Will this be the year you seriously drive up the value of your company?

If you have resolved to make your company more valuable in 2017, you may want to think hard about how your customers pay.

 

If you have a transaction business model where customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).

 

If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue.

 

Breedlove & Associates Sells for 6X Revenue

 

In 1992 Stephanie Breedlove started a payroll company to make it easier for parents to pay their nannies on a recurring basis. It began small and Breedlove self-funded her growth, which averaged 20% per year.

 

By 2012, Breedlove & Associates had hit $9 million in annual sales when Breedlove accepted an offer from Care.com of $55 million for her business—representing an astronomical multiple of more than six times Breedlove’s revenue.

 

Buyers pay up for companies with recurring revenue because they can clearly see how your company will make money long after you hit the exit.

 

Not sure how to create recurring revenue? Here are four models to consider:

 

Products That Run Out

 

If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest) in running to the store to re-stock on Pampers. Dollar Shave Club, which was recently acquired by Unilever for five times revenue, sells razor blades on subscription. The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions. 

 

Membership Websites

 

If you’re a consultant and offer specialized advice, consider whether customers might pay access to a premium membership website where you offer your know-how to subscribers only. Today there are membership websites for people who want to know about anything from Search Engine Marketing to running a restaurant.

 

Services Contracts

 

If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business.

 

Piggyback Services

 

Ask yourself what your “one-off” customers buy after they buy what you sell. For example, if you make a company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service.

 

Rentals

 

If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. ZipCar subscribers can have access to a car when they need it without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to the company’s co-working space without buying a building or committing to a long-term lease.

 

You don’t have to be a software company to create customers who pay you automatically each month. There is simply no faster way to improve the value of your business this year than to add some recurring revenue.

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How Three Moves Quadrupled the Value of this Business

By Kim Santos • November 20, 2024
Are you stuck trying to figure out how to create some recurring revenue for your business? You know those automatic sales will make your business more valuable and predictable, but the secret to transforming your company is to think less about what’s in it for you and more about coming up with a reason for customers to agree to a monthly bill. Take a look at the transformation of Laura Steward’s company, Guardian Angel. Steward had gotten her IT consulting firm up to $400,000 in revenue when she called in a valuation consultant to help her put a price on her business. Steward was disappointed to learn her company was worth less than fifty percent of one year’s sales because she had no recurring revenue and what sales she did have were dependent on her personally. Steward set about to transform her business into a more valuable company and made three big moves: 1. Angel Watch The first thing Steward did was to design a monthly program called Angel Watch, which offered her business clients ongoing protection from technology problems. Steward offered her Angel Watch customers ongoing remote monitoring of their networks, pre-emptive virus protection and staff on call if there was ever a problem. Steward approached her clients with a calculation of what they had spent with her firm over the most recent 12-month period, including the cost of her customer’s downtime. She made the case that by signing up for Angel Watch, they would save money when taking into consideration both the hard costs of her firm’s time and the soft costs associated with downtime. 90% of her customers switched from hourly billing to the Angel Watch program. 2. Doubling Rates Next Steward doubled her personal consulting rates. That way, when one of the customers who decided not to opt into Angel Watch called her firm, they were quoted one rate for a technician’s time or twice the price to have Steward herself. Not surprisingly, most customers opted for the cheaper option and others chose to re-consider their decision not to sign up for Angel Watch. 3. Survivor Clause Steward also credits a small legal manoeuvre for further driving up the value of her business. She included a “survivor clause” in her Angel Watch contracts, which stipulated that the obligations of the agreement would “survive” a change of ownership of her company. Steward went on to successfully sell her business at a price that was more than four times the original valuation she had received just two years prior to launching Angel Watch.

How much goodwill do you have in your business?

By Kim Santos • November 19, 2024
The term “goodwill” is often thrown around in conversation as though it is a subjective description of how much your customers like your business. In fact, when it comes to valuing your business, there is nothing subjective about the definition of goodwill. It is defined as the difference between what someone is willing to pay for your company minus the value of your hard assets. Let’s imagine you own a plumbing company and the main physical assets in your company are the five vans you own and some tools with a total value of around $100,000. If you sold your plumbing company for $1,000,000, the acquirer would have paid $900,000 in goodwill ($1,000,000 - $100,000). When a company sells for the value of its fixed assets, it is often a distressed business one step away from closing down. One way to think about your job description as an owner is to maximize the difference between what your business is worth to a buyer and the value of your fixed assets. Marriott buys more than bricks and mortar For an example of the difference between valuing a business for its hard assets vs. its goodwill, take a look at the recent acquisition of Starwood Hotels & Resorts Worldwide by Marriott. Neither Starwood nor Marriott own many of the hotels that bear their name. Instead, they license the name to operators, franchisees and the owners of the bricks and mortar. So why would Marriott cough up $13 billion for Starwood if they don’t even own the hotels they run? In part, Marriott wanted to get its hands on the Starwood Preferred Guest program, a loyalty scheme which has proven more popular than Marriott’s program for frequent travellers. Similarly, Uber is worth something north of $50 billion because more than one million people per day hail a ride using Uber, not because they own a whole bunch of cars. Chasing hard assets at the expense of goodwill Many owners focus on building their stockpile of hard assets, not understanding the concept of goodwill. Accumulating hard assets like land and machines and equipment is fine, but the savvy owner, looking to maximize her value, focuses less on the tangible assets and more on what those assets allow her to create for customers. There is nothing wrong with owning hard assets unless they take away from capital you could be investing in creating goodwill. Then the opportunity cost may exceed the value of owning the stuff. Arguably both Uber and Starwood would be a shadow of the companies they are today had they pursued a strategy of accumulating hard assets. Would Uber ever have made it out of San Francisco if they had to buy a Lincoln Town Car every time they wanted to add a driver to their network? In your case, focus on what creates value for customers and you will maximize the value of your business far beyond the value of your hard assets.

Market Share vs. Addressable Market

By Kim Santos • November 18, 2024
Imagine you’re a farmer and you’ve been tending to your crops all year. It’s harvest season and finally time to collect the spoils of your labor. You start harvesting your crops only to find out that pesky rodents have been quietly eating away at your fields. You’re devastated as you come to the realization that much of what you have been working so hard to cultivate has already been taken. Feeling like there is not much field left to harvest is what acquirers and investors are trying to avoid as they evaluate buying your business. Metaphorically speaking, acquirers want to know that if they buy your business, there will be plenty of fresh farmland left for them to till. Addressable Market Investors call it your company’s “addressable market” and it is one of the main factors buyers will look at when they evaluate the potential of acquiring your company. Business 101 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 plough. 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 but they have 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 travellers, but if all you want is a basic room, you could opt for a Courtyard Marriott. It’s the same company, but they have 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 favourite among environmentalists. Toyota also produces the thirsty Tundra pickup truck and, at just 15 miles per gallon, attracts a 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 have also demonstrated that the golden arches can draw a crowd in other markets. McDonald’s has nearly three thousand stores in Japan, two thousand in China and more than a thousand locations in each of the European countries of Germany, Canada, France and the United Kingdom. You don’t actually have to become a global giant like Marriott, Toyota or McDonald’s to increase your company’s value but you do need to be able to communicate that your concept could work in other markets and that there is still good land left to plough.
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