Today we are going to discuss the idea of scalability, and how to create a business that can thrive without you.

The hallmark of a valuable company is one that can run without you, which means if you can create a business that’s built to sell, you also have the option to hold on to it without the stress of running your company on a day-to-day basis.

A valuable business is also a sought-after asset, making it more likely that you will get an unsolicited offer for your business. This gives you negotiating leverage when you decide to sell.

 Many business owners find themselves trapped in an unsellable business. Customers ask to deal with the owner, the owner becomes personally involved in serving the customer, reinforcing the customer’s reliance on the owner, and the cycle continues. A business reliant on its owner is unsellable, so the owner becomes trapped in the business. In the coming months, we will discuss steps to provide a road map for creating a company that can thrive without you. I’ve also included my own personal observations and experiences gleaned from applying the process in my businesses.  

STEP 1: ISOLATE A PRODUCT OR SERVICE WITH THE POTENTIAL TO SCALE

The first step in building a company that can thrive without you is to find a service or product that has the potential to scale. Scal­able things meet three criteria: (1) They are “teachable” to employ­ees (example, a Five-Step Logo Design Process) or can be delivered through technology; (2) they are “valuable” to your customers, which allows you to avoid commoditization; (3) they are “repeatable,” meaning customers need to return again and again to buy (e.g., think razor blades, not razors). Brainstorm all the products and services that you provide today and plot them on a simple diagram with “Teachable” on one axis and “Valuable” on the other. Once you have plotted everything you offer on the chart, eliminate services or products that a customer needs to buy only once. Often, you’ll find that the most teachable services or products are the ones that customers value the least. Alternatively, you’ll find that the products and services your customers value most are the least teachable. That’s normal. Try combining one or more ser­vices or products to create the ideal offering.

Of the three criteria for a scalable product or service – teachable, valuable, and repeatable – I found the sin­gle most important factor in driving up the value of my companies was ensuring my revenue was repeat­able, meaning customers had to repurchase somewhat regularly. Although all recurring revenue will have a positive impact on your company’s value, some forms are more desirable than others. Based on what I’ve learned from talking to buyers, here are six forms of recurring revenue presented from least to most valuable:

1. 6: CONSUMABLES – TOOTH PASTE Consumables are disposable items customers purchase regularly but that they have no solid motivation to be brand-loyal toward. Each morning I wake up and brush my teeth with Crest Whitening Gel. I’m sure the “whitening gel” is a placebo, but it appeals to me given the amount of black coffee and red wine I consume. Every once in a while, I’ll go off the beaten path and try a Colgate prod­uct collected at one of the many hotels I stay at during a normal year, that promises “extra whitening,” but I always work my way back to Crest. If you sell a consumable, start tracking your repurchase rate from existing customers. This will be a num­ber that acquirers will use to calculate your projected sales into the future-and to calculate how much they’re willing to pay to buy your company today.
2. 5: SUNK MONEY CONSUMABLES – RAZOR BLADES More valuable than basic consumables such as tooth­paste are “sunk money consumables.” In the case of these items, the customer has made an investment in a platform. When I started using Gillette Sensor razor blades, I first had to buy a handle. Now I buy a new five-pack of blades every month, and I can’t bring myself to try Schick because then I’d have to purchase its handle mechanism. I’ve been a Sensor guy since I grew my first patch of peach fuzz. I’ve made an investment in the plat­form, and that makes me reluctant to switch providers. The same is true at the office. Years ago, when I was in the market for a printer, I bought a Xerox. And even though I probably won’t need to buy another printer for a while, I still have to buy Xerox’s expensive toner car­tridges. Expect to garner a premium for your business if you can demonstrate a loyal group of customers who have made an investment in your platform.
3. 4: RENEWABLE SUBSCRIPTIONS – MAGAZINES Even better than having loyal customers who repurchase is having revenue that is guaranteed into the future. For example, I am a loyal subscriber to ROBB REPORT magazine. Each year I get a re-up letter, and I send a check to cover my next twelve issues. ROBB REPORT recognizes one-twelfth of my subscription fee the month it receives the check and each of the next eleven months. Magazines are cheap compared with the subscriptions that analyst firms such as Frost & Sullivan or IDC sell their customers, which can run into the hundreds of thousands of dollars, making these companies more valuable than their competitors that offer project-based consulting on a one-off basis.
4. 3: SUNK MONEY RENEWABLE SUBSCRIPTIONS – THE BLOOMBERG TERMINAL When customers make an investment to do business with you, they become very sticky. If they buy on a subscription model, you will have one of the most valuable businesses in your industry. Traders and money managers swear by their Bloomberg Terminal. Bloomberg customers must first buy or lease the terminal and then subscribe to Bloomberg’s financial information. Having sticky customers loyal to a proprietary platform allowed Michael Bloomberg to build a valuable company. For most dry-cleaning operators, we can relate to our hosted POS systems from SMRT, SPOT or others. Pretty sticky situation.
5. 2: AUTO-RENEWAL SUBSCRIPTIONS – DOCUMENT STORAGE When you store documents with Iron Mountain, you are charged a fee each month until you ask for your documents to be shredded or you agree to pick them up. Unlike a magazine subscription, for which you must make the conscious decision to re-up, Iron Mountain just bills you until you tell it to stop. Iron Mountain tracks its cancellation rate down to the decimal point and it can predict its revenue well into the future, which is why it is such a valuable company. I challenge you to review your monthly credit card statement to see just how many auto renewals you have but may have forgotten. How about that gym membership or unlimited carwash membership? At this point in time, there are several operators throughout the country which have created WDF subscription services with monthly auto renewals. I am aware of at least 3 who are experimenting with Dry-cleaning subscription plans. The jury is still out on this service. One idea that we have played around with is a bedding program and also a shoeshine service.
6. 1: CONTRACTS – WIRELESS PHONES The only thing more valuable than an automatic renewal subscription is a hard contract for a defined term. As much as we may despise being tied to them, wire­less companies have mastered the art of recurring rev­enue. Many give their customers free phones as long as the customer locks into a two- or three-year full-service contract. A related part of our industry would the linen rental companies which have contract with their customers. This guarantees the revenue stream. Be careful of those contracts which contain auto renewals requiring a 6-month advanced notice. Security companies use these frequently.

As you ascend the recurring-revenue hierarchy, expect the value of your business to go up in lockstep. Once you’ve isolated what is teachable, what your customers value, and what they need most often, document your process for delivering this type of product or service. This will form the basis of your instruction man­ual for delivering that product or service. Use examples and fill-in-the-­blank templates where possible to help ensure that your instructions are specific enough for someone to follow independently. Test your instructions by asking a team or team member to deliver the service or product without your involvement. Getting the instruction manual right will require time and patience. Expect to develop many drafts. Next, name your scalable product or service. Naming your offering gives you ownership of it and helps you differentiate it from those of potential competitors. Once you own something unique, you move from providing a commoditized service or prod­uct to providing one whose terms of use you decide. If your prod­uct or service isn’t generic, customers won’t be able to compare your price to others’. Instead, name your offering, along with each of the steps you take to deliver it, to differentiate your offer so that you can set its price and payment terms.

After you come up with a great name, write a short descrip­tion of the features and corresponding benefits of each step in the production of your offering. Revamp all of your customer commu­nications (e.g., Web site, store signage, brochure, social media) to describe your process in a uniform way. This mostly likely is best done with your management team or a marketing firm. Sounds easy until you get started. 

If you are intrigued with this first driver of value, you can log on to https://mfmbusinesscoaching.com/value-builder-assessment-score/ and get your Value Builders Score.

Until next time, enjoy building value.