How protecting your intellectual capital builds long term value.
When most business owners think about the value of their business, their thoughts immediately turn to profitability, growth, and tangible assets. Of course, these are all extremely important factors in valuing any business. However, there are other things, intellectual assets, that impact long-term sustainable value in your business.
Intellectual assets are the sum of your company's intellectual capital. We find these Intellectual assets in four primary categories - 1) Human Capital, 2) Customer Capital, 3) Structural Capital, and 4) Social Capital. In Chris Snyder's book, Walking to Destiny - 11 Actions An Owner MUST Take To Rapidly Grow Value & Unlock Wealth, he calls these Intellectual assets as the Four C's. Let's briefly explore each of these.
Simply put, human capital is the value of the talent of your team. Typically, the stronger the team, the more valuable the business. And, of course, the culture of a business has everything to do with the value of human capital.
If you follow our blog posts, you already know that I believe that the true role of a CEO is to be the keeper of the company culture, making human capital their number one priority. Think of the CEO as a CCO, Chief Culture Officer.
Author Jim Collins understands the importance of human capital. In his classic business books Good to Great and Built to Last, Collins talks extensively about how to make sure that you consider first WHO, then WHAT. His process for implementing strong human capital can be defined as - 1) get the right people on the bus, 2) get the right people in the right seats on the bus, 3) get the wrong people off the bus, and 4) put WHO before WHAT, no matter what the circumstances are.
“Great vision without great people is irrelevant.”
- Jim Collins, Good to Great
If you are confident that you have the right people on your bus, you need to ensure that they have everything they need to continue to build long-term value for you and your business. This starts with recruiting the right people then motivating them to be the best they can possibly be. You also need to pay special attention to retaining the very best people.
Customer Capital is the present and future value of the relationships you have with your customer base. How does your business view it’s customers today? Building strong, deep, long term, and contractual relationships with your customers, while delivering a unique value proposition that drives customers directly to you when they need your product or service are the best ways to improve customer capital.
Most importantly, business owners should “spread the wealth” by transferring those deep relationships to the team, rather than the business owner.
Otherwise, what happens when the business owner is longer in the picture? Being able to transfer customers to the new owner at the time of transition is very important in terms of the long-term value of your business.
Of course, if you are using your human capital to stay on top of customer relationships rather than personally developing all of those long-term deep relationships, all the better. But, if you are the center of the relationships with the customer, you should find ways to introduce other team members into the relationship and ultimately transfer those relationships to the key people who will remain long after you transition the business. This is an issue that many business owners grapple with on a regular basis. They have long, deep relationships with their customers and yet don't realize that if they don't transfer those relationships to other people in their organization they run the risk of losing those customers if something happens to them, or when the business is transitioned. Make sure that your customer capital is strong and transferable.
Structural capital is all about how you do business - your systems and processes. Certainly structural capital may include actual intellectual property, or IP, which should be protected legally, at the very least. (See Ladd Hirsch’s recent blog post for more on that.) But here, we’re going to focus on systems and processes.
Many business owners neglect to clearly document their processes. Those that do, often don’t enforce them. Some businesses take the time to document all of their processes and only to put them in a three-ring binder to sit on a shelf and collect dust for years. The best companies not only routinely update their process and enforce their use, but they also use them as training tools for new employees. Well documented processes can cut training time in half. Are all of your processes clearly documented and being used?
In Gino Wickman’s book Traction, clearly documented processes are key to building a solid operating model. Wickman advocates using the Entrepreneurial Operating System (EOS) described in the book as a framework for building your operating processes. I'm not saying that you should document every single process in your business, because that could take years. However, I do recommend identifying the most important processes in the business and then setting out to document those processes. Dot all the i’s, cross all the t's on your most important processes, and then make sure your people are following them.
There have been instances recently when a company’s valuation was dramatically increased because of well-documented processes. Many times effective and well-documented processes are exactly what attracts larger companies to well-run smaller ones. So, when you can show clearly defined, well-oiled processes for procedures like acquiring customers, operating your business, and maintaining customer satisfaction, that becomes a selling point to the potential acquirer whose processes may not be as well documented.
Social Capital is communications and how things really work. In the days of social media, social capital may be more important than many business owners realize. Social capital includes not only components of human capital and customer capital, but it also revolves around how you communicate (internally and externally) and how you get things done. It’s the rhythm of your day-to-day operations and your internal and external communications. It has everything to do with the written and unspoken hierarchical structures that you have in place to carry out business on a day-to-day basis. Arguably, social capital can be the most important hidden asset any business has.
Bringing it all together
As Chris Snyder points out in Walking to Destiny: building, maintaining, and packaging your intellectual capital is a great thing to do. Once you have mastered your intellectual capital, the business is no longer all about the business owner. Now it’s about the business itself, and that’s a good thing when it comes to building long term, sustainable value in your business.
So, stop right now. Go examine your intellectual capital. Identify 3 things you can do now to improve your business by focusing on your intellectual capital.
Message me on LinkedIn or on our Facebook Page or email me or call my cell and tell me HOW you are going to upgrade your intellectual capital. It can have more impact on your business value than you think!
What are you going to do today to Maximize Business Value?
And as always, we’re here to help. Don’t hesitate to reach out!