Why Growth Potential is One of the Eight Factors that Drive the Value of Your Business￼
As promised, this next module for building value in your business is not as long or “technical” as last month. This month we will talk about the growth potential for your business.
As a business owner, you’re likely proud of the results you’ve achieved in the past. The value of your business, your future growth and the rate of that growth is critical. Can your business be scaled up? That’s why your growth potential is one of eight factors that drive the value of your business. One metric that acquirers may use to evaluate your growth potential is your revenue per employee. This was one of the KPI’s we looked at several months ago. Alphabet (Google’s parent company) generates around $1.3 million in revenue per employee. Compare that to the advertising agency WPP Group, whose average when it comes to revenue per employee is around $100,000. For every dollar of revenue, WPP needs more than ten times the employees than Alphabet does. It takes time to recruit, train, and motivate people, which is why WPP has grown more slowly and suffers much lower valuations when compared to a less people heavy company. Measuring your revenue per employee is just one of many ways an investor may evaluate how quickly they are likely to grow your company.
Stop Selling Your Time
If your goal is to build a more valuable company, stop selling your time. Billing by the hour or day means customers are renting your time rather than buying a result, which means that your business model lacks leverage. To grow, you need to either work harder or hire more people. Since it can take months to ramp up new employees, fast growth is just about impossible. As mentioned, one of the eight factors that acquirers look for in the businesses they invest in is your company’s Growth Potential. Simply put, they want to know how fast they could grow your business, and nothing diminishes your Growth Potential more than selling your time. Billing by the hour can also drag down your customer’s satisfaction with your business — because customers dislike the feeling of being nickel and dimed. They know you’re incentivized to lengthen the time a project takes, while they want a solution in the shortest time. This misalignment leads to unhappy customers, which can destroy the value of your business. Peddling time also invites competition. When you sell your time, you allow customers to compare you with others offering the same service. This can lead to downward pricing pressure and lower margins as you become commoditized.
How Likeable Media Stopped Selling Time
Carrie and Dave Kerpen started Likeable Media, a social media agency, in 2006. Facebook was emerging as a dominant platform, and marketers were trying to figure out how to monetize users of their platform. The Kerpens started selling their time but quickly realized the limitations of an hourly billing model. They realized that customers didn’t want to buy their time. Instead, Likeable customers wanted to buy social content. Marketers wanted a video they could post to their Facebook feed, or a blog post they could publish on their site. The Kerpens decided to switch from an hourly billing model to the Content Credit System. They assigned each piece of content several credits. For example, a tweet might be one credit, a written blog post might be ten, and a video might cost twenty credits. Customers signed up for an annual allotment of credits they could roll over month to month. The Content Credit System transformed Likeable Media for the better. To begin with, customers were no longer buying time. Instead, they were happy to pay for tangible output rather than trying to scrutinize an hourly bill. The credits also made it easier for Likeable’s Account Managers to upsell customers. They no longer needed to justify why a particular project would take more time. Instead, they suggested that customers buy more credits if they needed more content. The Kerpens’ innovative billing approach also created recurring revenue because The Content Credit System relied on annual contracts renewed each year. The Content Credit System also transformed Likeable’s cash flow because customers paid for their credits upfront. Most importantly, the Content Credit System enabled the Kerpens to stop selling their time and build a team. By 2020, Likeable was up to more than 50 full-time employees when they caught the attention of 10Pearls, a digital strategy company which acquired Likeable Media for 8.5 times EBITDA, a healthy premium over a typical marketing agency. The bottom line? If your goal is to grow a more valuable company, stop selling your time and start selling your customers’ results.
Now how could these principles be used in the garment care space we are in? During the past 20 months, many operators innovated with new services, especially wash/dry/fold. Then a few moved to the subscription model of a fixed monthly fee based on the level of service the client wishes. Could the model of selling “points” be used to allow the customer to use as they wish and when they wish? This could also be applied to household items, outdoor items, or actually any service. Revenue is received upfront helping with cashflow. As learned from our friends in the commercial laundry industry, the additional benefit is realized from under wash or unused points.
Another matrix to consider is the Ansoff Matrix. This is a method of reviewing your existing service offerings. Picture a line chart with existing services in the bottom left corner. Along the lower line are New Products/Services you could offer to your existing client base. On the vertical line would be New Markets for your existing Products/Services. Out in the top right quadrant would be new Products/Services to new markets. Think of a lemonade stand at the end of the driveway. Existing product with existing customers. Now go to the beach with the same lemonade, exiting product but new market. Next would be adding iced tea to the mix at the driveway, new product at existing market. Now the stretch, add iced tea to the beach location. New product – new market. I challenge you to list your current services and the current markets you serve. Now create a list of new services you could offer (that are profitable) and the mew markets you could offer your services to. Plot them in the 4 quadrants. Now list any and all obstacles to implementation. Through analyzing all this information, you may discover your new opportunities for the future.
No matter what business you’re in, the critical takeaway is to remember that the value of your business is determined less by what you have done in the past and more by what you will likely do in the future. Now make it happen.
Until next time, enjoy building value.
Want to take control of your business?
How Business Coaching Can Help
Service companies, trades, restoration companies, dry cleaning businesses, laundry businesses come to me for assistance in:
- Developing systems to create smoother operation, improving processes and removing bottlenecks
- Implementing team management practices including meetings, delegation and working with challenging communication issues
- Interpreting financial statements and using the information to make better decisions and become more profitable
- Sales and marketing help to get better clients and bigger projects
In this captivating blog post, Kermit Engh takes readers on a journey filled with personal anecdotes and intriguing insights. From expressing gratitude to the Southwest Drycleaners Association’s Showcase in Dallas to recounting the sale of his cherished Christmas Tree farm, Engh shares the joys and challenges of his various business ventures. However, it is his recent encounter with pizza-making robots at an expo that sparks his imagination about the potential for automation in the garment care industry. Alongside this exploration, Engh delves into the success of his partnership in opening a thriving brewery with a pizza kitchen, and the heartwarming story of his 98-year-old WWII veteran father joining their household. Join Engh as he navigates the world of entrepreneurship, embraces automation’s possibilities, and cherishes the precious moments shared with loved ones.
There are plenty of great business books that can help you hone your skills and take your company to the next level. Not sure where to start? Here are seven must-reads for small business owners.
This month, we discuss the tenth of the Value Builders drivers with our focus on cash flow. We call this the TEETER TOTTER. Our goal will be to maximize the cash flow coming from the day-to-day operations of your business.