it highly. They don’t use the Euro currency despite being sandwiched between France and Germany, and they never officially picked sides in the two World Wars for fear of tying their wagon too closely to one geopolitical regime over the other.
But how can independence help your own company? It does so by creating a business model that is free of reliance on a key customer, employee, or supplier. Over-reliance on one of these can seriously undermine the value of your business. Imagine if your main customer went somewhere else, or your major supplier doubled their prices, or your top employee joined your main competitor. None of these are going to help your business grow.
Acquirers want to invest in businesses that protects themselves against danger. Being overly dependent on one supplier, customer or employee can be a big risk.
The supplier problem
In 1994 Robert Hartline started selling phones in the back of his car. By 2019 he had built Absolute Wireless into a chain of 56 wireless stores and 350 employees. He had two main carriers that gave him with the bulk of his data plans.
Hartline was able to systematize his business while he grew, creating employee onboarding videos and delegating key processes for his new employees to follow. The business was a success, and Hartline was riding high up until early 2020 when the pandemic hit, and two of his wireless carriers merged, leaving Hartline’s business spinning out of control.
One carrier assumed the dominant position in the marketplace and promptly delisted its dealers from their Google search listings. Panicked by the abrupt change of position from his wireless carrier, Hartline decided to sell to another dealer, who was on better terms with the now dominant carrier.
Hartline agreed to an acquisition offer, but as diligence progressed, the carrier insisted Hartline drop ten of his stores. Hartline’s acquirer promptly dropped the acquisition offer by $4 million. Frustrated, but still happy to get out, Hartline agreed to the lower number only to be told the acquirer was not prepared to pay cash, and that he would be asked to finance almost half of their acquisition over time.
Not the result he was hoping for.
Hartline has gone on to create other successful businesses since his experience with Absolute Wireless, but now prefers software businesses, which are not beholden to a major supplier.
What can you do to avoid a situation like this?
If you find yourself too dependent on one supplier, you need to ensure you invest in your customer relationships so that your customer thinks of your business when they’re buying from you, not your supplier.
It’s also worth cultivating a relationship with alternative suppliers even if it costs you a point or two of margin in the short term. Over time, the diversity of suppliers will allow you to avoid the value of your business decreasing as a result of becoming dependent on a single supplier.
The same goes for customers and employees. If you become overly reliant on one customer or one employee, your business is at risk.
That’s why you need to be more like Switzerland.