Improve Your Valuation: Unimportance

I have been going through a few ways of improving the value of your business. This time I want to talk about your value as an owner to the business. If you look at my business, it is about me and my expertise. That is what you get when you hire me. The problem is that this means that I cannot sell my business to someone else.

Why is that? Well, my customers bought my service because of me. There are no two ways around it. If someone bought my business, they would be missing the thing that they bought. It just comes with my type of business and I am comfortable with that.

Suppose I wanted to change my practice to something that was saleable? What would I do to make this happen? I think you understand from the title of this post. I need to make myself unimportant to the business. That is not to say that I would not have or deliver value to the customer. I simply need to make the customer buy something other than me. Let me use an example from another Professional Service - Accounting. When you go to a large CPA firm, you know that the person that you chose will not be doing the bulk of the work. There is a staff that will handle most of the work. The firm may assign a CPA to your account different than the one that you originally bought from. Why does this work? There are two elements of the sale that make this possible. First, the company has a number of systems that ensure the quality of the work and the effectiveness of the employees. This means that you can depend on the quality of the work independent from the person performing the work. Second, the skill of the firm is additive. This means that a number of specialists are available to everyone on a fractional basis. So a person working on your tax return can get an expert opinion from a specialist without you having to pay specialist rates for the entire return.

As with a smaller firm, this highlights 2 of the 3 ways that firms can become more valuable as the owner becomes less important. These 2 are systems and people. By using systems, your customers can be assured that the quality of the products and services that they buy are not dependent on you. This is extended by the use of other people to execute these systems to help scale the business. To be clear, these systems are not only those that are customer facing but internal ones as well. I work with a Property Manager that is working on systemizing his Work Orders for maintaining properties. This includes not only working with tenants and owners but vendors and internal processes as well. This effort is a focus to reduce the number of Work Orders and the length of time that they are open to improving customer satisfaction. This involved changes and standardization of several sub-processes. The work is still in progress but already there are about 2/3rds fewer open Work Orders.

Finally, the third leg of this stool is outsourcing. There are many parts of a business that are important but the owner's participation is not. Think of this as an exercise with a Covey matrix. Getting rid of processes that do not require the owner's time is a great way of building value in two ways. First, it means that a buyer can maintain the existing systems without any transition. This simplifies their job in taking over all the work that goes on. Second, this will force the owner to do more valuable work in and on the business. By doing this, the owner will improve revenue and profits over time.

So, it is important to be unimportant. 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!

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!