3 Things to Consider When You Hit “The Freedom Point”

When was the last time you calculated the percentage of your net worth tied to your company’s value?

When you started your business, its value was probably negligible. Unless you purchased or inherited your company, it wasn’t worth much when you opened your doors, but over time, the proportion of your assets tied to your business may have crept up.

Let’s imagine a hypothetical business owner named Tim, who starts his company at age 30. He has a little bit of equity in his first home and a small retirement fund. When he starts his business, it’s worthless, so it doesn’t yet factor into Tim’s net worth calculation.

By the age of 50, Tim has built up $600,000 worth of equity in his home, his retirement nest egg has grown to $400,000, and his business has blossomed and is now worth $4,000,000. Tim’s company has crept up to represent 80 per cent of his net worth.

Tim knows the first rule of investing is to diversify, which he is careful to do with his retirement account. Still, he has failed to achieve overall diversity given the success of his business.

What’s more, he may have unknowingly passed something called “The Freedom Point,” which is when the net proceeds (i.e., after taxes and expenses) of selling his business would garner enough money for him to live comfortably for the rest of his life. Your lifestyle determines your Freedom Point, but when you pass it, it’s worth considering the risk you’re taking.

If the pandemic has taught us anything, it is that nothing is for sure, and a thriving business one day can turn into a struggling company overnight. When your business makes up most of your net worth and selling it would garner enough money to retire, there’s no financial reason to continue owning your business. You may enjoy the challenge, the social interactions, and the creative process of building a business, but keeping it may be unnecessarily risky.

When you’ve crested the Freedom Point and want to diversity—but still don’t want to retire—you have some options:

• Sell a Minority Stake: In a minority recapitalization, you sell less than half of your shares. Often sold to a financial investor such as a private equity group, a minority recapitalization allows you to diversify your net worth while continuing to control your business.

• Sell a Majority Stake: In a majority recapitalization, you sell more than half of your shares to an investor who will most likely ask you to continue to run your business for many years to come. You get to diversify your wealth, keep some equity in your business for when the investor sells, and continue to run your company.

• Earn-Out: When you sell your company, you’ll likely have to agree to a transition period of sorts. One of the most popular is called an earn-out, where you agree to continue to run your company as a division of your acquirer’s business for a specified period of time. Your earn-out may be as little as a year or as long as seven, but the average is three years. Therefore, if you’re past the Freedom Point and can see yourself wanting to step down in the next three to five years, an earn-out may be worth considering.

Building a successful business is rewarding, but when your personal balance sheet gets out of whack, it may be worth considering the risk you’re shouldering and the options you have for sharing some of it. 

The Recurring Revenue Bump

In June of this year the owner of the Olive Garden restaurant chain, Darden, acquired Ruth’s Chris, the legendary American steakhouse. A $715MM acquisition, implying a valuation of around one times last year’s annual revenue, or about ten times its adjusted EBITDA for 2022.

Not bad for a giant company, but Ruth’s Chris’s value was likely hindered by its lack of recurring revenue.

Comparing Ruth’s Chris to another traditional business with recurring revenue demonstrates the power of automatic customers. For instance, Waste Management, a private garbage collection company that disposes of trash for clients through long-term contracts, trades at over three times its annual revenue.

Two companies in traditional industries, have nothing to do with software, yet one trades at one times revenue while the other fetches three.

Recurring Revenue: Not Just for Software Companies Anymore

Many people consider recurring revenue to be exclusive to software companies, but traditional businesses can also reap the benefits of creating recurring income streams. For example, let’s look at Gamal Codner, the founder of Fresh Heritage, a line of men’s grooming products that began with beard oil for softening facial hair prior to shaving.

Codner used Facebook ads to acquire customers at a cost of around $15 each. However, with an average order value of $30, there was little margin left to support his expanding operation. Recognizing the need for change, Codner decided to broaden his product line by introducing additional grooming offerings and launching the VIP Club, a subscription program for men wanting automatic shipments of Fresh Heritage products.

A Subscription Program That Goes Beyond Just Discounts

Codner conducted an in-depth survey among approximately 500 customers and made an intriguing discovery. He found that his target customers were less captivated by discounts and more attracted to the empowering notion of being an alpha male in their respective fields. The insightful results from this survey perfectly aligned with Fresh Heritage’s inherent goal of building a distinct brand that appealed specifically to growth-oriented men, those that were keenly focused on boosting their self-confidence.

Subsequently, to incentivize men to join the VIP program, Gamal moved beyond merely offering financial incentives such as discounts. He strategically created a sense of community and belonging by emphasizing membership in a group of like-minded individuals, all striving for personal excellence. To nurture this sense of community, Gamal established quarterly local area meetups, providing valuable opportunities for members to network and share experiences. These empowering gatherings soon evolved into a significant driving force, steering new customers toward the experience offered by Fresh Heritage’s VIP program.

Converting Customers into Subscribers

Gamal continued to acquire customers through Facebook advertising, and instead of relying on one-time purchases, he successfully converted them into subscribers, significantly increasing their lifetime value. The average order value also surged to over $60, and with the subscription program expanding to 3,000 members, Codner’s EBITDA margin grew to 40 per cent.

That got the attention of BRANDED, an aggregator of digitally native, direct-to-consumer brands that made Gamal an acquisition offer he couldn’t refuse in 2022.

Recurring revenue will make your business more valuable. As the example of Fresh Heritage demonstrates, you don’t have to be in the software business to create an annuity stream. Find out what your customers crave on an ongoing basis, and you will have the raw material for a subscription offering.

3 (Creative) Ways to Get Your Business to Run Without You

If you aspire to build a valuable company, one crucial factor is to ensure your business can operate independently without your constant involvement, but embarking on this journey can feel daunting. In this article, we'll explore three cost-effective, simple strategies to set your business on a path to autonomy and allowing it to thrive without your constant presence.

1. Replace yourself by niching down.  

The reason most owners can’t replace themselves is that a substitute would be too expensive. Trying to replace your breadth of experience would likely require a very high-salaried employee. If you can’t afford to replace all of what you do, niche down your core offering.  

For example, Casey Cavell’s baseball business, D-Bat Academy, could have catered to a broad range of players: professionals, softball players, slow-pitch beer leaguers, fast-pitch…but instead, he got specific about who his business was for: 5- to 10-year-old kids.  

Sure, he could have charged more per customer if he catered to college athletes and aspiring pros—but those elite athletes would expect to get a hitting coach with years of expertise, and Casey would have had to staff for that.  

On the other hand, when you have a business where one of its primary objectives is to give an 8-year-old an awesome birthday party, well, an entry-level employee can deliver on that.  

When you narrow down your offering, you can bypass the high salary that comes with someone with a wide breadth of experience. 

2. Create a question diary. 

When Jodie Cook was building her social media agency, she made a conscious choice every time an employee came to ask her a question. 

The easy thing to do would have been to answer the question, but she forced herself to write each question down. She turned that question diary into a business manual that documented how to do every single task required of her employees.  

Her manual came in the form of an Excel spreadsheet with 50 tabs, each one documenting a specific process, like payroll for example. 

Challenge yourself to do the same: When an employee asks you a question, resist the urge to just answer and move on. Document those queries, and turn them into a standard operating procedure (SOP) that enables your staff to develop expertise in their role. The go-to reference becomes the manual…instead of you. 

3. List your employees alphabetically on your site.

Most companies list their employees by seniority, with the owner and CEO as the top listing. However, this communicates that you are the most important person in your company, which will trigger everyone from salespeople to suppliers and prospective partners to want to go straight to the top by calling you.

An effective strategy to downplaying your role in your company (and getting others to step up and shoulder more) is to list employees alphabetically rather than by seniority on your company’s website. This approach can minimize the spotlight on you. Additionally, using titles like “Head of Culture” and “Head of Product” instead of “CEO” or “Owner” can further obscure your seniority, making it less likely customers will call you by default.

Getting your business to thrive without you gives you the freedom to cherry pick the projects you want to work on or just own your business and collect passive income. A business that runs without you is also a valuable, sellable asset if you ever choose to move on to a new chapter in your life. Niching down, creating SOPs, and downplaying your role on your website are all tactical things you can do today to get your business running more independently in the future.

One Counterintuitive Strategy Led to This US$380 Million Payday

When David Perry started his video game company Gaikai, he filled a dartboard in his office with the names of companies he thought would want to buy his company, one day.

Why would a startup business with no revenue or employees be thinking about potential acquirers so early? For Perry, it comes down to something he refers to as “down-the-track thinking”.

Perry was interviewed about Sony’s US$380MM acquisition of Gaikai, and he described his philosophy by using a moving train as an analogy. He described a train full of people representing an industry with three different groups:

 1.    Most people are comfortably inside the train watching the countryside go by.

2.    There are some people scrambling behind the train, hoping to jump on.

3.    There are a select few people who are obsessing over where the train is going and are constantly thinking about the upcoming stops along their journey.

Perry described himself as one of the people thinking about where the train is going next, so it only made sense to him to have a list of businesses he could sell to.

Sony was in the bullseye of Perry’s dartboard of companies to sell to so when his partner suggested they name their company Gaikai, a Japanese word that roughly translates to “open sea”, Perry agreed. The word gaikai is hard for the average English speaker to pronounce, but Perry knew the name would be irresistible to Sony.

Perry and his partners went further and named other parts of their product line with Japanese words and designed the company for the global gaming market, not just American customers, as was the habit of videogame makers at the time.

Years later, when Perry was ready to sell Gaikai, he approached all the big video game makers about buying his company, and Sony was the most enthusiastic. They were thrilled to see the extent to which Perry and his partners had gone to make Gaikai fit Sony’s culture.

Visualizing a shortlist of potential acquirers when you make key decisions is a good way to vet your next move. Imagining how your potential acquirers would react to hear how you are thinking of evolving your company can inspire a more strategic lens through which to make big bets. Whether you are looking to sell soon or are years away from selling, the process of developing a shortlist of potential acquirers tomorrow will help you make better decisions today.

Contact Whitehorn today to find out how we can help you strategize accordingly and discuss potential acquirers for your business.

3 Invisible Gates That Stop Most Companies Flat

How many people can one person manage?

Harvard Business Review estimates the ideal range for an experienced manager is between five and nine with a sweet spot of seven.

The ratio of managers to direct reporters matters because it explains why some companies grow and others plateau. Every business is different, but you can loosely think of a company’s evolution as a series of stages with an invisible gate holding most owners from progressing to the next stage.

Stage 1: Doers (up to 9 employees)

In stage 1, you direct a handful of doers. You need people who can follow your standard operating procedures and execute. Your best employees will often be generalists who can do a lot of things reasonably well. They thrive on variety and like the feeling of getting things done.

Many owners get stuck in stage 1 because they fear delegation. Many owners do not trust employees enough to do the work without their direct oversight. However, those owners courageous enough to hire some managers will graduate to stage 2.

Stage 2: Managers (10–40 employees)

In a Stage 2 company, the owner hires a small number of managers (usually less than five), who are paid to ensure their direct reports execute. The emphasis is on managing against the plan the owner gives them. Good managers understand the process they are being asked to manage. They are detail-oriented and stick to the plan.

While managers may contribute to the plan, they are not usually responsible for creating it. Managers typically need their leader(s) to supply their plan, which is why many companies stall out at stage 2.

Stage 3: Leaders (40 + employees)

For our purposes here, let’s define a leader as a person who can lead a team through more than one layer of management.

While most leaders can manage, the opposite is not necessarily true. Leadership requires managers to learn a new set of skills. Leaders need to be able to communicate clearly, delegate effectively, and create strategy.

If you are stuck at stage 2, you have two options: either you need to hire leaders, which risks alienating your managers, or train managers to become leaders. Both strategies are hard and time consuming, which is why many companies get stuck at stage 2.

If you are stuck, it is worth asking if you have the right people in place to take your business to the next stage. In the beginning, you will need managers you can trust. And to graduate to stage 3, you will need people who can manage and lead. Some managers may need training, while other areas of your business may need an entirely new leader to make the transition successful.

Contact Whitehorn today to find out how we can help you grow your business.

How to Create a Recurring Revenue Model That Appeals to Customers

Have you struggled to identify a recurring revenue model that will work in your business? 

If so, you are not alone. 

Most owners understand the benefits of recurring revenue, such as predictable cash flow and an increase in their company’s valuation, but struggle with where to start. Just changing your pricing from a one-time transaction to a smaller, recurring fee does not make for a sticky subscription model. 

The first step of creating a recurring revenue model for your business has nothing to do with your billing platform and everything to do with your target customer. The secret to reimagining your business into a recurring revenue juggernaut is to niche way down.

Niche Down

For a recurring revenue model to retain subscribers, it needs to provide an outlandishly attractive value proposition to customers who agree to continue with the service over the long run. To create that kind of delight, you have to find a pain point where a group of customers feels uniform. That only happens when you niche way down. 

For example, when Jorey Ramer, the founder of Super, moved to the San Francisco Bay area, he purchased a home. Ramer had previously been a renter and was surprised by the hassles of owning a house.

Ramer realized that everything from the ice maker in his fridge to the lighting in his backyard was susceptible to failing. He decided to create a subscription model that would allow homeowners to pay a monthly fee in return for a mobile app where subscribers could summon a repair person to fix just about anything that could break down in a home. 

Last year Ramer raised $20MM from investors, who see the opportunity in putting home repairs on subscription. 

Ramer’s first step in creating Super was not to be a home repair professional with a different billing model. Instead, he focused on niching down to a customer group with a common need. To begin segmenting, he picked homeowners. Then Ramer went further and identified a subsegment of homeowners who are not do-it-yourself types. 

Some homeowners are tinkerers and do not mind digging into a “honey-do”" list every weekend, but Ramer knows those are not his people. Instead, he chose to focus on the sub-niche of homeowners that do not want the hassle and surprises that come with homeownership. 

How Peloton Made Their Subscription Sticky

At Peloton, the fitness company that started with a souped-up stationary bike and now includes classes on everything from yoga to running, they have adopted a subscription model. Customers buy the bike and then subscribe to Peloton’s content package. To make Peloton’s subscription sticky, they did not just target people who wanted to get fit, many of whom were happy to go to a gym before the pandemic. Instead, they targeted relatively affluent people who are too busy to go to the gym. While the single twenty-something sees a spinning class at his local gym as a chance to connect with like-minded people, Peloton knew the forty-something mom with three kids often does not have the time to go to the gym. Therefore, they defined their target customer as relatively affluent fitness enthusiasts who do not have time to go to the gym—a niche of a niche. 

If you’re stuck trying to come up with a recurring revenue model that would work for your industry, segment your customers based on what makes them buy from you. Then determine if one of your niches has a recurring need for something you sell. 

Contact Whitehorn today to find out how we can help you find your niche and create a recurring revenue model.

The Most Critical Factor in Achieving Your Goals May Surprise You

As we start to come closer to the end of another year, you may be starting to consider your business goals for next year.

Perhaps you are going to create a new recurring revenue stream or hire a new general manager, or maybe you have decided to start preparing for an exit from your business.

Whatever your goals are, the most important thing you can do now is write down your plan to achieve them.    

A Revealing Study 

Writing down your goals being the most important thing you can do was driven home recently by a study published in the British Journal of Health Psychology. The project was designed to see what impact stimuli would have on participants’ level of exercise. Researchers divided a random sample of participants into three groups.

For the first group, the researchers asked the participants to track how frequently they exercise. They were told to read a passage of an unrelated book before beginning.

For the second group, researchers wanted to measure the impact that motivation would have on their exercise levels. The second group was also asked to track their activity levels and were then told to read a book’s motivational passage that outlined the benefits of exercise for maintaining a healthy weight.  

The third group was asked to read the same motivational excerpt as the second group but had the additional task of writing down their exercise goals for the coming week. 

The Results

When the researchers sat down to analyze the results, they were surprised to find that with group two, just 35% exercised once per week. That was slightly less exercise than group one (36%) even though they were motivated to work out from reading the motivational passages.

When the researchers analyzed the third group’s exercise log, they were stunned to find that 91% of them had worked out. The only difference between groups two and three was that the third group was asked to write down their goals. That simple task seems to have almost tripled their likelihood to succeed. 

The researchers concluded that motivation alone has virtually no impact on our actions. Instead, it is motivation coupled with a written action plan of how you’re going to achieve your goals that has the most significant impact on your results. 

Food for thought as you start thinking about making 2023 your best year yet.

Contact Whitehorn today to find out how we can help you strategize and set an action plan to accomplishing your upcoming goals.

The Simplest Form of Recurring Revenue Virtually Every Business Can Adopt

Recurring revenue can make your company more predictable, can extend the lifetime value of a customer and can ultimately make your business more valuable. If you are unsure how to create automatic sales, a simple service contract can be the place to start. 

A service contract is an agreement to provide an ongoing level of service in return for a regular payment. It can be a way to transform an ordinary service company into a predictable subscription business. 

For example, John Abell’s grandfather started a small Canadian pest control company in 1924 with one office. For many years Abell Pest Control ran on single pest control services, this means that a customer would call for a certain pest problem, such as a wasp nest and Abell would send someone out to fix it. 

The business model worked fine, but cashflow was lumpy. Abell had reached a point where it could no longer sell any more of the company’s time, and his growth stalled. Knowing something had to change, Abell made a 90-degree turn.

The Switch

In the early 2000’s Abell began offering a membership model were, instead going out on a call-to-call basis. Abell started offering a subscription plan to allow customers to have regularly scheduled services throughout the year, with protection against 17 different pests for a fixed yearly fee.

The switch to a subscription billing model transformed the business, and Abell quickly grew the company to an estimated $100MM in annual sales. 

 As the example of Abell Pest Control illustrates, most small businesses begin life using the “break/fix” business model where a customer has a problem, and you swoop in to provide a solution. This business model may make you feel valued as a problem solver, but it comes at the expense of the value of your company. In the break/fix model, you must create demand, sell your product or service, deliver it, and start all over again, which is why acquirers place a lower value on these transactional businesses when compared to subscription-based companies. 

By contrast, with a service contract, you create an ongoing stream of income that has the potential to grow the lifetime value of a customer dramatically. When you can accurately predict how much money you will get from a subscriber, you can invest more in wooing them. 

The most compelling reason to adopt a recurring revenue model is the impact it can have on your company’s valuation. Dollar for dollar, recurring revenue can be worth more than twice that of transactional revenue, depending on your industry.

Service contracts are a simple and effective way to transform a transactional business into a recurring revenue goldmine. 

Contact Whitehorn today and find out how we can help you transform your business.

Raising Your Business Like a Child

Why did you decide to become an entrepreneur?

If you are like most owners, you aspire to have the freedom that comes from owning your own business, including the freedom to: 

• Decide how you spend your time

• Choose whom to work with and to avoid people who drain your energy

• Make as much money as you deserve

This desire for freedom often leads owners to aspire for a bigger business, which they believe will give them what they want. Unfortunately, most owners who strive for more revenue or profit as their primary goal often have:

• Less time because it is spent managing an ever-expanding set of offerings.

• Less freedom because complexity inevitably leads to conflict.

• Less money because any available cash is reinvested in growth initiatives.

So, in many ways, growing a larger business may get you further from your ultimate goal of freedom.  

Instead of thinking of your business as something to push harder and faster, there is an alternative that may get you closer to what you want. Think of your business as a child, and your role is to guide them into becoming an independent, thriving adult. 

If your goal is to create a business that can thrive without you, you will start to make different decisions. That demanding customer who wants your attention on their project no longer looks so attractive. That exciting new product that is going to require you to sell no longer looks worth it. 

By focusing on the role of being a parent to your business rather than a business driver, the demands on your time lessen as your employees pick up more of the load. You may also find your business selling more as you build a team of salespeople rather than relying only on yourself to drive the top line. Your business may end up being more valuable than a larger peer where the owner is still mostly responsible for sales.

Acquirers want businesses that will survive the loss of their owner. In many cases, they will pay a premium for companies where the owner is in the background. Consider the case of Damian James, who sold his network of mobile podiatry clinics generating $11MM in revenue for $13.2MM. He credits much of the sale to the fact that he was no longer running the businesses day to day and had reduced his time commitment to just one or two days per week. 

David Hauser started Grasshopper, an Internet-based phone system he built to $30MM in annual revenue before he sold it to Citrix for $165MM in cash and $8.6MM in stock. Hauser was down to working just one day per week at the time of the sale of his company. 

Growing revenue and profits will be valuable to an acquirer, but if you make them your only goal, you may find yourself with less of what you want. Treat your business like a child who needs guidance to become a thriving adult, and revenue, profits, and ultimate value will come as a by-product.

Contact Whitehorn today to find out how we can help add value to your company.

The 2 Best Ways to Make Your Company Special

Specializing in one product or service allows you to focus on delivering it better than your competitors. It enables you to hire, or train specialists in your field, improving the quality of your work, which will ultimately lead to happier customers. Satisfied customers tend to buy again and refer their peers.

This is why specialists often grow faster even while they are spending less on marketing, leading to better profit margins and, ultimately, a more valuable company. Specializing in a specific product or service has tremendous benefits, but what if your customers expect you to deliver a range of offerings?

That’s when the second form of specialization can help: focusing on a specific industry.

The Benefits of Becoming an Industry Expert

Specializing in serving a specific industry confers several benefits. First, offering your products or services to one industry allows you to learn the language spoken in that industry. Every industry has a unique language and being able to speak the jargon can benefit your company. Knowing your industry’s lingo can indirectly communicate to your customers that you are experienced, knowledgeable, and able to navigate the space effectively. 

Furthermore, focusing on one industry ensures you stay current with industry trends, which will result in being able to identify new opportunities for your customers sooner than a competitor who serves multiple industries.  

Most importantly, specializing in one industry allows your employees to become experts in that industry. You may be an expert in that industry, but chances are, they’re not (especially when you first hire them). Focusing on an industry accelerates how quickly your staff can become fluent in your industry’s vocabulary, which allows you to delegate customer relationship management faster and more successfully.

Case Study: Specializing in an Industry Led to a 20x Increase in Revenue

Consider the story of UK-based founder Raman Sehgal. Sehgal started a small marketing agency called ramarketing in 2009. By 2015, the business had grown to the Pound Sterling equivalent of around $500,000 USD in revenue, but the company was losing customers as fast as they were winning new ones. 

Frustrated with his company’s lack of progress, Sehgal decided to do a complete analysis of his business. He found that ramarketing’s most valuable customers (low maintenance, sticky, high gross margin, etc.) were in the pharmaceutical industry. Sehgal decided to pivot his business to solely serve clients in the pharmaceutical supply chain. 

Beginning to serve one industry created a sequence of positive events for ramarketing. 

Becoming an industry specialist allowed ramarketing to stay up to date with industry trends, learn the lingo, and ultimately improve the quality of their work. An increase in customer satisfaction led to more referrals and a strong reputation in the industry.

His employees began to understand the intricacies of the industry. In the pharmaceutical space, there are many rules and laws to adhere to. Understanding the regulations allowed Sehgal’s employees to better serve their customers.

Subsequently, the business boomed. 

The Proof Is in the Pudding 

Sehgal’s once stagnant marketing agency grew from $500,000 in turnover in 2015, to over $10MM by 2022, which is when Sehgal accepted an acquisition offer from NorthEdge Capital of more than 10x EBITDA.  

In Summary

Sehgal’s bold decision to specialize in the pharmaceutical industry led to a 20x increase in revenue and, ultimately, a lucrative exit.

Narrowing your product or service line is the most common way to increase your company’s value but specializing in one industry carries many of the same benefits. Contact Whitehorn today to find out how we can help you increase your company’s value.

5 Ways to Get Your Business to Run Without You

Some owners focus on growing their profits, while others are obsessed with sales goals. Have you ever considered making it your primary goal to set up your business so that it can thrive and grow without you? 

A business not dependent on its owner is the ultimate asset to own. It allows you complete control over your time so that you can choose the projects you get involved in and the vacations you take.

When it comes to getting out, a business independent of its owner is worth a lot more than an owner-dependent company.  Here are five ways to set up your business so that it can succeed without you. 

1. Give Them a Stake in The Outcome

Jack Stack, the author of The Great Game of Business and A Stake in The Outcome wrote the book on creating an ownership culture inside your company: you are transparent about your financial results, and you allow employees to participate in your financial success. This results in employees who act like owners when you’re not around.

2. Get Them to Walk in Your Shoes

If you’re not quite comfortable opening the books to your employees, consider a simple management technique where you respond to every question your staff brings you with the same answer, “If you owned the company, what would you do?”

By forcing your employees to walk in your shoes, you get them thinking about their question as you would, and it builds the habit of starting to think like an owner. Pretty soon, employees are able to solve their own problems. 

3. Vet Your Offerings

Identify the products and services which require your personal involvement in either making, delivering, or selling them. Make a list of everything you sell and score each on a scale of 0 to 10 on how easy they are to teach an employee to handle. Assign a 10 to offerings that are easy to teach employees and give a lower score to anything that requires your personal attention. Commit to stopping to sell the lowest scoring product or service on your list. Repeat this exercise every quarter. 

4. Create Automatic Customers

Are you the company’s best salesperson? If so, you’ll need to fire yourself as your company’s rainmaker in order to get it to run without you.

One way to do this is to create a recurring revenue business model where customers buy from you automatically. Consider creating a service contract with your customers that offers to fulfill one of their ongoing needs on a regular basis. 

5. Write an Instruction Manual for Your Business

Finally, make sure your company comes with instructions included. Write an employee manual or what MBA-types call the Standard Operating Procedures (SOPs). These are a set of rules employees can follow for repetitive tasks in your company. This will ensure employees have a rulebook they can follow when you’re not around, and, it makes training new employees easier.

You-proofing your business has enormous benefits. It will allow you to create a valuable company and have a life. Your business will be free to scale up because it is no longer dependent on you. Best of all, it will be worth a lot more to a buyer whenever you are ready to sell. 

One Tweak That Can Add Value to Your Business

One Tweak That Can Add Value to Your Business 

If you are trying to figure out what your business might be worth, it is helpful to consider what acquirers are paying for companies like yours these days. 

A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, or Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).  

Obsessing Over Your Multiple 

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. After all, if your business has $5MM in EBITDA, and it trades for four times EBITDA, it is worth $20MM; if the same business trades for eight times EBITDA, it is worth $40MM. 

Obviously, your multiple will have a profound impact on the haul you take from the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying. 

How Profitability Is Open to Interpretation 

Most entrepreneurs think of EBITDA as an objective measure, calculated by an accountant, but when it comes to the sale of your business, EBITDA is far from objective. Your EBITDA will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner. 

This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value. 

Let us take a simple example to illustrate. Imagine you run a company with $30MM in revenue and you pay yourself a salary of $300,000 a year. Further, let us assume you could get a competent manager to run your business as a division of an acquirer for $180,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $120,000 in EBITDA. If they are paying you five times EBITDA for your business, that one adjustment has the potential to earn you an extra $600,000. 

You should be able to make a case for several adjustments that will boost your EBITDA and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer. 

Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, one-off lawsuits or insurance claims and one-time professional services fees. 

Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business. 

Contact Whitehorn today to find out how we can help you add more value to your business.

8 Questions You’ll Be Asked When Selling Your Business

One of the most intimidating aspects of selling your business can be facing the barrage of questions during the various management presentations you will be doing for potential acquirers. Be prepared to be grilled on all facets of your operations. Of course, every meeting will be different, but here are some questions you can expect to be asked when you are in the hot seat:

1. Why do you want to sell your business?

It is a slippery question because if your business truly does have a bright future and you want the buyer to believe that's the case the obvious question is: “Why do you want to sell it, and do would you want to sell it now?”

2. What is your cost per new customer acquired?

The potential acquirer wants to find out if you have a predictable, economical and scalable formula for finding new customers.

3. What is your market penetration rate?

The acquirer, with an eye to future growth, is trying to understand how big the potential market is for your product or service and what part of the field remains to be harvested.

4. Who are the critical members of your team?

The acquirer wants to understand the breadth and depth of your team and determine specifically which members need to be motivated and retained post-purchase.

5. Who buys what you sell?

Strategic buyers will be searching for any possible synergies between what you sell and what they sell. The more you know about your customer demographics, the better the buyer will be able to assess the strategic fit. If your customers are other businesses, a buyer will want to know what functional role (e.g., training manager, VP of sales and marketing) buys your product or service.

6. How do you make what you sell?

This question is asked to size up the uniqueness of your formula for creating your product or service. Potential buyers want to know if you have any proprietary systems that would be hard for a competitor to replicate. For various reasons, they will also want to understand if the creation of your product or service is dependent on any one person.

7. What makes your product truly unique?

A buyer is trying to understand how big the moat is around your business and what kind of protection it offers from competitors who may decide to compete with you in the future. What have you done to safeguard yourself against the competition?

8. Can you describe your back-office setup?

Most buyers will try to understand how easily they can integrate your back office into their operation. They'll want to know what bookkeeping and billing software you use, how customers pay, and how you pay suppliers.

Of course this is not an exhaustive list, but it’s a good start when you’re preparing to represent your company to your potential buyers.

8 Drivers of Company Value

1. Financial Performance

Your history of producing revenue and profit combined with the professionalism of your record keeping.

2. Growth Potential

Your likelihood to grow your business in the future and at what rate.

3. Business Independence

Does your business rely on any one employee, customer or vendor?

4. Cash Flow Finder

Does your business “gush” cash? How fast can you collect your A/R?  When do you pay your payables?

5. Recurring Revenue

The proportion and quality of automatic, annuity-based revenue you collect each month.

6. Monopoly Control

How well differentiated your business is from competitors in your industry.

7. Customer Satisfaction

The likelihood that your customers will re-purchase and refer you.

8. Hub & Spoke

Are you at the centre of your business? If you were unavailable for three months, what would happen at the business?

Whether you want to sell your business next year or just want to know you’re building a valuable asset for the future, Whitehorn can help give you a comprehensive assessment of the value of your business.

Being Stingy With Your Equity

Being Stingy With Your Equity

It can be tempting to offer shares in your company to finance its growth. These days, there are plenty of investors chasing promising new companies and, in today’s tight labour market, employees are getting bolder in their demands for equity-based compensation. However, using equity as a form of currency dilutes your position and may not be necessary with a pinch of creativity.

How David Hauser Bootstrapped His Way To a 9-Figure Exit

David Hauser has been an entrepreneur for most of his life. He had a number of small money-making ventures in high school and studied entrepreneurship at Babson College. He started a web design business after graduation, followed by an internet advertising company.

Through his early experiences in entrepreneurship, Hauser discovered that one of the most frustrating parts of starting and growing a small business was acquiring a phone system. Back in the late 1990s, big companies used a PBX system to route calls through a switchboard, but a PBX system was ridiculously expensive for most small companies to acquire and maintain.

Hauser and his friend, Siamak Taghaddos imagined a “virtual PBX” which allowed small business owners to leverage the internet to create a phone system without having to buy any of the hardware. They built a rough version of the technology, named their new company GotVMail (later rebranded as Grasshopper), and launched in 2003.

By 2004, they had acquired their first few customers and could see that in order to scale they would need to buy servers and a lot of advertising to drive demand. The venture capital markets were starting to thaw after the dot com bust of 2001 but Hauser chose not to raise venture capital. Instead, they clung to their equity and bootstrapped their little business.

Instead of ordering servers from Dell, Hauser found a local computer company and sold it on Grasshopper’s vision for the future. Hauser asked the owner to make a server for him below cost arguing that if Grasshopper achieved its vision, Hauser would soon buy many more. When Howard Stern moved his show to satellite radio, Grasshopper offered to support Stern’s new medium in return for major concessions on the price of a commercial.

Grasshopper also offered discounts to customers who paid for a year’s worth of service up front, effectively turning its customers into financiers of the business. Despite its growth from start-up to $30MM in revenue in just 12 years, Hauser was able to retain the majority of the equity in his business, which he sold to Citrix in 2015 for $165MM in cash and $8.6MM in Citrix stock.

As the story of David Hauser illustrates, owners who focus on value building will guard their equity like a greedy child hoarding a bag of Halloween candy. Rather than selling their friends and family cheap shares or giving every new employee options, they used other forms of financing to start and grow their business.

Rather than thinking of your shares as a currency to distribute lavishly, consider your stock as the essential ingredient to building value.    

Contact Whitehorn today to find out how we can help you find ways to finance the growth plans of your business.

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 2022, 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 EBITDA. 

If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, there is a higher likelihood that your business valuation will be based on a multiple of your revenue.

Buyers pay a pretty penny for companies with recurring revenue because they can clearly see how your company will make money long after you exit. 

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

Products That Run Out

If you have a product that people run out of, consider offering it on a subscription. The local firm Pumpkin’s Diaper Delivery sells subscriptions to diapers for busy parents who don’t have the time (or interest) to run to the store to re-stock on diapers.  Dollar Shave Club, which was acquired by Unilever in 2016 for five times its revenue, sells razor blades on subscription. Subscription Boxes have grown into a complete retail category. The likes of WhiskerBox, RockyMountainShave, CleanCrate and Goodfood are all emerging Canadian retailers with assorted gifts and consumables that are delivered regularly with 80% or more of sales originating in recurring, subscription-based revenue. 

Membership Websites

If you are a consultant and offer specialized advice, consider whether customers might pay access to a premium membership website where you offer your know-hows 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! did 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 create a new website for a company, chances are they need hosting services for their site as well. While your initial website design may be a one-off service, you could offer to host it for your customer on a subscription. If you offer interior design, chances are your customers will want to keep their home looking like the day you presented your design so that 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. Communauto provides customers with 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.

Conclusion

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.

Contact Whitehorn today to find out how we can help you drive up the value of your business

Partnering to build long term wealth Webinar

Joint webinar with QV Investors

Topics covered included:

• Current market insights

• How to increase your long-term wealth

• How to transition from running your business to retirement

Will your business be more valuable this time next year?

Most company owners set business goals that focus on hitting certain revenue or profit milestones. But if your goal is to own a more valuable business, you may want to make one of the following goals instead:

• Take a two-week vacation without checking in with the office. When you return, you’ll see how well your company performed and where you need to make a key hire or create a new system.

• Cultivate a new relationship with a new supplier. Having a “go to” group of suppliers is great, but an over-reliance on one or two suppliers can create a liability for your business. By spreading some of your business to other suppliers, you keep your best suppliers hungry, and you can make a case to an acquirer that you have other sources of supply for your critical inputs.

• Offload at least one customer relationship. If you are like most business owners, you are still your company’s best salesperson, but this can be a liability in the eyes of an acquirer, which is why you should wean your customers off relying on you as their point person. By the time you sell, none of your key customers should think of you as their relationship manager.

• Write down at least one process per month. You know you need to document your systems, but you may be overwhelmed by the task of taking what’s inside your head and putting it down in writing for others to follow.

• Create a recurring revenue stream. Valuable companies can look into the future and see where their revenue is going to come from. Recurring revenue models can vary from charging customers a small amount for a special level of service to offering a warranty or service contract.

• Check your contracts and make sure they would survive the change of ownership of your company. If not, talk to your lawyer about adding a line to your agreements that states the obligations of the contract “surviving” in the event of a change of ownership of your company.

• Start tracking your Net Promoter Score (NPS). The NPS methodology is the best predictor that your customers will re-purchase from you and/or refer you, which are two key indicators of a healthy and successful company. It is also why many strategic acquirers and private equity companies use NPS as a way to measure the health of their acquisition targets during due diligence.

A lot of company owners will set goals around their revenue or profits, but those goals are blunt instruments. Instead of just building a bigger company, also consider making this the year you build a more valuable one.

Contact Whitehorn today to find out how we can help set and achieve these goals and help make your company more valuable.

6 Little Things That Make A Big Difference To The Value Of Your Company When Selling

1.   Professionalize your books. Consider having audited financial statements prepared to give a buyer confidence in your bookkeeping. You may also benefit from hiring an interim CFO, find out more in our Do You Need a Chief Financial Officer? blog.

2.   Stop using your company as an ATM. Many business owners run trips and other perks through their business, but if you are planning to sell, these treats will artificially depress your earnings, which will reduce the value of your company in the eyes of a buyer by much more than the value of the perks.

3.   Protect your gross margin. Oftentimes, when leading up to being listed for sale, companies try to grow further by chasing low-margin business. You tell yourself you need top-line growth, but when an acquirer sees your growth has come at the expense of your gross margin, they will question your pricing authority and assume your journey to the bottom of the commoditization heap has begun.

4.   Customer Contracts. If you are lucky enough to have formal contracts with your customers, make sure your customer contracts include a “survivor clause” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers cannot use the sale of your company to wiggle out of their commitments to your business post-closing, which would impact a buyer’s valuation of your company. Have a lawyer draft the language to ensure it works in your jurisdiction.

5.   Find your lease. If you rent space, you may be required to notify your landlord if you intend to sell your company. Read through the fine print and ensure you are not scrambling at the last minute to seek permission from your landlord to sell.

6.   Get your Value Builder Score. Take 10 minutes to answer the Value Builder questionnaire now. You will see how you performed on the eight key drivers of company value and you can identify any gaps you need to fill before taking your business to market. The Value Builder System is a 12-module program designed to allow business owners like you to focus on the eight key drivers with the help of a WMC Advisor to create clear action toward improving the value of your business.

Selling a business can be an all-or-nothing affair. Contact Whitehorn today to find out how we can help you get ready for the sale of your business.

4 Ways to Protect Your Turf

Warren Buffett famously invests in businesses that have what he calls a protective “moat” around them – one that inoculates them from competition and allows them to control their pricing.

Big companies lock out their competitors by out-slugging them in capital infrastructure investments, but smaller businesses must be smarter about how they defend their turf. Here are four ways to deepen and widen the protective moat around your business:

Get certified

Is there a certification program that you could take to differentiate your business? We previously worked with a Western Canadian manufacturer that was seeking to expand into the healthcare sector. The company received its ISO 13485 medical devices certification, allowing it to distinguish itself from its peers and pursue additional opportunities within the healthcare sector. There was lots of paperwork and training involved, but the certification process acts as a barrier against other companies competing against them until today.

In your line of business, is there a certification you could get that would make it more difficult for others to compete with you while enhancing your industry reputation?

Create an army of defenders

Ecstatic customers act as defenders against other competitors entering your market, a factor that has enabled companies like Trader Joe’s to defend their market share in the bourgeois bohemian (bobo) market, despite a crowded market of stores hawking groceries.

Get your customers to integrate

Is there a way you can get your customers to integrate your product or service into their operations?

The basic switching costs of Customer Relationship Management (CRM) software are virtually nil. Everyone from 37signals to Salesforce.com will give you a free trial to test their software.  

The real expenses associated with changing CRM software only come when a business starts to customize the software and integrate it into the way they work. Once a sales manager has trained his/her salespeople in creating a weekly sales funnel in a CRM platform, it won’t be easy to convince the team to switch software at that point.

Food for thought: Can you offer your customers training on how to use what you sell to make your company stickier?

Become a verb

Think back to the last time you looked for a recipe. You probably “googled” it. Part of Google’s competitive shield is that the company name has become a verb. Now every time someone refers to searching for something online, it reinforces the competitive position of a single company.

Is there a way you could control the vocabulary people use to refer to your category or specialty?

Conclusion

Widening your protective moat triggers a virtuous cycle: differentiation leads to having control over your pricing, which allows for healthier margins, which in turn leads to greater profitability and the cash to further differentiate your offering.

If you’re wondering how to further differentiate your business, contact us today to find out how we can help you!