If you’re not a business owner, stop reading here.
Congratulations! You’ve made it this far so you must be a business owner. You work the 80 hour weeks away from your family and friends. You’ve experienced the good times and bad. You live and breathe based on the results of your company’s success. It’s you who bears the responsibility of leadership, the challenge of profitable growth, and the burden of growing enterprise value – all in preparation for the future of your business. In fact, according to Entrepreneur.com, more than 50% of business owner’s today are 50 and older and those who intend to sell their business is 78%. If you’re part of the 78%, then business value should be of critical importance to you.
Unified Communications and IT companies we recently surveyed identify finding good employees and securing net new business as their top challenges. While addressing these concerns is critical to the small business owner; doing this alone will not thoughtfully address the need to grow business value. Your growth strategy has to be intentional.
For a moment, let’s skip over the present and focus the future with these four questions to ask yourself as you evaluate the long-term value of your business.
What Is Your Revenue Mix?
Usually at the expense of your margins, revenue for revenue’s sake is a flawed system. All revenues are not created equal and in the hierarchy of all different types of revenue, “contract revenue” carries the most value from potential business suitors and evaluators.
Let’s look at this common example, which option would a potential business investor value more assuming the same base of customers, profit margin and gross revenue?
- A base of customers who have paid in cash for their products and future services, along with the corresponding liability that you carry on your balance sheet to deliver future services.
- A base of customers who pay you on a monthly consumption model, that are bound to an agreement that delivers you enough contracted service revenue to cover your cost of operations.
This example demonstrates that sticky revenue is better revenue and it applies across consumption of services in nearly every industry.
How Aligned Are Your Company Economic Drivers?
We all have our personal economic motivators. Your salespeople and sales leaders have mortgages to pay for and families to feed.
Is it possible that you are fostering an environment where there are different economic drivers for different levels of the organization?
For instance, the typical value added reseller has economic drivers similar to this example:
|Position ||Personal Economic Driver ||Result |
|Sales Associate ||Individual Commission Plan ||Sacrificing Gross Margin in order to meet monthly quotas often without any extended agreement or recurring revenue. |
|Sales Manager ||Quarterly Commission Plan ||Closing deals for the sales reps to meet quarterly targets instead of developing their skills. Discounts years of future services if they are prepaid today. |
|Business Owner ||Cash Flow and Profitably Growth ||Makes a sale on reduced margins, inflated cash flow injection due to discounted future services, and carries a multi-year service liability on balance sheet. |
The challenge is creating an environment where the goals and economic drivers align across multiple levels of the organization and that the compensation plan is thoughtfully crafted to incent the top-down drivers.
You write the checks and your employees work for you, not the other way around. In fact, a compensation plan with components that drive contract revenue can also drive loyalty and a high level of engagement. Paying compensation residuals to Sales Associates and Sales Mangers for contract revenue drives loyalty and influences their selling behavior in your favor.
Do You Own Your Customer?
Smart business owners will tell you it’s good for your business to have more than one supplier to provide pricing competition, product diversity and security against one of them failing. If you are a VAR and selling as an agent, you need to ask the question, Who does ‘MY’ customer really belong to?
For example, if you’re selling your business and pledging that you have a base of 100 loyal customers; will your product suppliers, servicers or financiers challenge that claim? Or will they provide you the agreements that help you defend your customer base? This is a dangerous trap to fall in, and if half of your 100 loyal clients are taken away, how much would your business be worth?
How Deeply Are You Invested In Yourself?
You have a good team you rely on working for you, but still, you were there for the beginning, middle and end of the business life. If you’ve poured your heart and soul for decades into the business, it’s your sunset ride that really matters. Will you go empty handed?
There is no surefire diversion of failure or path to victory; but there are ways to build incremental value into your business. You know, just in case your future financial wealth exists exclusively in the performance of your own business.
You can find some simple solutions to these complex problems in some of the most unexpected places. Take a listen to how GreatAmerica is helping business owners take charge of their future business evaluations in small but meaningful ways by joining our webcast with CorsPro: “Build Business Net Worth with Recurring Revenue” on September 20th.
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- cash flow
- monthly payment
- recurring revenue