THE 4 INTANGIBLE CAPITALS OF ACCELERATED VALUE CREATION.

In the Mortgage Broking world there are only two ways to extract asset value from your business. The liquidation value of your trail book - or - a multiple of EBIT based upon how attractive and ready your business is to be sold and run by someone other than you.

Last week i talked at length about the key drivers of accelerated value creation: being the attractiveness and readiness of your business. Attractiveness is your numbers - revenue, cost to income ratio, profit etc ... This week i am diving much deeper into one of the key components of readiness - The Four Intangible Capitals.

Remembering that up to 80% of the true value of your business is most likely locked up inside these 4 areas. So it might just be worth studying this one closely!

HUMAN CAPITAL

People are everything. ““I don’t care how good your product or processes are, if you don’t have the right people – you’re screwed."

What is Human Capital?

Human capital is the value of the talent that you have in your company. The more talented your team, the better they will perform, especially in a crisis. All things being equal, the stronger your human capital, the more value the market is going to place your company. The Human Capital in your business is one of the most difficult to navigate and one of the most important. Human Capital is the measure of talent on your team. According to Walking to Destiny by EPI CEO, Christopher Snider, “62% of owners indicated that finding and retaining top talent is the biggest challenge they face.” When working on your employee development plans, follow a series of steps that encourage growth in your employees and your business. Chloe Quigley, CEPA and Exit Planning Advisor at Barrington Wealth Management, shares, “Human Capital is key to developing a documented succession plan for your business. If a key person in the organization died or retired, what would happen the following month? Is there a written plan that would be implemented to protect loved ones, key employees, and the value of the company? Would the company become a burden or would the plan provide peace of mind and direction to family and key employees as to what’s next?”

The Impact of Weak Human Capital

Without taking care of the stars in your business, your organization will fail to reach its full potential. In addition to providing a path for professional growth, you should consider providing retention incentives to key employees. They provide the opportunity for your superstars to benefit from value creation. This incentivizes key performers to stay with the company and encourages growth. Dan Paxton, Principal at ExitSmarts, Inc., states, “Human Capital is the most important of the Four Capitals, while at the same time it is usually the most overlooked. Potential purchasers are interested in all the financial metrics of a business, but the astute purchaser knows that these metrics can evaporate overnight if the Human Capital is weak.” Laura Queen, Founder and CEO of 29Bison, shares some of the main reasons she has seen employees leave organizations. She explains, “One of the biggest indicators of poor employee retention is crappy managers. Learn from your people what matters most to them and use that as your managerial guide.”

How to Build a Strong Team

The team that makes up a business is critical for its success or failure. To effectively recruit top talent to an organization, the owner and hiring managers must have a structured hiring and onboarding process in place. Dr. Gary Russell, Founder of Winning Profile, shares that only one out of every five business owners hires correctly. Dr. Russell states that typically, hiring managers only look at a third of a potential candidate's traits during an interview and fail to account for mental stamina and emotional intelligence. When building a team, an owner must take into account what they are looking for in an employee in broader terms than just talent. The most effective team member not only has the acumen to accomplish their tasks but the emotional intelligence and belief in the company's core values. Dr. Russell stresses the importance of forming teams comprised of employees with differences. He says, “The strength of the business is its team and the strength of the team is their differences and how they use those differences to create something powerful.” Hugh Blane shares, “In my work as a leadership and team performance coach, I suggest leaders put their fingers on the pulse of the employee experience. To do so, I use a three-dimensional approach called The Employee Experience Audit. It has four steps which are as follows:

HUMAN CAPITAL

The Benefits of Strong Human Capital

A component of strong Human Capital is for key employees to want to stay in place after the exit of an owner. Buyers are looking for incentives to be in place to increase the likelihood that key employees will stay at least through a critical transition period. There are many tools the business owner can use to “lock in” key employees. Chloe Quigley stresses the importance of providing employees with a clear path to advancement within the company. She shares, “Each of our team members has a clear path for growth based on their personal goals and skill sets. We revisit their roles and job descriptions annually. Each team member has their own KPIs and a number that they report on. We find this helps hold people accountable and have ownership over the success of our firm. We also allow team members to take initiative. In this way, each person has control and the opportunity to grow within the organization.” When every member of an organization feels like a valued and essential component of the overall company’s success, human capital is strengthened. Joe Slatter, Founder and Principal at Better Practice, believes businesses should do everything they can to set their employees up for success. He continues, “Be willing to help them achieve what they really want even if it means going somewhere else. I know that sounds like a paradox. Be loyal to them and they will reciprocate. This reminds me of something I remember hearing many years ago: ‘If you love someone, set them free. If they come back, they are yours forever. If they don’t, they never were.’”

Strengthening Human Capital

Chloe Quigley says you cannot build the right team without a defined, written, and agreed-upon vision and core values. She shares, “Improving your Human Capital starts with a leadership team that is confident and comfortable with the company’s vision. Once this is established, employees can be evaluated and celebrated based on their achievements within this set framework. Employees are happy because they feel like, and they truly do, belong in the organization!” Strengthening Human Capital does not have to be a complete overhaul of your team and your business. Even small business improvements can provide owners with exceptional growth in Human Capital. By focusing on smaller tasks and initiatives instead of massive changes, the process of enhancing Human Capital is less overwhelming and daunting. Laura Queen shares, “Start small, get curious, and focus on materiality. A great way to start is to look at one data set to begin with – often employee turnover is a good way to begin. What does history look like? Are there patterns in the data? If I break the data down by location, division, department, or manager/supervisor does it paint a different picture?” To improve Human Capital in a business, business owners and their advisory teams must address several issues and operational processes.

? When determining the value of your Human Capital, work through the following checklist

CUSTOMER CAPITAL

Without a strong customer base businesses would crumble. They could have one of the best products, the strongest teams, and incredible leadership, but without meeting customer needs, they have no value. Customers are everything to a business.

What is Customer Capital?

Customer capital is the measure of the strength of relationships with your customers. Deep, integrated, tenured relationships, recurring revenue, contractual relationships, and diversified customer bases all contribute to strong customer capital. Business owners should conduct detailed demographic and psychographic research on their potential customers. How do they ensure that your message is being delivered to the right target market? Do they even know who that “right” target market is and what their pain points include? No business’s service is for everyone, so their marketing techniques should not try to reach everyone either. Owners should create buyer persona guidelines to ensure all content created will be valuable to their target audience. Even with a target customer in mind, businesses should not solely depend on any single customer.

How to Assess Customer Capital

One simple step towards improving the customer capital in a business is to have a baseline understanding of value. By auditing a business customer list based on their product types, industry, service, and demographic indicators, advisors and owners gain an understanding of key customer types and gaps in their customer base. Chloe Quigley shares, “Growing your customer base is easier said than done. I recommend looking back to see where you’ve gotten your best clients in the past. Do they come mostly from referrals from current customers, meeting in social settings, and introductions from other professionals? What has been successful is likely a good place to start. By starting with what you know has worked, you can iterate off it to identify more ways to connect with new groups.”

Business owners should research the best tools to use and share content. A lack of research will result in failure to reach their customers in the right way. It does not matter how amazing the message is if it does not reach the right people. Without understanding their target audience, owners will not be able to communicate with them in the correct way, meet their needs, or accept feedback effectively.

Highly personalized interactions foster the most engagement between customers and brands. Engaging with customers through social media is one of the best ways to create organic connections. Laura Queen adds, “If you don’t regularly connect with your customers about their needs, desires, and experience with your organization, you’re missing huge opportunities. You will get great insights from these interactions. Use these insights to continuously improve your business. This may mean changing your measures of success or offering or sunsetting products or services. It is critical to determine what skills, behaviors, values, etc. are critical for you

How Owner Dependence Negatively Impacts Customer Capital

Dan Paxton shares, “Two of the important parts of Customer Capital are a diverse customer base and key customers not being tied to the owner or to any one key employee. A diverse customer base means that no one customer or small group of customers constitutes a large percentage of overall revenue.” Businesses that are extremely owner-dependent often have negatively impacted intangible capitals. If the majority of a business's customers work entirely with the owner, when that owner ultimately exits the business, the buyer runs the risk of losing a large portion of their total client base.

The Benefits of Strong Customer Capital

A diverse customer base helps to strengthen Customer Capital. Dan Paxton states, “Some Advisors state that no one customer should be more than 10% of revenue, while others state that the top five customers should not be more than 50% of revenue. While there is no bright line about these percentages, Customer Capital will be higher in the buyer’s eye when customer concentration does not exist.”

Dan continues, “Fixing a customer concentration problem is a long-term process that focuses upon growing smaller clients and adding new clients. An additional step that an Advisor can suggest is to explore the possibility of putting large client(s) on multi-year contracts which are beneficial to both parties, and which carry a penalty for early termination by the customer. This gives the purchaser time, after the sale, to get close to the large client(s) so that they stay with the business.” A business with strong Customer Capital is indispensable to its customers. This organization treats its customers with personalized service and manages their professional relationships effectively. Strong Customer Capital is not only beneficial for the current owners but is also transferable to the potential future owners.

Creating an Entangled Customer Base

It is important to meet your customers where they are, especially early in the customer relationship. As a business owner, you want your customers to view their experiences with your brand as transformational instead of transactional. Josh Wright, Managing Director of The Bedford Group powered by Ameriprise Financial, shares that his firm, “Works hard to establish as many points of contact as possible with our clients. We invite clients to join organizations with us, contribute to charities with us, socialize with us, etc. We also work hard to identify opportunities for our clients to network with one another, and then we create circumstances in which those networking connections can happen. Our goal is for our clients to feel deeply invested in our firm not just as a source of valuable advice but also as an integral part of their businesses and lives.

By building a strong relationship with the customer instead of simply selling your services, you gain a deeper understanding of their business and personal goals. This allows you to make more informed decisions and suggestions for the customer. Chloe Quigley explains how her firm, Barrington Wealth Management, creates a strong and entangled customer base. She says, “One way to improve your customer capital is to strengthen the relationships with your current customers and improve your level of service. This starts with understanding where you are currently. Maybe this looks like a feedback survey or a 30-minute call with some of your most valued customers to get feedback on their experience and how you can improve it in the future.”

Strengthening Customer Capital

Building Customer Capital is one way to improve the overall value of a business. Josh Wright shares, “Don’t just think of your customers as commodities or revenue-producing units. Think of them as valuable human beings who you can learn from and grow with.” Business Owners and their teams need to shift their mindset from viewing customers as a number stored in their CRM to a relationship with an individual that needs to be developed over time. The stronger the customer relationships with a business are the more likely they are to remain a customer. Hugh Blane expands on this thought, saying, “Make a shift to exchange one five-letter word, ‘money’, with another five-letter word, ‘value.’ This simple shift from looking at a customer in financial terms to creating and communicating superb value to a customer results in increased revenue, profit, customer loyalty, and greater business value. If you want to improve your customer capital, stop thinking of customers in monetary terms and create such high value that people see you as indispensable to their success and satisfaction. That's a game changer from a mindset and financial perspective.”

? When determining the value of your Customer Capital, work through the following checklist

SOCIAL CAPITAL

Social capital represents a company’s culture, brand, communication style, and purpose.

What is Social Capital?

Social Capital, or company culture, embraces the people. How they communicate, what they believe in, and how they operate internally and externally are key components of a company’s culture. This is represented by the rhythm and culture of the company. It is also shown in how your company contributes to its community. Laura Queen stresses the importance of strong company culture. “Culture drives job satisfaction, employee engagement, customer service, innovation and creativity, employee attraction and retention. It is your magic or secret sauce.” In a business, the strength of the social capital also begins with strong foundational elements; the organization’s vision and purpose. Your purpose guides every aspect of your business. Christopher Snider writes in Walking to Destiny, “Purpose expresses personal values, inspires and unifies the team, focuses action, and disciplines you to think strategically.” The Social capital in your business incorporates this purpose, reflects your organization’s vision, and is everpresent in the day-to-day operations of your business. Aaron Stine, CEPA and CEO of Maus, shares, “Knowing your ‘Why’ makes for strong social capital. That’s why your company exists other than to make money. Once you understand that, it becomes straightforward to build a culture around this purpose. Employees in the organization know why their work matters and pull together towards this common purpose.”

The Impact of Weak Social Capital

Dan Paxton exclaims, “Company culture, as a primary component of social capital, is closely related to human capital. The positive aspects of human capital are greatly diminished if the business does not have a positive culture. A negative culture yields in-fighting, politicking, gossip, inefficiency, lack of team play, unhealthy competition, and absenteeism.” Negative culture can always be traced back to the core values of the company. Accordingly, the Advisor must ascertain whether a set of core values are present and known by all employees. Once core values are identified, the company must hire, fire, reward, and discipline based on those core values. Aaron Stine shares, “Poor culture or even toxic culture hurts the business in a myriad of ways. But perhaps the single most important is that companies with poor culture look inward. Employees focus on what’s happening within the company rather than what’s happening outside the company. If you’re not servicing customers and partners, or addressing the competition, you’re eventually going to fail.” It is difficult to develop a positive culture when employees do not see themselves as essential components of the business.

The Benefits of Strong Social Capital

One of the main components of strong social capital in your business is having clearly defined and lived Core Values. These Core Values impact the way a team works together, determine the culture of the organization, and embody the purpose and vision of the company. Your social capital represents your company culture and brand image. Culture is the “magic” of a business and what can set you apart from others. It is what makes your employees want to be there and what makes people want to partner with you. Customers place a high value on the experience of doing business with you, not just your products and services. The way you do business is a reflection of your culture. If your team is connected to your vision, they will be more passionate, more creative, and more committed.

The Importance of Core Values

Social capital represents your operations, your brand, the way your team works, and daily communications among employees and customers. EPI President, Scott Snider, shared, “For me, I thought we had great social capital, and then the pandemic hit and it was challenged. We had to change. For us, it was actually a pivotal positive change. EPI rewrote our purpose and core values, redefined work/life balance for our people, and began an unlimited vacation policy in 2021. We also focused on professional development programs and improved the way we communicate as a team.” Hugh Blane emphasizes the importance of the entire team understanding the company's core values. He asks his owner clients, “What are your non-negotiable values? If you go one or two levels down inside your company, can those employees article your values? If there is a gap between senior leaders' understanding and expression of values and the front-line employees, there is lost performance.”

Social Capital’s Impact on Company Branding

Josh Wright says, “Branding is very crucial, but the impression we make on our clients and our reputation in the communities we serve are much more crucial elements of our brand than our logos or slogans.” An owner’s business is only as valuable as their ability to share their brand story and purpose with the correct audience. There is more to a brand than company colors and imagery. Branding is an organization’s outward projection of its core values, passions, vision, and mission. By creating and sharing a strong brand presence, the company becomes synonymous with its branding and ultimately the culture they have fostered. Aaron Stine expands on the importance of culture in a company’s brand. He says, “Great brands start from within. When an organization lives its ‘Why’, the brand becomes the medium by which it communicates its mission and values. In its ideal form, branding is the outward reflection of the organization’s inner self.”

? When determining how to improve the value of your Social Capital, work through the following checklist

STRUCTURAL CAPITAL

The documented processes, technology, intellectual property, and infrastructure make up the structural capital in a business. Without strong structural capital a business, even if successful, will not sell for the multiple desired by the owner.

What is Structural Capital?

Structural capital is the back-end infrastructure of the company such as your processes, your financials, your strategies, your information technology, your patents, and other intellectual property (IP). It is the documented know-how and know-what of the company that positions you to be fast and flexible. The most robust of all intangible capitals is Structural Capital. It encompasses everything that makes your company work efficiently. The process, documentation, training programs, technology, tools, equipment, and real estate. Exit Planning Institute President, Scott Snider says, “Bottom line, I don’t think there is a more important intangible capital than the processes that make your business.” Structural capital captures the knowledge assets within your company, converting that mental process into company property and, therefore making it transferable.

The Impact of Weak Structural Capital

The lack of documented processes and Standard Operating Procedures (SOPs) will negatively impact business value and the likelihood of the business selling when put on the market. Think of the ensuing chaos if your workers were not given detailed job descriptions, provided the correct materials, or defined job duties. Dan Paxton says the owner’s professional advisor often exposes the weaknesses in an owner’s structural capital. He shares, “One of the traits required of the Advisor throughout this process is to expose lots of prior inefficiencies including those folks who cannot thrive in an atmosphere of accountability.”

How Owner Dependence Negatively Impacts Structural Capital

When an owner has control and responsibility for many of the business production activities, not only do they create risk in the business, but they likely stunt the growth of the business. By not trusting key team members with processes in the business, owners create a bottleneck in the flow of information, which can slow the day-to-day operations of their organization. Chloe Quigley shares, “If the owner has sole responsibility over many tasks, they have a big impact on their business. While they are there, working, focused, and healthy, they can execute the tasks with complete control. However, as soon as one of those factors changes, they put their business at risk. Does anyone know how to fulfill the tasks? Are the processes documented? Are there clear goals and outcomes?” Joe Slatter echoes this sentiment. He shares, “If the owner is required to make decisions, you’re back to dependence. Driving decision-making as close to the point of performance as possible is rocket fuel not just for transferability but for a high-performance organization that retains its best talent.”

The Impact of Structural Capital During Onboarding

The people in your business, although mainly associated with your organization’s Human Capital, represent a part of your structural capital as well. If only one person understands a specific process, the remaining members must look to them for support. Imagine what impact it would have on the business if one member of the team were to leave. Would the remaining team members be able to complete that employee's tasks? How easy would it be to train that employee’s replacement? Without properly documented standard operating procedures, the business not only struggles in the interim once an employee leaves but also during the onboarding process when a new employee takes their place. Aaron Stine shares that at Maus, they make sure all onboarding procedures allow for a smooth transition for their new employees. He says, “We combine documentation of the role, training videos, and a templated onboarding process. Having redundant team members who conduct peer training can also be a benefit where possible.”

The Benefits of Strong Structural Capital

When a business has strong structural capital, the success of the company does not depend on any individual person’s ability to perform a specific task. Christopher Snider writes in Walking to Destiny, “Your knowledge needs to be documented and transferable, such that someone else can learn from you and apply it. Making this knowledge company property ensures that when your talent walks out the door at night, the knowledge doesn’t walk out the door with them.” Properly documented processes and protocols are key to creating strong Structural Capital. Joe Slatter shares that in his business, Better Practice, “Everything has ‘one source of truth’ so there is no confusion or ambiguity about what the current process, procedure, policy, etc. is.” Having the proper tools, equipment, technical resources, and intellectual property in a business is paramount to its success. Without strong structural capital, your business will be unable to function in a repeatable and scalable way. The stronger your organization’s structural capital, the more valuable your business is. Dan Paxton shares, “From the buyer’s perspective, this type of operating system is extremely valuable because it signals a disciplined company culture that is accustomed to setting and achieving goals.” When the main processes, resources, and infrastructure are well documented and organized, the business value increases as a result. The physical components of your structural capital such as your real estate, equipment, and technology, are some of the most important factors for potential buyers looking to purchase your business.

? When determining how to improve the value of your Structural Capital, work through the following checklist.

Dan Paxton states, “Business operational focus, discipline, and accountability come from having an operating system, not an IT solution.” When working on strengthening an owner’s structural capital, always begin with written plans that address the owner’s objectives. The owner will then set benchmarks to meet those objectives. These include long-term, intermediate-term, next-year, 90-day sprints, and finally, weekly benchmarks. The creation of an Organizational Chart complete with responsibilities clearly defined allows all employees to be held accountable for their roles. This should include a process and an atmosphere for addressing challenges, problems, concerns, and opportunities so all employees are not only empowered to state what is on their minds but have the responsibility to do so without fear or reprisal for speaking up. Chloe Quigley recommends that owners and their leadership teams write down their most repeated processes as a starting point to improve their structural capital. She says, “Documenting these processes doesn’t need to be an all-consuming task. You can do it in pieces, and you can divvy up the work. It is important the processes are clear and concise. They also need to be updated. In doing this, you may also discover some inefficiencies in how your team is running its processes. Maybe there is an overlap in who is doing what. Or some parts can be delegated elsewhere. By documenting your key processes, those that run them are taking ownership over their methodology and there is an opportunity to give feedback.”

HOW TO IMPROVE THE INTANGIBLE CAPITALS IN YOUR BUSINESS

The following chart can be used to determine the strength of the four intangible capitals in your business. Upon completing the checklist, you will have actionable next steps toward improving intangible capitals and ultimately building transferable business value.

Conclusion

If you're like most people, acquiring knowledge is enjoyable and desirable, yet without appropriate action and support it just clogs up your brain and your broking business.

My hope is that this lengthier, more in depth article has given you plenty of 'food for thought'. To take the next step in your Accelerated Value Creation journey, schedule a complimentary chat with Ash here ? [Discovery Call]

About the Author

Ash Playsted | GM Broker Performance - RECLUDO Group

Ash is both a dedicated STRATEGIST and MINDSET tactician who relentlessly pursues his 'higher calling'. Ash been has been building businesses personally plus continuously learning for more than 40 years, all of it deep inside the Mortgage and Finance industry. He's written thousands of loans, hired and mentored hundreds of brokers and business owners, started, built, and successfully exited, multiple award winning Mortgage businesses himself. When he's not immersed helping clients create massive value you can find Ash with his loving family, including his wife Kaz, two children, two dogs, two cats and three parrots! Ash believes in keeping physically and mentally fit and is constantly developing himself through exercise of body, mind and spirit.