The Benefit of the 'Business' Niche

Most business owners begin with a vision. They may not frame it in their mind as a “vision”; but nonetheless, they have one. At the core, the vision begins with some void or weakness in the marketplace, which the aspiring new owner thinks he can competitively fill with a new product or service.

Rock Sathre started a manufacturing company in a small rented garage. He manufactured custom subassemblies for various customers. He made his own tooling, designed to enhance production quality and to solve special problems for his customers. He knew he could provide competitive services, because he could solve certain types of manufacturing problems that others couldn’t. Industrial Custom Products was formed.

Nancy Friedman complained to her insurance agent about his horrible telephone reception and service. At his request she came in a week later and spent an hour telling his staff how to do a better job in responding to customers on the phone. Results were so good that she then had several follow-up calls from friends of his, asking her to do the same for their companies. It didn’t take long for her to say, “This is a need in the marketplace which I can fill.” Her company, Telephone Doctor, was formed.

The initial vision for a business is generally a focused concept for filling a needed niche. Over time, this initial clarity of the enterprise vision naturally changes and evolves. Opportunities come along, which, although not the original focus of the business, seem to offer short-term help to building revenue levels. The owner tells himself he is “expanding” into other areas. The incidental new business that happens along is happily folded in as increased revenue, without much scrutiny as to its relative fit with the initial concept. Focus becomes blurred.
These are natural responses to normal patterns of growth and evolution. Unfortunately, these “natural” patterns can be dangerous. Growth without focus can be hazardous to your company’s health.

Strategic buyers – the ones who pay most dearly for the select enterprises that they want – search for FOCUS. They want the niche player, who has carved out a special spot where he is king.

So what is a “niche”? What does that actually mean in form and appearance?

For the manufacturer it may mean that you are the only provider of a patented technology or a “family” of patented technologies. For a distributor it may mean that you are THE supplier of 70% of a narrow given category of product in the United States. For a service company it may mean that you have a solid reputation as the best provider of a single service. For a retailer it may mean you have the most complete stock of a particular well-defined product category. It may be a focus on customers whom you understand, an extended service capability that perfectly fills a need, or an element of quality that you alone have perfected.
Aristotle Onassis said that the secret of all business is to know something that nobody else knows. The advantage is what gives you focus.

When buyers see it, they want it. Your margins of profit are higher than others because of your niche position. Your competition will have far greater trouble displacing you. You have the momentum of success in one focused area, which is likely to build naturally upon itself and multiply, in continuation of a solid trend line.

In the entire world of attributes that add value to businesses, there is no one element as important as FOCUS.

“Put all of your eggs in one basket – then watch the basket.” Mark Twain.

We represented the owner of a plastics manufacturing company who was eager to sell his business and who was very excited about his niche. He informed me that he had not only one, but TWO niches! Even better than one! His company was a leading manufacturer of every plastic part imaginable for the snowmobile industry, from fenders to dash panels to mirror trim. They had the best clients in the world in this segment, and they proudly worked to know more than anyone in the world about snowmobile production issues, market demand, and even timing for their customers’ production needs.

At the same time, the company was also fast becoming one of the top producers of anti-static packaging in the United States. These two markets accounted for around 80% of the company’s business while the other 20% was somewhat ad hoc. Ad hoc in this case did not mean unimportant. The company cared meticulously for all of its customers, and had many special little pet products. As a result, profits were great, customer relationships were excellent, and we were thrilled to take this fine company to market.

We researched and probed and carefully screened to identify the “best” prospective buyers. Packaging concerns were paying great prices for acquisitions. Our client sold anti-static packaging products to the computer and telecommunications giants, and the major players in this market were cool and polished developers of the mega-sized customer account. They recognized promising value in our client, particularly in one clever design and in its niche development of budding antistatic solutions. Thus they found the company very interesting. However, when viewed in total, one after another concluded that it was not quite a natural fit. “We love the anti-static packaging niche these people have carved out, and it could be a great complement to our other product offerings. But… is that a snowmobile fender?”

The recreational vehicle types were a hardier, more free-wheeling crowd, with great appreciation for our client’s understanding of their customers. “These guys really know their stuff. Look at these ingenious handguards that won’t break, even at one hundred degrees below! But... what in the world are those anti-static people doing? Production people wearing hairnets and booties seem a little outside of our range.”

The two business segments could not be split apart, because they shared too many people, too much capital equipment base, and all of their space. The company was still great and commanded a good price, but if either one of the segments alone had represented a vast share of the business, the company would probably have brought at least 25% more.

Is there risk in focus? Sure. But it creates power and life and targeted drive, which is usually worth the risk.

As one of my Texan clients once put it, “If you’re gonna be great, you gotta figure out where you’re goin’, and you gotta commit. There’s nothin’ in the middle of the road but yellow stripes and dead armadillos.”

Deborah Douglas -
Author ‘Cashing In! Selling Your Company for Maximum Price'

www.DouglasGroup.net