How to Outshine Your Industry Peers

10 Things That Make Your Business More Valuable Than That of Your Industry Peers

The value of your company is partly determined by your industry.  However, within an industry there can be major variations in valuation and the following items seemed to lead to those differences.

  1. Recurring Revenue  – The more revenue you have from automatically recurring contracts or subscriptions, the more valuable your business will be to a buyer.  Even if subscriptions are not the norm in your industry, if you can find some form of recurring revenue it will make your company much more valuable that those of your competitors.
  2. Something Different – Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to knock off are more valuable that sells the same commodity as everyone else in the industry.
  3. Growth – Acquirers looking to fuel their top line revenue growth through acquisition will pay a premium for your business if it is growing much faster that your industry overall.
  4. Cache – Tired old companies often try to buy sex appeal through the acquisition of a trendy young company in their industry.  If you are the darling of your industry, you can expect to get a premium acquisition offer.
  5. Location – If you have a great location with natural physical characteristics that are difficult to replicate, you will have buyers interested in your location in addition to your business.
  6. Diversity – Acquirers pay a premium for companies that naturally hedge the loss of a single customer.  Ensure no customer amounts to more that 10% of your revenue and your company will be more valuable that an industry peer with just a few big customers.
  7. Predictability – If you have mastered a way to win customers and documented your sales funnel with a predictable set of conversion rates, your secret customer-acquiring formula will make your business more valuable to an acquirer than an industry peer who doesn’t have a plan of how to attract their next customer.
  8. Clean Books – Companies that invest in audited statements have financials that are generally viewed by acquirers as more trustworthy and therefore worth more.  You may want to get your books reviewed professionally each year even if audited statements are not the norm in your industry.
  9. A Second in Command – Companies with a second-in-command who has agreed to stay on post sale are more valuable than businesses where all the power and knowledge are in the hands of the owner
  10. Happy Customers – Being able to objectively demonstrate that your customers are happy and intend to re-purchase in the future will make your business more valuable than an industry peer that does not have a means of tracking customer satisfaction.

Your industry typically defines a range of multiples within which your business is likely to sell for; but weather you fall at the bottom or the top of the range comes down to factors that have nothing to do with what you do, but instead, how you do it.

 

 

 

 

Source of some information from The Value Builder System TM

The Hidden Goal of the Smartest Business Owners

What are your business goals for the year?  If you’re like most owners, you have a profit goal you want to hit.  You may also have a top line revenue number that’s important to you.  While those goals are important, there is another objective that may have an even bigger payoff:  building a valuable business.

But what if you don’t want to sell your business? That’s irrelevant.  Here are five reasons why building a sellable business should be your most important goal, regardless of when you plan to push the eject button:

  1. Value means Freedom

One of the fundamental tenants of value is how well your company would perform if you were unable to work for a while.  As long as your business is dependent on you personally, there’s not much to sell.  Making your company less dependent on you, by building a management team and creating clear systems for employees to follow, means you have the ability to spend time away from your business. This could open up a world of possibilities for your time.

  1. Value is Financial Freedom

Each month you open your brokerage statement to see how your portfolio is doing.  Not because you want to sell your portfolio, but because you want to know where you stand on the journey to financial freedom.  Creating a sellable business also allows you peace of mind, knowing that you’re building something that, like your stock portfolio, has value you could choose to make liquid one day.

  1. Valuable Businesses are Enjoyable

Running a business would be more enjoyable if you were able to spend your days on strategic thinking and big picture ideas.  Instead, most business owners spend the majority of their day on the minutia:  the government forms, the employee performance reviews, bank reconciliations, customer issues, etc.  The boring details of company ownership suck the enjoyment out of owning a business.  It is exactly these tasks you need to get into someone else’s job description if you’re ever going to sell.

  1. Value is a Gift

Imagine that your first-born graduates from college and as a gift you give your prized 1967 Shelby Ford Mustang.  Your heavily indebted child takes it on the road, but after a few miles, the engine starts smoking.  The mechanic takes one look under the hood and declares that the engine needs a rebuild.  You thought you were giving your child an incredible asset, but instead it’s an expensive liability he can’t afford to keep, and nor can it be sold without feeling guilty.

You may be planning to pass your business on to your children or let your managers buy into your company over time.  These are both admirable exit options, but if your business is too dependent on you, and it hasn’t been tuned up to run without you, you may be passing along a jalopy.

  1. Value can’t be Rushed

There are some things in life that take time, no matter how much you want to rush them.  Making your business valuable often requires significant changes; and a prospective buyer is going to want to see how your business has performed for the three years after you have made the changes required to make your business sellable.  Therefore, if you want to sell in five years, you need to start making your business valuable now so the changes have time to take root.

 

 

 

 

Source of some information from The Value Builder System TM

Growth vs Value: Not All Revenue is Created Equal

When you look ahead to next year, will your growth come from selling more to your existing customers or finding new customers for your existing products and services?

The answer may have a profound impact on the value of your business.

Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.

A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Conversely, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.

Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.

 

 

 

Source of some information from The Value Builder System TM

The Power of Subscriptions for Every Business

Do you have a billion dollar business hiding inside your company?

Asking customers to pay to join a special group of your best patrons can increase your revenue, encourage customers to buy new products and services from you, and provide a healthy boost to your cash flow.  At Amazon, in exchange for an annual fee, customers get: free two-day shipping, unlimited videos & shows and books to borrow for free.

It’s a compelling offer, which is why, according to TIME Magazine, more than 10 million people have signed up for Amazon Prime.  If you do the math, that makes Prime close to a billion-dollar business for Amazon.  And like most subscription programs, members pay upfront, giving Amazon a big injection of positive cash flow.

Additionally, Prime memebership changes the buying behavior of the average Amazon customer.  Prime customers are eager to “get their money back” by purchasing a bigger and broader array of products from Amazon.  According to TIME, the average Prime customer now spends over $1,200 per year with Amazon compared to $500 the average non-Prime customer spends, almost triple.

Private member models are nothing new or unique. Many businesses are using them to sell everything from razor blades, to clothes, and beauty products. They create customer loyalty because of the investment of the fee and they are more likely to purchase additional products or services.

Getting your customers to pay to join your subscription club does require you to design a compelling offer.  If executed correctly, not only will the club return a profit, it will also provide a boost to your cash flow, create customer loyalty and a ready market for additional products and services.

There are a variety of subscription models that can be applied to products and services from any industry.  Contact me to explore this option for your business.

 

 

 

 

 

Source of some information from The Value Builder System TM

Market Share vs Addressable Market

This article highlights a unique way to view your potential customer base.

Addressable Market

Basic business sense tells us we should strive for market share so we can control pricing.  Market share is a worthy goal if your objective is to maximize your profits.  However, if your primary objective is to increase the value of your company, you want to be able to communicate that you have relatively low market share across the entire addressable market.  In other words, there is plenty of field left to plow.

Consider the following ways you might expand the way you are currently thinking about the addressable market for what you sell:

Demographics

Demographics involve segmenting a market by objective measures like gender, income, age and education level.  Marriott is a hotel chain which has created a variety of brands to address the various demographic segments they want to serve.  Ritz Carlton is a Marriott brand that appeals to well-heeled travelers, but a Courtyard Marriott provides a basic room.  The same company has expanded their addressable market by focusing on different demographic segments.

Psychographics

Psychographics involve segmenting your market according to the way people think.  Toyota produces the Prius, which gets 50 miles per gallon and is a favorite among environmentalists.  In contrast, the Tundra pickup truck at just 15 miles per gallon, attracts a very different psychographic segment.

Geography

Success in your local market is good but if you want to really boost the value of your company in the eyes of an acquirer, you need to demonstrate that your concept crosses geographic lines.  McDonald’s has more than fourteen thousand locations in the United States but they also have demonstrated success in global markets.

Increasing a company’s value is not limited to large corporations.  The key for all businesses is to be able to communicate that your concept could work in other markets and that there is still good land left to plow.

 

 

 

 

 

 

Some information is provided by The Value Builder System TM

Strategy…Do You Really Need One?

Mid-market companies can be very well served if they have a clearly defined business strategy. Whether your company is 50 years-old or you just started it, you are in a basic industry or a more complex one, strategy, along with a sound business philosophy, are the foundation to any successful business.

Although, I believe every business needs a well defined strategy, this does not have to be a sophisticated process. In fact, the strategic planning process should be free flowing and very fluid. Your business strategy is that thing that matches your internal resources with the market in which you operate or hope to operate. Although the strategic process does not have to be sophisticated, to be effective and a differentiator for your business, it does need to be thorough. Again, thorough does not mean a 20 page document. Most effective strategic plans for mid-market businesses can be done in outline form and will consist of no more than 3 pages.

So why do so many smaller companies avoid the strategic planning process?  It is the thorough aspect of this task that most small business owners decide they do not have time for. They get so busy doing business that they ignore the “how to do business” part of the equation. Developing a strategy or a strategic plan helps businesses outline their goals and also the achievement of those goals. If done properly it can be done very efficiently and as part of your day-to-day business.

I have facilitated the strategic planning process at many companies and I think the biggest surprise to all of them is the types of discussions that go into the process. Most managers come away asking – “was that it?” The topics are rather basic, getting them down on paper is a bit time consuming, but, to be honest the real trick and hard work related to a strategic plan is execution. I will cover execution in a separate article, but, staying with the strategic plan itself, I break it down into 5 areas and although I will lay them out in a particular order, their particular development will be different for each company depending on their particular organization.  Your strategic plan will need to address the following issues:

  1. Core Strategy or Mission
  2. Management Team and Human Resources
  3. Core Competencies and Service/Product Offerings
  4. Customer Focus
  5. Sales Strategy

I would also like to add that this process can be used in the context of the business as a whole or for a particular business segment, if that is applicable. For more information on how you can refine or develop a sound strategic plan, please contact me.

© Saddle Creek LLC