Hidden Value: A 3-Part Approach to Hiring High-Potential Employees

French economist Jean-Baptiste Say characterized an entrepreneur as one who “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” This expands the term’s literal translation from the French for “one who undertakes” to include the concept of value creation.

Bootstrapping founders epitomize the principle of creating more value with less resources, particularly when hiring. While it may be tempting to try and hire C-level executives with extensive resumes and impressive LinkedIn profiles, smaller businesses often cannot afford those seasoned professionals. To combat this, value creators need to develop a knack for hiring talented people about to blossom.

High Potential Employees, or HIPOs, might have thin resumes—but spotting their burgeoning talent allows you to create significant value that others overlook. This is challenging to do well, however, since
most HIPOs have limited credentials for you to evaluate.

Here’s a three-part process for spotting HIPOs, developed by Skubana co-founder Chad Rubin, who built his company to $5 million in revenue with the help of a team of HIPOs before deciding to sell it to 3PL Central.

Rubin criticized the traditional hiring process as “broken.” How can you evaluate a candidate’s potential in just a 45-minute meeting? Rubin’s alternative solution comes in a three-part approach:

1. Hide a Golden Egg

Many young candidates apply for any (and every) job they come across, but Rubin sought detail-oriented applicants who took the time to understand his business and the specific role. He embedded an obscure request within each job posting to identify those who had read it in full. For instance, he asked candidates to include the name of their favorite ’90s band in their cover letter. Rubin’s intention wasn’t to compile a new playlist; he wanted to see who had read the entire posting.

2. Pattern Recognition

Aware that traditional interviews wouldn’t suffice to gauge a candidate’s potential, Rubin turned to pattern recognition assessments to evaluate their intelligence. He discovered an online puzzle that required candidates to recognize patterns in a set of images, and he found this to be a reliable measure of their intellectual potential.

3. Measure the Fit

Once satisfied with their cognitive abilities, Rubin aimed to gauge how well a candidate would mesh with his team. Instead of relying on a conventional interview, he used a Culture Index psychometric test to assess psychological attributes beyond IQ, thereby measuring their fit within the company culture.

Another psychometric assessment you can leverage is the Kolbe A Index. It measures the ways people instinctively take action and is a great barometer to use when evaluating the value that new employees will bring to your business.

Let’s walk through a concrete example of how you can use a Kolbe score to assist your hiring process. If you need a manager who will run the daily operations of your business, here’s what to look for on the four attributes Kolbe measures, on a scale from 1 to 10:

Fact Finder: 6-8

This attribute measures how someone gathers and shares information. For someone running the day-to-day operations of your business, look for the sweet spot of someone who gathers a lot of info before taking action, without succumbing to analysis paralysis.

Follow Thru: 5-8

This category focuses on how candidates organize and design. You’re looking for someone who initiates systems, structure, and organization, so they should score relatively high here.

Quick Start: 4-6

This one’s about how a candidate deals with risk and uncertainty. Look for someone with a healthy dose of risk aversion. Watch out though, because if they score too low, say a 1, they might not be a fit for an entrepreneurial company.

Implementor: 3-7

The last bucket covers how candidates handle space and tangibles. Ideally, you’ll find someone in the middle who is able to keep things working the way they should, and construct tangible solutions when needed.

This unique three-part hiring strategy, paired with these effective assessment tests, will empower you to consistently recruit high-potential employees—even when they’re entry-level—and unlock hidden value for your organization.

What to Do When Your Clients Want You

Do your customers ever ask that you personally get involved in their account? If so, one of the best things you can do to improve the value of your business (and your life) is to get your employees to treat your customers as well as you do. That’s easy to say but hard to do, which is why the story of Ian Fraser is so instructive. 

A former pro golfer, Fraser got his start in business by helping elite golfers find the perfect clubs as a master fitter at TaylorMade Europe. 

When Fraser launched his own club-fitting business, he quickly realized the necessity of teaching his club-fitting expertise to his employees if he aimed to elevate his company beyond a lifestyle business. Fraser used the following five-step approach to clone himself:

1. Master Your Craft on Someone Else’s Dime

Before founding TXG, Fraser had already dedicated most of his professional life to golf. He began playing at 15, and within three years, he had become a scratch golfer. He then spent eight years at TaylorMade Europe, working in various club-fitting roles where he collaborated with some of the biggest names in the PGA in Europe, including Colin Montgomerie, Gary Woodland, Eduardo Molinari, and Chris Wood. In his final role with the company, Fraser designed and operated the TaylorMade Performance Lab at Scotland’s world-famous Turnberry golf resort.

Fraser describes himself as “underpaid” while at TaylorMade, but he was content to accept a below-market wage because he had a vision for the company he wanted to start. He knew the insights he was gaining at TaylorMade would assist him in building TXG.

2. Think Like Nobu

Fraser drew inspiration from Nobu, the five-star restaurant chain partly owned by Robert De Niro. Fraser argued that when you visit one of the 50 Nobu restaurants worldwide, you never question who the chef is that night. Nobu has established the benchmark for five-star dining, so you’re assured that regardless of the chef or location, you will have a fine dining experience. Fraser utilized the Nobu example to communicate his vision to his team of club fitters.

3. Hire for EQ, Not IQ

Fraser aimed to establish a customer experience company that happened to fit golf clubs, as opposed to a golf-fitting business that offered good customer service. That’s why he prioritized EQ over IQ when hiring TXG staff. “I can teach you to fit a golf club,” Fraser argues, “but I can’t teach you to be a good person.”

Fraser implemented a behavioral interview question to identify the right candidates. He presented potential interviewees with a scenario that offered two choices: one that would benefit the client and another that would provide short-term gains to the company at the expense of the client. Candidates who opted for short-term profit over doing what was right for the customer were eliminated from consideration.

4. Teach Your Employees Through Osmosis

Most golf-fitting studios are private offices where the fitter works one on one with a player. Fraser, however, wanted to observe his apprentices at work and wanted them to learn from his interactions with clients. Therefore, he designed his location with three open-concept bays. He worked from the middle bay so his apprentices could overhear his client interactions and he could listen in on their client conversations as well.

Fraser contended that being physically close to his employees accelerated their learning curve more than any other technique he tried.

5. Broadcast Your Expertise

Fraser established a YouTube channel where he provided club-fitting advice for free. The channel amassed 216,000 subscribers. Fraser understood that only one percent of his subscribers would ever step foot in a TXG store, but the channel reinforced TXG’s reputation as the world’s best club fitters. Additionally, it transformed his marketing strategy from a cost into a profit center as the channel generated over $300,000 per year in advertising revenue, which Fraser reinvested in growth. 

When asked if he was concerned about divulging his “secret sauce” in the YouTube videos, Fraser referred to celebrity chef Gordon Ramsay. He reasoned that Ramsay shares his recipes in cookbooks, but this doesn’t make people any less likely to visit his restaurants.  

By implementing an innovative hiring process and utilizing a creative teaching approach, Fraser
succeeded in expanding Tour Experience Golf (TXG) to a team of 14 employees, developing a YouTube fan base of over 200,000 subscribers, and generating revenue exceeding $3 million. In 2022 TXG was acquired by Club Champion, the largest club-fitting company in the United States, with more than 100 locations.

How to Increase the Value of a Distribution Business

Transforming a distributor or reseller into a valuable company may seem like a daunting task. Distributors are usually not worth very much, because an acquirer reasons that without a point of differentiation, a distributor is vulnerable to a price war. Rather than acquire a target company, a savvy potential acquirer of a distributor could temporarily lower their price for whatever is being distributed and woo most of the target company’s customers without acquiring the company. 

However, the key to this transformation lies in setting yourself apart through innovation and the development of intellectual property (IP).

The Value of Developing Your Own IP

Look at the story of Miles Faulkner, the founder of Blended Perspectives, a reseller specializing in Atlassian products, which offer software solutions for large teams. Faulkner’s story provides a blueprint for how to punch above your weight when selling a business that distributes or resells other companies’ products.

Driven to create a more valuable reseller, Faulkner set his sights on creating a product of his own: the Marketplace Analytic Research Service, or MARS. This tool is designed to guide Atlassian users in selecting the most appropriate aftermarket apps to supplement their Atlassian software.

While Blended Perspectives still made the lion’s share of their money by reselling Jira and Confluence licenses, MARS provided Blended Perspectives with a unique selling proposition, separating it from the multitude of other Atlassian resellers and, in the process, enhancing its appeal to prospective clients. MARS also rendered Blended Perspectives an attractive acquisition target for Contegix, a larger reseller of Atlassian products.

At the time Contegix acquired Blended Perspectives, observers may have wondered why the larger firm didn’t simply lower its prices temporarily to attract Blended Perspectives’ customers. However, for Contegix, the acquisition was not just about growing market share; Blended Perspectives brought a differentiating element to the table.

By owning MARS, their intellectual property, Blended Perspectives was more than just a distributor in the Atlassian ecosystem. This point of differentiation gave Contegix a compelling reason to acquire the firm far above what would typically be paid for a distributor, underlining the value of creating unique products and services in a highly competitive marketplace.

How a Parts Distributor Became a Valuable Company

Another example of someone who went from middleman to eight-figure business is Mahul Sheth. Sheth started VMS Aircraft in 1995 as a distributor of airline parts. He offered a “one-stop shop” for airlines and their maintenance crews to find parts and accessories. 

VMS was the local distributor and survived on gross margins of 22–23%. It was a subsistence living, and Sheth was determined to build a more valuable company. He decided to evolve his value proposition from just being the local warehouse for distributing other people’s stuff to a sophisticated provider of advanced materials. Sheth chose to focus on the materials that airlines need to be stored and handled meticulously. If the safety of your metal tube flying 300 people 40,000 feet in the air is determined by the quality of a seam of metal, you want that steel to be handled carefully. You also want the sealant that joins the sheet of metal kept at a temperature that maximizes its adhesiveness. You may also want your rivets stored with the same care a surgeon uses to put away her scalpel after performing life-saving surgery. 

Sheth invested in a clean room that minimized dust at his facility. He bought dry ice containers so certain materials could be stored in a cold environment, maximizing their effectiveness. He also repackaged materials into smaller containers so that an airline that only needed a small amount of a particular material didn’t need to buy an entire tub. Sheth’s evolution from simple reseller to value-added provider fueled his gross margins to60–70%. Along the way, Sheth attracted a French company that wanted to enter the U.S. market. Rather than set up shop to compete with Sheth, they realized VMS had created a
unique offering with a layer of value-added services that would be difficult to imitate. They decided to acquire VMS for 7.4 times EBITDA.

In Conclusion

If you’re a business owner operating in a highly competitive field like distribution, it’s crucial to pinpoint your unique selling proposition and dedicate resources to developing your own intellectual property. These strategies not only augment your business’s value but also strategically position it for potential acquisition down the line.

The Recurring Revenue Bump

Last month, Darden, the owner of the Olive Garden restaurant chain, announced it was acquiring Ruth’s Chris, the legendary American steakhouse, for $715 million, implying a valuation of around one times last year’s annual revenue, or about ten times their adjusted EBITDA for 2022.

Not bad for a giant company, but Ruth’s Chris’s value was likely hindered by its lack of recurring revenue.

Comparing Ruth’s Chris to another traditional business with recurring revenue demonstrates the power of automatic customers. For instance, Waste Management, a private garbage collection company that disposes of trash for clients through long-term contracts, trades at over three times its annual revenue.

Two companies in traditional industries, have nothing to do with software, yet one trades at
one times revenue while the other fetches three.

Recurring Revenue: Not Just for Software Companies Anymore

Many people consider recurring revenue to be exclusive to software companies, but traditional businesses can also reap the benefits of creating recurring income streams. For example, let’s look at Gamal Codner, the founder of Fresh Heritage, a line of men’s grooming products that began with beard oil for softening facial hair prior to shaving.

Codner used Facebook ads to acquire customers at a cost of around $15 each. However, with an average order value of $30, there was little margin left to support his expanding operation. Recognizing the need for change, Codner decided to broaden his product line by introducing additional grooming offerings and launching the VIP Club, a subscription program for men wanting automatic shipments of Fresh Heritage products.

A Subscription Program That Goes Beyond Just Discounts

Codner conducted an in-depth survey among approximately 500 customers and made an intriguing discovery. He found that his target customers were less captivated by discounts and more attracted to the empowering notion of being an alpha male in their respective fields. The insightful results from this survey perfectly aligned with Fresh Heritage’s inherent goal of building a distinct brand that appealed specifically to growth-oriented men, those that were keenly focused on boosting their self-confidence.

Subsequently, to incentivize men to join the VIP program, Gamal moved beyond merely offering financial incentives such as discounts. He strategically created a sense of community and belonging by emphasizing membership in a group of like-minded individuals, all striving for personal excellence. To nurture this sense of community, Gamal established quarterly local area meetups, providing valuable opportunities for members to network and share experiences. These empowering gatherings soon evolved into a significant driving force, steering new customers toward the experience offered by Fresh Heritage’s VIP program.

Converting Customers into Subscribers

Gamal continued to acquire customers through Facebook advertising, and instead of relying on
one-time purchases, he successfully converted them into subscribers, significantly increasing their lifetime value. The average order value also surged to over $60, and with the subscription program expanding to 3,000 members, Codner’s EBITDA margin grew to 40%.

That got the attention of BRANDED, an aggregator of digitally native, direct-to-consumer brands that made Gamal an acquisition offer he couldn’t refuse in 2022.

Recurring revenue will make your business more valuable. As the example of Fresh Heritage demonstrates, you don’t have to be in the software business to create an annuity stream. Find out what your customers crave on an ongoing basis, and you will have the raw material for a subscription offering.

How First Impressions Can Drive the Value of Your Business

The initial impression customers have of your business often influences how much they decide to spend with your company. This is well known, but have you ever considered how first impressions affect the way potential investors value your business?

When raising capital, investors’ initial perception of your business significantly impacts their valuation,
affecting both the equity you’ll need to give up for growth and the company’s value when selling.

Take Jeremy Parker’s experience raising money for Swag.com as an example. Investors initially perceived Swag.com as a simple distributor of promotional products. Despite Parker’s efforts to position the company as more than a middleman, investors weren’t convinced. They categorized Swag.com with other promotional product companies, offering Parker a low single-digit multiple of EBITDA for a stake in his business.

Parker re-strategized, presenting Swag.com as an e-commerce platform with a memorable domain name and a world-class, elegant, direct-to-consumer buying experience. This shift in perception transformed Swag.com from a simple distributor to a technology company in investors’ eyes. As a result, Parker received an acquisition offer that valued his $30 million company at a healthy multiple of revenue.

When it comes to raising funds or selling your business, optics matter significantly, and the way investors categorize your business in their minds plays a crucial role.

The Alibaba Discount: Why Diversification Can Hurt Your Valuation

Speaking of being categorized incorrectly inside the minds of investors, recently Chinese Internet giant Alibaba announced its intention to split into six separate businesses. In the two weeks following the
announcement, Alibaba’s market value increased by $19 billion. Why would investors welcome such a
move? Alibaba consists of a range of businesses resembling those of Amazon.com, including e-commerce, logistics, and cloud storage. Before the announcement, Alibaba was valued at just ten times their earnings forecast for next year, yet each individual business as a standalone will likely fetch a much higher multiple.

Investors often discount businesses like Alibaba, as they are compelled to purchase assets, they may not be interested in. They frequently apply the lowest value multiple of a particular business to the entire
group of companies. Amazon faces a similar situation. The Bloomberg Intelligence Unit estimates that
Amazon’s cloud storage division, AWS, could be valued at $2–3 trillion as a standalone business.
However, as a collection of various services, from e-commerce to audiobooks and cloud storage, Amazon’s entire market capitalization is less than half (around $1 trillion) of what Bloomberg analysts believe just one of its divisions could be worth as a standalone.

Focus or Diversify? Striking a Balance Between Revenue and Valuation Goals

Investors typically prefer businesses that concentrate on dominating a single product or service rather than diversifying into various unrelated offerings. A diversified portfolio may lead investors to perceive your business as unfocused, which can result in a lower valuation. The same principle applies when you decide to sell your company. If your business appears scattered, potential acquirers may focus on your
least valuable division and apply that multiple to your entire organization.

It’s essential to prioritize your goals: Do you aim to grow your business by increasing revenue or enhancing its value? While these objectives are related, they require different strategies. Pursue diversification if your primary goal is to boost revenue. However, if you’re striving for a more valuable company that could potentially be sold, maintaining a clear focus is crucial.

How to Protect Your Equity When Your Business Is Thirsty for Cash

When it comes to financing the growth of your business, you may find yourself facing a difficult choice between the lesser of two evils. Selling shares in your business can provide an immediate cash injection, but it means giving up some of your valuable equity stake. Borrowing money from a bank, on the other hand, can be costly to repay, can limit your growth, and often requires that you provide a personal guarantee.

However, there is a third option: customer financing. This approach involves convincing your customers to prepay for some or all of your product or service, providing you with the necessary working capital to drive growth. This method can be a great alternative to selling equity or taking on bank debt and gives you access to cash without having to sacrifice ownership or pay interest.

How Brad Lorge Got His Customers to Fund the Growth of His Business

In 2015 Brad Lorge founded Premonition, a technology company that provides logistics software to streamline delivery operations for large enterprise companies. While working with big businesses brought in good revenue, large enterprise customers were slow to make purchasing decisions, and when they did decide to buy, getting them up and running was slow and costly. If an implementation failed, Premonition risked losing months’ worth of work for nothing.

Rather than the traditional approach of financing a software start-up (rounds of dilutive funding), Lorge asked his customers to prepay. Having customers pay in advance allowed Premonition to utilize the cash from their customers to fund its growth.

By March 2022 Premonition had grown to $3 million in Annual Contract Value (ACV) when Shippit acquired it for $20.5 million—an implied valuation of just under seven times ACV. Better yet, because they used customer financing, Lorge and his partners still owned 80% of the equity in the company when they sold it.

Customer financing can be a powerful tool for business owners looking to raise money without giving up equity in their businesses. If you’re considering getting your customers to prepay, like Lorge, start by understanding your customer’s needs and motivations. Consider what’s in it for your customer to prepay. Could you guarantee delivery times in return for a project deposit? Could you offer incentives or discounts that make sense for your business and your customers?

Productize Your Service

If you offer a service, another strategy for getting customer prepayments is to consider productizing it. A productized service is a type of service offering that has been standardized and packaged as a product with a defined scope, price, and deliverables. It is essentially a predefined service that is delivered repeatedly to multiple clients in a similar fashion, with a fixed set of deliverables, processes, and pricing. Examples of productized services include website design packages, social media management plans, and content creation bundles.

The goal of productizing a service is to simplify the sales process, increase efficiency, and provide a predictable customer experience. By creating a standardized offering, service providers can reduce the amount of time and effort required to close a sale as well as minimize the need for customization, which can be time-consuming and expensive.

Best of all, when it comes to products, we are accustomed to paying in advance (e.g., you expect to pay for that box of cereal at the grocery store before going home to dig in). Therefore, if you package your service offering into a product, your customers will be more inclined to pay up front for some or all of your offering.

Productizing your services or asking customers to prepay can be effective ways to obtain the cash your business needs to grow while keeping a tight grip on your equity and avoiding the obligations of a hefty bank loan.

One Overlooked Metric That Could Transform Your Company’s Value

You know gross margin impacts your profit, but have you considered the impact it has on the value of your company?

When assessing your company’s value, acquirers and investors will often scrutinize your gross profit margin. Gross profit margin is the difference between a company’s revenue and its cost of goods sold. In other words, it’s the profit a company makes from each unit of product or service sold after accounting for the cost of producing or delivering that unit but does not include other fixed expenses. For example, if a company sells a product for $100 and it costs $70 to produce and deliver it, the gross profit margin would be $30, or 30%.

A high gross profit margin is a crucial factor for investors and potential acquirers as it indicates that a company has established pricing power through marketing differentiation and possesses a competitive advantage. A strong competitive moat is an indicator of a company’s long-term sustainability, making it more appealing to potential investors.

When a company’s gross margin shrinks, it indicates to investors that the company may be competing on price. This is typically a sign that the business lacks a unique value proposition or marketing differentiation and that competing on price is the only way to attract customers. A shallow moat leaves the company vulnerable to competitive threats and makes it less appealing to potential acquirers.

24 vs. 6 Times Earnings

To illustrate the impact of gross margin on a company’s value, let’s compare two companies: Apple and Dell. Apple has a strong competitive advantage and a healthy gross margin, whereas Dell’s competitive moat is weaker, and its gross margin is lower. In 2022 Apple’s average gross margin was 43%, compared to just 23% for Dell.

Apple has a highly differentiated brand and controls the buying experience through its Apple Stores. Additionally, Apple has invested in a range of high-margin subscription offerings, such as Apple TV and Apple Music. The market is willing to pay more than 24 times Apple’s 2023 earnings forecast, and the company has a market capitalization of over $2 trillion.

By contrast, Dell offers commoditized technology products, which puts them in a weaker competitive position, requiring them to compete on price and resulting in a lower gross margin. The market is only paying around six times Dell’s 2023 earnings estimates, giving it a total market capitalization of around $30 billion.

Just as gross margin impacts the world’s largest publicly traded companies, it also impacts smaller businesses. Ron Holt started Two Maids & a Mop, a residential cleaning company, in 2003. Holt ran a lean business and enjoyed healthy gross margins and a net profit margin of around 30%. Holt invested his earnings in differentiating his business from mom-and-pop cleaning services. He built a network of 12 locations across the southern U.S. and had plans to expand across the country.

Holt was curious about franchising as a business model and attended a Las Vegas conference where he
had a chance encounter with Subway founder Fred DeLuca. Subway had more than 40,000 locations
around the world at the time, so Holt asked DeLuca for his expansion advice.

DeLuca cautioned Holt about actioning every idea from his employees as his company got bigger. He
told Holt, “Most of the time, employees bring you ideas to make their life easier, not to make you more money. Every time you make your employees’ lives easier, it comes at a cost.”

Armed with DeLuca’s advice, Holt grew Two Maids & a Mop from 12 to 91 locations and $40 million in
revenue without seriously compromising his gross margin. In 2021 Holt sold his business to JM Family
Enterprises for over ten times EBITDA.

Taking Action

Apart from raising prices or reducing input costs, an often overlooked approach to improving gross margin is to invest in carving out a point of differentiation for your business in the minds of your customers. When your customers see your business as unique, you are less likely to have to compete solely on price. Charge a premium for a differentiated product or service, and you’ll beef up your gross profit margin—and the value of your company.

The Purest Way to Increase the Value of Your Business

Picture a magic slot machine. Each time you pull the arm, you make back a multiple of whatever you wagered. How much time would you devote to cranking that arm?

When it comes to the value of your business, you can make many bets, but only one has a virtually guaranteed return. Most companies are valued on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), so every dollar of incremental profit you earn in the short term will translate into a multiple of that down the road. 

Since most acquirers look at three years’ worth of financial reporting, squeezing out every extra dollar of profit makes even more sense if you’re considering an ownership transition in the next thirty-six months.

How Derek Morin Jacked Up the Value of His Business

For an example of a founder obsessed with finding every dollar of profit available, let’s look at Derek Morin. Morin founded Tabarnapp to create after-market sales applications for Shopify website owners.

The business was a success, but when his partner, who handled finance, left the company, Morin was forced to look closely at his profit & loss (P&L) statement. Morin saw potential improvements, so he made notes in the margin next to each line item he wanted to change. 

To save time, he started using a single letter beside each entry to represent the action he wanted to take:

P stood for “Plus,” something profitable, and he wanted more. 
U stood for “Unnecessary,” an expense he could eliminate. 
R stood for “Replaceable,” a cost that could be replaced with a better or cheaper option. 
E stood for “Equal” and was used for items that should be left untouched.

Morin realized his shorthand notes could be organized into a memorable acronym he referred to as “PURE.”

Morin treated the PURE method like a game. Every month he scrutinized his P&L with the same four-letter system. Morin engaged his team to act on each item that needed improvement. He became obsessed with squeezing out a few more dollars of profit every month. 

His game worked. In 2020 Morin had bought out his business partner in a deal that valued the company at around $400,000. Two years later, after applying the PURE methodology of improving profitability, Morin sold Tabarnapp in an agreement that implied a roughly tenfold increase in the value of his business.

The Downside of Using Your Company’s Bank Account as a Slush Fund

There’s a downside to treating your company like your piggy bank. Co-mingling personal and business expenses while letting other costs go unchecked may help you reduce taxes in the short term but could end up costing you more in lost value when you decide to sell your business. Instead, keep your P&L “PURE” to jack up the value of your business.