Part II Minimizing Risk
By Philip Elworth
This is the second in a series of white papers on getting your business ready for a transition. As previously discussed this could mean a sale, a recapitalization or a gift. There are many things a business owner can do– long before the time to transition– to maximize the value of the business. Every business owner should be in business to create value.
Businesses are often purchased based upon a dependable revenue and net income stream. When this occurs a multiple can be taken of the EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). Another way of describing EBITDA is the Operating Earnings of the organization prior to ownership related expenses. Therefore, to the degree an owner can minimize the risk of fluctuation of this earnings stream and the associated cash flow, the higher the value of the business.
When a buyer is purchasing a home there is a clause in the sale contract that allows the buyer to bring in a home inspector to review the house and let the buyer know the risk they are assuming with the purchase. The same holds true with the buyer of a business. They will send in a team to “look under the hood” of the business and assess the risks they see. So what are these risks that an owner should begin to identify and correct now, prior to initiating a transition process? Below I will unpack the most common risk factors of any business. In addition, each business will have its own unique risks. One of the surprising things I see with business owners is their tolerance for certain risk in their business. When you start up a business or have been running one for a long period of time you become immune to certain risks and actually stop seeing them as risks because you manage around them. These types of risks are the ones a new buyer will be less prone to live with and provide full value.
Accounts receivable is the first area we discuss. Do your customers pay you based upon the terms of their agreement or have you allowed slippage in the payment patterns? Do you have current legal sale or credit documents behind your accounts receivable or have you operated off an old agreement or no agreement at all? Are your sales concentrated in a few key customers or are your sales to your largest customer under 10%? If your sales are by credit card and/or online, is the legal language of your website and the storage of credit card information properly documented and protected?
Inventory; is your inventory properly valued based upon a singular recognized accounting methodology, like average cost? Is the value of your inventory real or is there obsolescence built in? Do you take physical inventory counts on a regular basis? How detailed are your inventory records?
Software; is all the software currently in use licensed appropriately or have a few extra copies slipped in? If you have mission critical software is it properly secured and always available to you or are you dependent upon the supplier staying in business?
Intellectual Property (IP); is this asset adequately registered, licensed or applied for? Have infractions been appropriately contested, or have you allowed others to infringe on your rights thus reducing its value?
Are key processes documented and appropriately backed up? Are key employees being adequately supported or replacements being trained?
In future articles I will unpack additional areas of review. It is important for every owner looking to transition from their business identifies and controls their risk. As a partner with B2BCFO® in Chicago I can assist you getting your business ready for a transition. Contact me at email@example.com.
Part I Growing Revenue
By Philip Elworth
This is the first in a series of white papers on the topic of getting your business ready for a transition. This could mean a sale, a recapitalization or a gift. There are many things a business owner should do, long before the time to transition to maximize the value of the business. Every business owner should be in business to create value.
Growing your revenue is the first theme we will discuss to create value. Nothing creates value more than a dependable revenue stream. Therefore to increase the value of your company you should be growing your revenue. So how does one grow their businesses revenue?
There are four basis ways to grow revenue:
To accomplish any of these targets you need to be efficient in your processes. You need to own your intellectual property, which drives your offering, and control the space you operate in. Start by asking the question from your customer’s perspective; What Is in It for Me (WIIFM)? If you understand why your customer buys from you, then you can expand on the offering, thus controlling your space. You will then strive to own the unique capabilities that make your offering the answer to the WIIFM question.
Next you need to create a strategic plan to accomplish the growth areas you wish to pursue. If your goal is to add customers start with a plan defining just what this means. If your average customer order is $1million, then how many can you add before additional capacity needs to be added? If your average customer sale is $10, you have a different strategy to cost effectively bring in the required number of customers needed to reach your goal. Marketing is a strategic approach to growth, sales is an execution strategy to achieve this growth. Develop the key metrics around the plan, then a separate set of metrics around the execution of the plan.
If your strategy for growth is a partnership to move into or learn a new venue, then again start with a strategic plan of what you wish to accomplish. I once worked for a real estate company who specialized in office space. We chose to grow and diversify by moving into the industrial building market. We had no experience in this market so we chose a strategic partner who did. We succeeded in learning about a new market and mitigated the risk of ignorance, while creating a successful revenue stream. Our partner obtained a reasonable return for their effort, but also learned how to put funds together for future expansion of the concept we pioneered together. We both won- we both grew our businesses. This process can be accomplished with new products or new markets.
Once again, growth needs to be planned for and executed with a specific strategy in mind. You cannot decide to “grow your business” and just go out and do what you have always done or by just working harder. You must have a plan. If you need help developing a plan for growth of your business or for to begin to plan for an exit, I as a partner in B2BCFO® in Chicago am ready to lend assistance. Contact me at firstname.lastname@example.org.
Millions of Baby Boomers own their own business, where they have also stored the majority of their net worth. Sometime over the next 10-15 years these businesses will need to change hands. Many of these owners, if they consider their transition at all, will say they will sell the business when the time comes. But can they? Is their business really saleable? What makes a business saleable anyway?
John Warrillow has written a very interesting book on this topic, Built to Sell. The book is written in a very easy to read story format that mirrors many of the experiences he faced when he tried to sell his business. I had the chance to meet with John at a conference in New Orleans, and unpack these concepts a little further. The reality is that there are many factors that go into answering the question posed above and I will start by detailing a couple key points. These are the same issues I see often, while working with my clients as a partner with B2BCFO®.
Many businesses are an extension of the owner. If the owner where to walk away from the business; there would be no business. Often a large percentage of the business is linked to one or two key customers, who in turn are controlled by their relationship with the owner. This is a high risk scenario for any business; being dependent upon too few customers. From a sale of the business standpoint, this business is often worth considerably less than the owner would like, if he were able to sell it at all. To move the business toward being saleable, you will need to make some changes. These changes will often take years to initiate. This is the reason- in my articles and when dealing with my clients- I emphasize the need for strategy around the real, long term goal of a business owner.
To move a business toward salability you may need to change what you sell and how you sell it. If you set up a graph, similar to the one below, and put “Teachable” on the vertical axis and “Value to Customer” on the horizontal axis you have a method to gauge your current product mix and set a new direction
Next, plot the products or services you sell as points on the graph. First by teachablility, how easy is it to train someone new to sell or produce the product or service you sell? Second, how valuable is this product or service to the customer? Do you sell a commodity that can be purchased anywhere, or do you sell something that is unique and therefore carries a premium price? Clearly your goal is to have product that can be placed in the upper right hand corner of this graph. Then you are on your way to having a business that has value.
I do not propose that this undertaking is easy, but if you want to create lasting value in a company and allow for an easier transition, then you need to begin moving down this road. If you want help with this, as a partner with B2BCFO® I am well positioned to lead the process. You can contact me at email@example.com.
I am an avid reader and I especially like to focus on business books. After reading them I blog about them; because I have learned by teaching others, I learn more myself. I recently had the chance to meet Brent Allan, who is the author of a new book entitled Stand Out. It is a very practical read on the topic of marketing and is very applicable to networking for a new position as well as the real target of the book, building a business. Brent uses the Acronym FAST to describe his marketing technique, which I will unpack below.
The F stands for follow up. Follow up is defined as what you do in response to direct communication with someone. Whether it is a meeting or a phone call, you need to respond with a simple thank you that is personal in nature. In addition after this first follow up you need to find ways to communicate multiple times over coming weeks or months. Brent, in his book, refers to a McGraw Hill study that found that 2% of sales occur after the first point of contact; 3% of sales occur after the 2nd contact; 5% occur after the 3rd contact; 10% occur after the 4th contact; and 80% of all sales occur between contacts number 5 and 12. It is clear from my own experience, if I do not make a sale after the first opportunity that often down the road the sale comes back to me, if I appropriately follow up. As a partner and coach with B2B CFO® I tell those I work with that this follow up is critical. There is a tendency to think after a good meeting that you have won the deal or the job. It often does not work that way and it is the follow up that gets the job done. I have personally obtained clients a year or more after initial contact because I followed up and was top of mind when the opportunity was right.
The A stands for Adding Value. What do you do that goes above and beyond? When I am networking with people and especially when I am speaking with a potential client, I look for opportunities where I can be of help to that person no matter if they are interested in my service or not. This adds value. When I have a client, I always look for ways to add additional value to the relationship outside the scope of what we are doing. I do not care if it costs me something in the near-term; I am looking for a long term relationship that will pay dividends for many years. One of the easiest ways to add value is with information. One thing I do with every prospective client is to provide them a free benchmarking study of their business; this is information that is not readily available to them.
The S stands for Standing Out. How do you separate yourself from the competition? One way is by creating a niche for your services. The leader of my local FENG chapter tells the story on one person who came through the group, who labeled himself the Energy Guy. That was his background and the direction he was looking for a new position, by using the label everyone remembered him, he found a way to stand out. A guarantee is another method. Can you provide a money back guarantee for your service? Brent, as a marketing consultant, provides a money back guarantee or continued service for a year at no charge if the customer is not satisfied. My personal experience has been if a client is dissatisfied with my service, I did what I needed to do in order to satisfy him. I would rather lose a few dollars than a client and all the bad will that follows. If you are networking look for ways to help the person you are meeting with. If you are proactive in soliciting information you can find a way to help them and thus stand out.
The T stands for touch. If you are not constantly in touch with your key connections and customers then you are leaving sales on the table. I recently picked up a new assignment with an old client because I have been in constant touch with him since I finished the assignment over a year ago. When he was ready to proceed, I was top of mind. I look for ways to stay in touch that are totally outside of the normal. One thing I like to do is help clients or contacts find people to hire. This is a total win-win situation. I help a contact and allow someone else to make a recommendation that leads to employment for someone. This is a feel good situation for everyone and keeps me in front of a large group of contacts. Brent in his books uses greeting cards. He sends cards to celebrate odd holidays. Things like a Un-birthday or Ground Hogs day. When people get cards at unexpected times with no selling involved it becomes a very positive touch.
Most of these ideas are easy to implement and cost very little but can pay big dividends. I hope you try them out.
I was sitting in church recently in South Barrington, IL, listening to a message on spiritual growth. I thought the concepts were so universal that I would share them with you, because no matter what part of your life you may be working on, growth is growth. The speaker’s point was that in order to grow we need to consider two things. What do we need to stop doing and what we need to start doing? So now let’s unpack how this applies to business. One of the things I speak a lot about with my clients is metrics. Growing a business is all about increasing sales, so how do these tie together?
What are you currently doing that is not yielding results? Do you think about it? Are you tracking the results of your sales efforts? If you are asking for the sale, are you successful? Do you ever try new approaches? Do you ever look at changing your message, your appearance, or your delivery? In other words is there something you need to stop doing because it is not working?
The flip side is what do you need to start doing? When I work with clients on selling strategies, it really comes down to a numbers game. Who are your best customers? How did you obtain them? How many times did you have to connect with them before they moved forward with you? What are you doing to replicate this? From here you can build the numbers around how many touches do you need to find a prospective client or job? Are you working all the avenues available to you or are you concentrating on just one. There are personal meetings, phone interviews, networking, and the use of social media and advertising. Everything has a place.
So what do you need to stop doing and what do you need to start doing? Give it some thought and if you need help with that, give me a call.
With the passage on January 1, 2013 of the tax bill to pull us off the politically made fiscal cliff, there are many questions pertaining to how this legislation affects you individually. In addition there are a number of other taxes, not included in this legislation that will affect you just as much. While I am not a tax expert, nor am I offering tax advice, it is helpful for me to understand these changes since the clients I deal with in the Chicago area want to know how to plan their businesses in the upcoming year.
First the highlights of the new tax structure:
There are many more provisions to this legislation and if you have questions on specifics please contact your tax advisor.
The second group of tax changes that went into effect on January 1 and not a part of this legislation will affect many more people. They include:
All this is just to remind everyone that planning is critical, not only for your business but how the changes in these laws, as well as a slew of additional regulations will affect how you operate in 2013.
Patrick Lencioni, author, consultant and speaker recently published the book, Getting Naked, which describes his vision of the way a professional service firm should operate. His approach is basically one of fear avoidance. His views mirror so many of my own and how as a partner with B2B CFO® I have been trained to provides services, that I thought I would wet your appetite to investigate this topic at a deeper level. Previously, I have written that many more businesses provide professional services than is normally recognized. You can manufacture a product but still provide service to your customer in the design and manufacturing process. Thus this topic applies to many organizations.
Patrick simplified his view of providing service into three simple fears:
You become successful by getting past the fear.
The fear of losing the business is negated by demonstrating your competence and ability to help the client, showing them that you care about them instead of just growing your business. You do this by giving away your service. As a partner with B2B CFO® I provide, what we term, a phase I analysis. In order for me to understand the problem faced by a business owner, I ask for permission to dig deeper into the underlying cause of the issue. I do this at no charge. When I have completed my analysis, I provide a written report showing where the business is today and how we together can move the business forward. During this entire process I am looking for opportunities to add value and help the client, long before we have spoken about price. By the time we get to the discussion of fees, the conversation is more about getting started.
You get past the fear of being embarrassed by being willing to face your own inadequacies. As an advisor, I do not know everything. I will freely admit that I do not have all the answers, but as a partner with B2B CFO® I have, as of this writing, 184 partners with 5,200 years of experience which means together, we can solve the problem. I have also had situations with clients where I have been wrong. When this happens I will quickly own it and depending upon the circumstances apologize for it or make fun of myself, but in all situations I will fix it. Never back down from asking questions you do not know the answer to, no matter how elementary they are. No question is a dumb question; if you do not know the answer. Be willing to take a bullet for the client. I have been in situations where my recommendation was to terminate or lay off employees. I readily volunteered to be the bad guy; to help deliver the message or to be the fall guy so the owner could save face.
The third fear, of being inadequate, goes to our own attitudes. As an advisor you must be able to honor and celebrate your clients work if you are going to take on the assignment. If you have a problem or a moral issue with the client’s business; then refer the work on to someone else. You must be fully in your client’s camp. You can show this by being willing to do the dirty work, whatever that may be. Be vulnerable, humble and transparent with your client. If the client asks you to do a task, associated with your assignment, but something you consider below your station, be willing to do it and do it willingly. That is transparency.
Bottom line; find the way to help your client and lift them up, even if it means diminishing yourself. If we put our client first and ourselves second it will only lead to success.
Have you ever awoken at night with the thought that you need to do something, and are sure you do not have it written down somewhere; therefore it is not possible to go back to sleep? This is sadly, an all too common occurrence. So how can you avoid this situation?
David Allen, author of the book Getting Things Done, claims that if something is on your mind, then your mind will not be clear to do what it needs to do at that moment. Clear to sleep or clear to work on a project, the issues of distraction are the same as waking up at night. So, how do you clear your mind? According to Allen, you clear your mind by transferring the issue to a trusted system, outside your brain, that you are sure to come back to over and over. Let’s work through this concept in three parts using a project as an example.
As with any project you first need to clarify what the project is to accomplish. Next, you need to decide what steps are necessary to accomplish the project or at least to make progress toward completing it.
Second, record these steps in a system that you can review on a continual basis. They do not need to be detailed, only enough to keep you on track.
Third, keep reminders of the steps you need to accomplish in order to finish the project but more importantly to concentrate on the one next step you need to complete to keep the project moving forward.
This concept of the next step is the most important part of any system. When you are looking at a large project or commitment it can be overwhelming. If you concentrate, however on the one next step you need to accomplish to keep the project moving, it is not so intimidating. This is especially important when you are managing multiple commitments. If you have say, five projects, you could have 25 or more steps to accomplish, but if you concentrate on the one next task to be accomplished with each of them, you will not be overwhelmed with 25 steps but can concentrate on only 5. This is much more manageable to our minds. When this task is complete, then establish the next one task to be accomplished. It is easy to keep progress moving forward, one step at a time.
Everyone works differently with this process. Some people like lists where they can cross things off, others are more big picture oriented and want to see the whole project. There is no right answer here. I happen to use a white board on the wall of my office. I work with multiple clients and projects, plus my own life issues. I create boxes on my white board then put the critical tasks to be done under each project, but then mark or highlight the one next step for each project that needs to be done. This allows me to keep each area of my life working toward that particular goal and frees my mind to work the process rather than worry about what I missed. I encourage each of you to find the system that works best for you and remember the one next step you need to do.
I have long held to the belief that employees will accomplish the work they perceive they are being compensated for. As an example, if you were to pay commission to you sales people only to bring in sales– that is what they will do. They will do whatever it takes to bring in the sales, whether it helps the company or not, whether the sale is profitable or not. You are paying them for sales, not profitable sales. This may be an extreme point but I make it to help you think differently about rewards.
Daniel Pink, in his book entitled Drive, unpacks two research studies from 1940 and 1969 that seem to turn on its head the long held belief that rewarding performance leads to higher levels of performance. The study, in 1940 used monkeys and 1969 used humans; I will let you draw your own conclusion from that. But the results, interestingly, were the same. When test subjects were given a task to perform they were motivated to do so with no reward other than the accomplishment of the task. When rewards were introduced for either faster performance or a higher level of performance, or food in the case of the moneys, then performance actually went down. It appears that even the monkeys were motivated by the accomplishment of the task alone.
As a business owner, what can you take away from this study? I refer back to the first paragraph where I drew attention to the notion that people perform what they perceive they are being compensated for. In my opinion the concept of bringing in any sale versus a “good” sale, is actually an interpretation of the studies previously mentioned. To state this concept another way, it is important for a business owner to provide a fair base compensation for the job being performed. Then it is up to the business owner to create a work environment that encourages growth and participation in the core of the business, to provide the motivation to do the work.
To further unpack this concept that people are not always motivated to perform work for higher pay I w draw your attention to a number of free, very cutting edge products that were developed with no compensation to the participants nor are charges made to the end users. These include Linux, computer operating systems that competes with Microsoft; Wikipedia, a free encyclopedia that put Encarta, a Microsoft product, out of business; Apache, a free open source web Server.
Companies like 3M, allow their employees to use up to 20% of their time doing whatever project they want, whether it is part of their job or not. 3M, in turn, lives off the new products created by this totally unmanaged process. Your business is not 3M but if you could turn your employee time into productive time, what would that do to your business? To give you a practical example, when I worked for a real estate company a number of years ago, I saw the need to provide a sales tool to our leasing agents to help them better analyze the profitability of a deal. The market place solutions to this issue were good, but expensive. So I took it upon myself to develop a product that they could use to better their analysis. I had little time in my day to do this so I did it all on my own time. I was not compensated for it, nor was I told to accomplish it. I did it all on my own. To this day, many years later, I still take pride in accomplishing this and likewise to this day very few people understand what I did and how it helped the company, but our environment encouraged growth and improvement so I was just willing to put in the effort.
How can you rethink how you motivate your employees? How can you create an environment that encourages growth and development? If you would like some help figuring this out, as a partner with B2B CFO®, I am ready and willing to help you accomplish your goals.
The concept of a Blue Ocean was put forth back in 2005 by W. Chan Kim and Renee Mauborgne in their book Blue Ocean Strategy. I have recently come to realize that this concept can be applied to the areas where I focus my practice and actually where B2B CFO® excels.
According to the authors, the blue ocean strategy is made up of three characteristics. Focus, Divergence and a compelling tag line. Ultimately this works to create wide open markets. Instead of benchmarking against the competition, blue ocean strategy works to make the competition irrelevant by creating a leap in value for the customer. They use the analogy that when Southwest Airlines began, they did not target the other airlines as competition but instead looked to bring in new customers; namely those that were driving to the cities they serviced. Thus they made the “competition” from other airlines irrelevant.
The goal of B2B CFO® is to help clients become successful in their business. So how do we create a blue ocean strategy?
First, Focus, our customer is the private, small to mid-sized business owner who has a desire to grow their business and ultimately to exit their business, but needs help along the way. B2B CFO® partners provide the expertise that is missing from their staff; to empower the owner to achieve a higher level of success than they can on their own.
Second, Divergence-The firm continuously strives to bring value to their clients in ways that separate them from the competition. We recently announced an exclusive relationship with Morgan Stanley Smith Barney that brings the huge network of the bank to our small to mid-sized clients. We have partnered with other service providers for insurance products and other expertise that is not always readily available to the small private market. We have partnered with Pinnacle Equity Solutions to expand our offering of exit planning services, which opens up a whole new set of national relationships. We are currently developing a tool to assist business owners who are preparing for their exit. In addition we have access to benchmarking tools, processes and procedures to help any client, along with access to over 200 partners and 6,000 plus years of collective wisdom.
Third, B2B CFO® has the best tag line around, Cash, We Help You Get It™. This is exactly what we do for our clients, help them find cash and the ultimate cash payout is a successful exit from the business.