Improve Your Valuation: Revenue

There are some simple things that you can do to get a better valuation of a business that you want to sell. The obvious is to increase Revenue and Profit. I want to talk more about subtler things that you can do to improve your valuation. In this post, I want to talk about the kind of revenue that you get and how it impacts your valuation.

To start with, I want to define three basic types of Revenue: One-Time, Repeat, and Recurring. One-Time Revenue is straightforward. This is transactional Revenue that does not repeat. Car Sales would be a classic example of this. Automobiles are not replaced often and so each sale is likely between a dealership and a person. My current car is 16 years old and so I hope that the dealer was not expecting Revenue from me over that time. There is sometimes brand loyalty between an individual and a car maker. In this case, a family might periodically buy from the same dealer for multiple family members. In my family, I had a cousin who owned a Plymouth dealership. My parents bought several cars and trucks from him over a 20-year period. This is Repeat business. Finally, as cars became more expensive, automakers started leasing cars to buyers. This allowed the customer to rent the vehicle over a long period of time with an option to purchase at the end of the agreement. This has created Recurring revenue for automakers. They get a payment every month from the lessee.

The value of these different types of Revenue is placed in exactly that order. One-Time is the least value. Repeat is more valuable than One-Time. Recurring is the most valuable. To understand why these different Revenue types are worth different amounts, let us look at each type. When you buy a company that has only One-Time Revenue, you must sell and market to close each individual deal. Repeat customers are pre-sold, but a change in ownership may cause them to re-think their purchase behavior. Recurring revenue is generally linked to contracts. This means that a percentage of the revenue is guaranteed for a period. If you were purchasing a company, would it be appealing to know that all the next 12 months of revenue was already sold?

At this point, most people object to me that they cannot create a different kind of revenue stream for their business. I point at the automakers and note that they have created a huge Recurring revenue stream from a business that was One-Time 30 years ago. Some creative ways of doing this must be used to help small businesses get through this process. A great place to start is loyalty cards. These are “points” programs that you might see at a Sandwich shop. You get the 10th one free. In the end, this is a 10% discount for repeat customers. This can be extended into Recurring Revenue for a Massage Therapist if they purchase a “Massage A Month” program that gets billed to the customer’s credit card. Maintenance Agreements are other great ways to get Recurring revenue. This way customers pay you what is essentially insurance to defray larger incident costs.

There are many ways to move up the Revenue food chain. If you need to talk to someone about how to do it for your business, give me a call. Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, and Strategic Planning

Change Your Business – Change Your Life!

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All Good Things

This is not about the end of my blog or anything like that. What I want to write about here is that at some point you and your company will part ways. Either you will sell it, close it, or die while still running it.

For most small business owners, their business represents a tremendous investment of their time and money. If they were not running their business, they could be employed by someone else and earning a living that way. They could invest their dollars in other ways and potentially make good money doing that as well.

What this means is that everyone should be looking at the amount their business will generate for them at a Sale, if any at all. This could mean the difference between retiring normally and working until the time that you pass.

This will be a series about how to create a business valuation that meets your needs. If you are unclear of what you need from your business to retire, then visit a Financial Advisor. Most of them will do a free retirement plan. Just like any type of retirement planning, the sooner you think about a transaction the more likely that you will get out of it what you want.

Once you have that number that you need from the business, it is time to work on your valuation. For most small businesses, this is a multiple of the cash flow from the business plus net assets. To be clear, cash flow is the Net Profit from your business adjusted for any Capital Expenses. Since a number of the deals that I look at are in the Internet Service Provider space, Capital Expenses can be considerable. If that is not significant in your business, then it is just Net Profit. Assets would include any bank accounts, receivables, payables, fixed assets, inventory, and intangible assets that a business might have.

Both of these portions of the business are a bit more negotiable than one might think. It requires some accounting and some thought on how to get to an effective valuation on both fronts. For Net Profit, it turns out that many small business owners run some household expenses through the business. This needs to be changed in order to arrive at the right amount of Net Profit. There may be other factors that are added back (like underpayment of the owner as CEO). For Assets, both Fixed and Intangible Assets are more difficult to quantify. Intangible Assets are hard to quantify (What are your digital assets worth?). Even Fixed Assets can be tough. Do we look at the depreciated value or the replacement value?

All of that should be thought out before you want to sell your company. Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Building the Value of Your Business

I work a lot in the business of mergers and acquisitions, and it leads me to want to talk about a one-off topic here. When I evaluate a business for what I think it is worth, I start with a basic formula:

Value = Multiple * Cash Flow + Net Assets

I use Cash Flow instead of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) because I work with several industries that have a significant number of fixed assets and invest in these assets regularly. There are two points of debate when we talk about this formula. First is what is the Multiple. Second, is what are the net assets. The Multiple is always a discussion and for most small businesses they number runs between 2 and 5. Net Assets are a discussion because there are multiple ways of valuing the asset.

In the past, I posted a series on Inorganic Growth. Inorganic Growth is the purchasing of other firms to help accelerate your growth. The alternative is Organic Growth which is all about growing the existing business. The goal of both is to expand the Cash Flow but come with some risks. A well-cited statistic is that 75% of all acquisitions “fail”. I think this number is understated as success should be about generating more Cash Flow than the purchase price of the firm. Organic Growth often requires investment before profit expansion. A typical method would be to hire additional Sales Staff. This Sales Person (or People) need to get paid before they bring in new customers. Depending on your typical Sales Cycle, this can be a long time.

A lower risk alternative is to look at the Asset side of the equation. The most obvious thing to do to grow Assets is to acquire the building that your business is located in. For a large business, this is not generally a great idea. Their investors want them to invest their capital in their primary market. For a small business, the investors might be just the owner. By buying a building, the owner is diversifying his or her business investment. It provides a potential for additional value at the sale – though not at a Multiple. The owner may also decide to keep the building and keep the cash flow from leasing the space. Finally, there is a tax advantage in the deduction of the Depreciation from paying off the building.

So, I hope that helps Owners think about how to expand the value of their business. Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Communities of Interest

In my last couple of posts, I have used the term “Communities of Interest” as it relates to Social Media Marketing. This notion is the strength of Social Media. By that, a Community of Interest is a group of people that share a common interest. Because of this common interest, individuals share content that should be of interest to the entire group. If your company can develop a great number of followers, then the community of interest revolves around you.

This is the inherent weakness of Social Media Marketing. How does a business get a large number (1000s) of followers that care what it has to say? You can imagine that socially directed businesses have a great advantage here. For example, who wants to follow the mad ramblings of a business coach? I feel the best way is for me to provide educational snippets that help people to understand the value that I can bring.

One thing that I recommend is to combine the notion of Referral Marketing with Social Media Marketing. I want people to find businesses and groups that market to Communities of Interest that they want to serve. The business can connect with these potential marketing partners and offer something of value to the community. In exchange, the partner engages their marketing channels with the offer. This provides both groups with an exchange of value and the ability to promote each other.

There is additional power to this kind of activity. Social Media feeds expect advertising dollars to be used to expand the visibility of these messages. By cooperating, leverage is created, and the effect is multiplied.

I want to bring one last point to this thread. This is a case where narrow marketing is better. By narrowly targeting a message and an offer, you up the conversion rate of the offer. And by doing so in a targeted way, you spend the least money to spread a message.

Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Social Media Works for some Businesses

I had a client that had pretty good success with Social Media. This was a Children’s clothing and toy manufacturer. This business was run by a couple and the wife was the person in charge of Sales and Marketing. Though most of the sales were traditionally through retail stores, the business was moving more and more online. The company had been on Facebook for about 10 years when I started working with them and they had 14,000 followers.

When I started working with the company, it was clear that much of their outbound consumer marketing was done by Facebook. They had other mechanisms that were better for the retail stores and their International Distributors. The posts broke down broadly into 4 categories: Coupons, Sales Announcements, Contests, and Product. The Product posts were mostly photos and videos sent to the company from end consumers. The Sales Announcements told followers about money off specific products, particularly seconds of specific products. Coupons were a small percentage off of orders of a given size or larger.

The Contests were the most interesting posts. These were giveaways for different photos or videos and were judged for beauty. These contests were often done in conjunction with companies that were partners or having a similar end consumer demographic. The advantage of these posts is that they could reach beyond the audience of the company itself. In my last post, I talked about forming a community of interest. This is what I mean. By posting in conjunction with like-minded sites, the reach of the post is greatly expanded. By getting the attention of people that do not follow the company, they can expand their follower base. They will have the possibility to market to these new followers in the future.

So, one of the best things you can do is find partners with a similar interest and joint market with them. In today’s world, many spaces have voices that consumers follow already. If you can find those channels and offer them a proposal to engage their audience, you can find a great way to expand your presence. Unless you are working in a new space, it will be difficult to become an authority in an area for a long time. By partnering with others that have that reach that you want, you can accelerate the process.

Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Why is your Social Media Marketing Not Working?

I have had several customers and colleagues focus on Social Media Marketing. With few exceptions, these efforts have not worked. So, I want to take a few posts to look at what is going on. In some circles, Email Marketing is considered part of Social Media Marketing. I am going to ignore Email Marketing for this series. Email has its own pros and cons.

Most companies get involved in Social Media Marketing because they think it is necessary and inexpensive. What we really have is a fragmented set of services that are read by different audiences for different purposes. This method of Marketing is so poorly understood that it makes it very difficult to have an effective conversation about it. I want to start with classifying Marketing activities into some broad categories and talk about Social Media for them. I want to remind everyone that these channels are now heavily utilized and crowded with advertisers.

I will start this by examining Audience Creation. This is the use of Marketing techniques to let the market be aware of your existence. This is not normally done through Social Media, but I will give an example where this worked. The example is Dollar Shave Club. At this point, you may be aware of this Brand through its TV advertising. Dollar Shave Club started by advertising (aka sponsoring) some well know YouTube Channels. This was very inexpensive for the market reach at the time. The bulk of this channel came from a younger demographic and the Dollar Shave Club message of insurgency resonated very well with this audience.

On the other hand, Facebook does not even let every one of your followers know about a new post unless you “boost” a post. This means that audience reach on Facebook can be very limited unless you are willing to expend a significant amount of money. For that, you get your post placed into news feeds. This is like many other channels like LinkedIn or YouTube. Essentially, this is a shotgun into a demographic. It is not clear that your ad will be viewed, just potentially viewed.

Reputation Management sites (Yelp!, Angie’s List, etc.) are not directly aimed at broad audience creation. If your services are searched for on one of these sites, high ratings can get you more jobs. But you won’t see your company name show up in front of people otherwise.

And that is one of the challenges here. Social Media is not really a broad-based tool for Audience Creation. As we go using Social Media, you will see an ongoing conversation about the more targeted approach that suits Social Media more. This means effective use of Social Media will be around communities of interest.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning
Change Your Business – Change Your Life!

Performance Now!

You have spent time selecting a new employee, making them an effective offer, and onboarded them properly. Now it is time to ensure that they deliver the performance that you need. That is the entire point of the exercise correct? We return to the question that I started out with. How do you know that the employee is doing what you need?

There are side discussions that can happen here associated with delegation and retention. Today, I want to focus strictly on job performance. I work with many clients to help them define the way that they will measure performance. This measurement needs to be part of the way the business works. Otherwise keeping track will not happen. If the tracking does not happen, then the measurement does not mean much. This is part of one of the major rules of performance management. The rule is to Inspect what you Expect. If you are paying attention, your employees will as well. When I worked for Racal-Datacom, we had a VP of Engineering who wanted to improve schedule performance. Every Friday morning, we reviewed the schedule updates for every project in Engineering. If your schedule was not updated properly or changes were not explained, you were chastised in front of a crowd. This ensured that we had accurate and updated project plans. Those that did not were not employed for long.

If you are having trouble measuring employee performance, you might want to think about using Virtual Assistants. I have had several clients that employed these folks to implement documentation and data tasks at a modest price. This allows you to take advantage of more data before you have had a chance to automate it. This is important as you might want to adjust processes before they are automated. It costs less money to make changes before you have invested in the process.

Another management principal is how to address performance. The answer is that feedback must be timely and specific. This is true whether the feedback is positive or negative. Don’t let things go. If you appreciate what somebody has done, tell them as soon as possible. That feedback will help people understand what you want. Otherwise, they think that you don’t care. If they do poorly, then you need to address a problem before it is repeated. By being timely and specific, you let employees know that you are watching and care.

Some people think that numbers and objective measures of performance are too cold. I think it is transparent and removes personality. We want to talk about how John and Jane are doing their job against a standard. We don’t want to consider their personality or any other personal characteristics. An employee is doing the job, or they are not doing the job. They know what their accountabilities are and that is how you are judging their employment. If all the employee’s objectives together exceed your business plan then you have a circle of excellence to build on.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!