VALUE SIPHON OR VALUE CREATOR?
I always considered myself an entrepreneur. My father introduced me to the concept of being an entrepreneur and I gained my understanding of what that meant simply from watching, doing, and reading about other entrepreneurs. I thought I knew what it meant to be an entrepreneur, that is until I came across one of the most well-known and respected business gurus, a man named Peter Drucker. Drucker dropped an atomic bomb on my idea of what entrepreneurship is and gave me a completely new perspective that forever changed the way I thought, and more importantly, how I went about building and running businesses.
Today we’re going to talk about some important differences and distinctions between what it means to be an entrepreneur and what it means to simply being a proprietor or owner of a business. I said something in a prior episode that triggered a few people and generated a few comments regarding whether or not you, as an appraiser, are actually considered by some as anything more than an independent service provider or salesperson. There is a debate of sorts in the world of entrepreneurship around what constitutes a real business and what doesn’t.
At the end of the day, it doesn’t really matter what you call yourself, real business or not, since you didn’t start your company to settle a debate. You started your company, presumably, to have freedom, independence, income, security, a better future, some control, and do something meaningful in your life. You became a solopreneur, so to speak, for all your own reasons and it doesn’t really matter what somebody else calls it.
However, what I intend to highlight in this episode is the difference between what management guru, Peter Drucker, called a mere proprietor of a business versus a true entrepreneur. And again, you may not care about this debate, or these differences, but you should. It’s not the words or the titles that matter, it’s how these two disparate mindsets operate, and the successes of one versus the other that really matters. As the saying goes, the proof is in the pudding, and most appraisers, most realtors, most loan originators, heck, most small businesses out there, are acting as simple proprietors instead of real entrepreneurs and the proof is in the pudding.
So, what’s the difference between an entrepreneur and a proprietor you ask? The difference is profound my friends! I have heard for many years now and from a variety of industries that I’ve both worked in and coached in, the term entrepreneur tossed out by business owners of all kinds from franchise owners, real estate brokers, truck drivers, mechanical contractors, martial artists, and of course appraisers. However, what many of those who threw the term out there thought they were referring to when they called themselves entrepreneurs was really just the proprietor of something loosely called a business.
If you have never heard of the great Peter Drucker, I would like to suggest that you start googling him and become familiar with his writings and business philosophy. Peter Drucker left us at the ripe old age of 95 back in 2005 after having a massive impact on the business world and the field of management, specifically. What Drucker gave us was a way to look at businesses, creating them, running them, building and managing them, and then a new way to value their impact and their true profitability in something other than just straight-line accounting terms. Drucker taught us about a concept called Economic Value Added, which is a way to look at what a business is truly creating in the market. Without going into all of the accounting minutiae of the EVA (economic value added) model of valuing a business, what it essentially says is that unless or until a business is adding more to the market than what it is taking from the market to cover its costs, its actually destroying wealth, not creating it.
Ok, this is a huge concept, and it can get complicated because Peter Drucker taught large manufacturing organizations how to look at quality, efficiency, leadership, accounting, and a variety of other topics so that they could exist profitably long into the future. Some of the things that are valued and measured in a manufacturing system would have little to no comparison or equivalent in an appraisal or real estate business. However, the ideas and concepts, once you understand them, can be applied across the board to any and every business and that’s what this episode is about.
In essence, I’m hoping to get you thinking about what you’re really doing in the business you’re in. What kind of business are you operating, and more importantly, what kind of business do you WANT to be running? One of the first steps in moving in that direction is asking a series of questions. 3 of the questions that Drucker was famous for teaching his management and leadership students were these:
- What is our business today?
- What will be our business?
- What should our business be?
Since most appraisal businesses are one to three person operations, the owner and chief appraiser is typically the one who is responsible for asking these questions, or at least teaching his or her people to be asking these questions on a regular basis.
Drucker was famous for a bunch of different ideas and sayings, but one that has made a serious impact on the way I’ve looked at business for the past 20 years or so is something else Peter Drucker said, which is that “the purpose of business is to create a customer”. In fact, he said that is really the only purpose of a business. Businesses do a variety of things. Some make stuff, some sell stuff, some provide services, and some do a combination of all those things. However, is that the purpose of their businesses? Drucker would argue no! The purpose of all those businesses is to create a customer and the way they do that is by constant review of what it is they do to create that customer, what they should be doing, how they are taking care of that customer, the value of their product and service in the marketplace and how to continuously be looking into the future to see what business will be and what it should be.
When you think of your business in that way and from those perspectives, I believe your paradigms start to shift. One of the big problems in the appraisal, real estate, and lending industries is that many of the people producing the product or service tend to think like employees in a bigger business. By that I mean that they tend to think it the job of somebody else to innovate, to think differently, to question value and process. By value, of course, I don’t mean opinions of value, I mean the value an appraiser, a realtor, a loan originator adds to the overall market. I can tell you with 100% confidence that almost every single one of them thinks about one thing and one thing only: income. Appraisers count everything in terms of appraisal dollars, lenders and realtors count everything in terms of commission checks. Appraisers buy things based on the number of appraisals it will take to pay for a thing and realtors buy based on the number of commission checks it will take. A computer is 2 appraisals, a nice Disto laser is one and half appraisals, and a reliable car is 50 appraisals.
That kind of thinking is, of course, very limited and limiting, and it’s part of the problem the industry is facing today. It puts you in a position of simply taking from the market and thinking you’re making some profit if you cover your cost of doing business and put a little in the bank at the end of the week, month, or year. The big problem is those who think they’re profitable at the end of the year because there’s some left over. The extra money lies to them and makes them think they’ve actually created something. It makes them believe they're doing something right and why break it if it ain’t broke! If they were to start thinking like an investor, however, they’d apply the principle of substitution and highest and best use of their time, energy, and resources and they’d likely look at things a little differently.
You can easily build your bank account in any of those businesses. You can make really good money in the appraisal, real estate, and lending businesses. Although, in the last year or so, the differences between somebody who was relying on market demand to feed them, and an entrepreneur constantly digging their well and preparing for the future has become painfully clear. The incomes of all three of those professions has dropped significantly for many and, no, it’s not simply because demand for what you do has decreased. That’s a symptom of a bigger issue. The bigger issue being the work done in advance of the downturn by the so-called ‘professional businesspeople’. If you ever wondered why there is a debate about whether or not you’re running a real business, it’s blatantly obvious today.
And this is what people like Mr. Drucker and Jay Abraham would refer to as merely proprietors of a business and not entrepreneurs. A proprietor is somebody who adds nothing meaningful to a particular business category. They merely siphon off market capital and wealth from the market without necessarily creating any value and offering that back to the market, this is the EVA concept, or economic value added, that we discussed earlier (a much-simplified variation, anyway). A restaurant, auto shop, grocery store, Realtor, Lender, or appraiser that does things the same way everybody else does it, and the same as the thousands that have come before them, is adding very little, if any, real value to the market. They’re simply doing things the way they’ve always been done, more or less, and taking an income from the market.
Now this may not be a big deal to you. You may say, I don’t give shit what you call me as long as I’m getting paid. To which I’d say, cool, carry on. But to those that call themselves entrepreneurs and legitimate business people looking to be around for a long time and evolving with the market, as well as the needs of your customers, you’d do well to examine the differences and requirements of calling (and thinking) oneself an entrepreneur versus merely a proprietor of a business that, as we’ve discussed in other episodes, is seen typically as a commodity by most users, just as the typical burger joint is seen as a burger joint like all the others, aside from maybe its location. The owners of the typical business are hoping to extract from an existing market more dollars than it costs to operate and meet their needs for income or some kind of return on their investment. They’re hoping that the market will expand to take advantage of whatever it is they’re offering but they offer nothing special in return and offer nothing in the way of a better experience. They don’t innovate, they don’t redefine the concept or service, its merely another appraiser or realtor in the market.
Conversely, a real entrepreneur runs a business committed to continuous innovation of how they operate, offer their services and products, conduct their business, and the experience the customer or client receives from the interaction. A proprietor sets up a nondescript generic business that simply extracts an oxygen molecules from the air and cash from the market but contributes nothing beyond their own self-serving nature of the product or service they’re offering. An entrepreneur thinks through every step of their offering and service and all of the potential pain points in the process to make the product, service, and experience different than the burger joint down the street. In essence, always asking “what business are we in”, “what business should we be in”, and “what business do we want to be in”, and constantly reconciling those questions. The proprietor merely does what has always been done with no effort to create a new satisfaction, experience, or consumer demand for their product or service. All they do is hope to tap into existing demand.
We see this every day in every market. Appraisers complaining about the lack of business, the lack of clients, the proliferation of AMCs, the decreasing of fees, the rise and role of AI in the process, big tech pushing you out, and a host of other issues related to the industry. And as I’ve stated several times before, many of them very real issues for appraisers and signposts for the industry. However, entrepreneurs tend to see all of these things as signposts too, but what they do differently is they then look for the opportunity that may exist, whether one exists now or needs to be created. A proprietor will simply complain and slowly wither away, or they’ll willingly exit the industry on a sour note. In essence, the burger joint closes down because there aren’t enough customers in your market to continue extracting money from. The burger joint didn’t do anything special, different, or innovative enough for the market to say, “we’ll frequent your burger joint over the one three blocks or a mile away”.
Entrepreneurs create! They create new things, new experiences, new levels of satisfaction for their clients and customers, they’re more exciting, better marketers, more desired and desirable in the market, and, most importantly, they add some value back to the market instead of just taking from the market. Entrepreneurs think differently and, based on the way they think, they find ways to improve, innovate, redefine, and shape the experience for the end user so as to add value and thus separate themselves from the rest of the market. It’s not good enough to just tell the market you’re better, if you actually are, because it’s about recognizing that you have to actually be different before the market can accept it as true. When you actually innovate and redefine the experience, the customer and client do the marketing for you.
I’ve talked about this before; it’s a marketing concept called push pull. Either you’re pushing your marketing onto your market hoping they’ll bite on your offer, or you create so much value in your market that the market actually demands YOU, this is the pull side of marketing. You create so much value for your market that they pull you into the transaction. That’s one of the big differences between a proprietor of a business and a real entrepreneur. One does what has always been done and is subject to the whims of the market where the other is always seeking to change the game, renew the vision, redefine the marketplace, and they seek to add value to their offering beyond what it costs. One of them works for somebody else (and that could still be you as the sole proprietor) and the other is constantly rehiring themselves by creating new markets, new customers, new clients, new products and services, and new experiences.
At the end of the day my friends, this is all just an exercise to begin asking yourself which one are you currently, which one would you like to be, and which one should you be. You may come to the conclusion that you are quite happy to extract an income from the market doing what you’ve always done and that’s just fine. There are many appraisers, realtors, lenders, and burger joints doing just fine and happy with what their business model affords them in terms of lifestyle and income, although that has changed drastically in the last year or so with the increases in the interest rates.
The point of the exercise and questions are simply to create some honesty in your self assessment of your business, what it is and what it isn’t. If you’ve been telling yourself and others that you’re an entrepreneur and you run a successful appraisal business, but the bulk of your business comes from AMCs, it may be time to reassess because you are what Peter Drucker would call simply a proprietor of a business doing what thousands have done before you and adding nothing to the market. The entrepreneur, on the other hand, is always looking for ways to add value to the market, systematize their business, build some kind of equity, and get paid based on the value they create in the market.
Friends, if you’re ready to go from being an proprietor of a small business that relies on market demand to put food on your table, to somebody with a business that you can leave for a month and still earn an income while you’re away, it’s time to join our Appraiser Increase Academy and start to develop some of the pieces in our business that will allow you to do that. The appraisal industry is changing, and it doesn’t care if you’re upset about the changes or not. It’s up to you to make the necessary changes to stay ahead, stay on top, and build something that is scalable and salable. You can join us for free for 30 days by going to www.coachblaine.com/freemonth and get access to all of our coaching exercises, profit sharing community calls, 60+ hours of video training, almost 10 hours of guest coaching videos, and a vibrant community of some of the most successful appraisers in the country, at least 8 of which built their companies to the point of a successful sale in the high 6 figures and even some 7 figure exits.
We talk about this all the time on this show. Even if you have no interest in ever selling your company in the future, you’re buying it yourself with your time, your life energy, and the sacrifices you make to it. You are the current buyer whether you know it or not. You should always be building and running it like you’re going to sell it. Not only does it make it more valuable for you as the current buyer, it makes it that much more valuable to somebody actually interested in buying profitable businesses. www.coachblaine.com/freemonth to come be part of a dynamic community of big thinkers and high achievers.
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