Tag Archives: business owner

Caution Business Owners! – Don’t Poke The Giant…

By: Scott E. Plaskett, CFP & John Warrillow

On June 1, 2011, both Floyd’s Coffee Shops in Portland, Oregon were busier than usual. The regulars were elbowed out of the way by new customers visiting the store for the first time to redeem their coupon and get $10 worth of coffee for $3.

This tempting offer was made because Floyd’s had been picked as the first-ever Google Offers “deal.” Google Offers is the company’s first baby step into the world of “social buying” style promotions where a special, limited time offer is made by a business hoping that the deal will spread virally and thereby introduce a new legion of customers to their business.

Google, of course, did not invent the deal-of-the-day category; they were goaded into it after their generous $6 billion dollar offer to buy Groupon was turned down.

Now Groupon is starting to feel the pinch after thumbing their nose at one of the world’s most valuable companies. According to compete.com, Groupon’s traffic went from 33.7 million unique visitors in June 2011 to just 18.3 million unique visitors in January 2012. That’s a drop of almost half inside less than a year. Not surprisingly, Groupon’s stock is also down around 25% since its IPO last year.

Over-playing your hand

The moral of the story is to be careful not to over-play your hand when being approached by someone who wants to buy your company. Acquirers usually have deep pockets and, while you may think your business is unique, never underestimate the resolve of a big company with lots of cash.

They do have an alternative to buying you: they can simply compete with you.

Typically when they make the decision to walk away from the negotiation table they do not leave empty-handed. They come away with new-found insight on how you run your business, what works, and what flops; so they have an enormous head start to launch a competitive company.

And it doesn’t just happen in Silicon Valley. Take a hypothetical example of a home security company generating $500,000 per year in profit (before tax) installing and monitoring home alarms.  One day a big alarm company comes along and says they want to buy the business and they’re willing to pay four times pre tax profit.  The alarm company owner turns up his nose and demands six times earnings.

Now the suitor has a choice. They can try and negotiate with the owner, but that would undermine the economics of the model they’ve used to buy hundreds of similar alarm companies across the country, or they can simply hire someone to start an office to compete with him.

Let’s say they pick door number two and hire a young, aggressive manager. They guarantee her $200,000 a year in the first 12 months on the job while she is building her business.  You have not only lost the opportunity to sell your business; you’re now competing against a young, motivated rival with a parent company who has an extra $1,800,000 ($2,000,000 withdrawn offer minus the $200,000/ year salary for their manager) that they didn’t use to buy you and they’re putting it towards helping your new competitor build her business.

If you’re lucky enough to get approached by a big company who wants to buy yours, remember that they are usually not choosing between buying you or buying your competitor. They are often choosing between buying you or setting up shop to compete with you.

Wondering if you have a sellable business? The Sellability Score is a quantitative tool designed to analyze how sellable your business is. After completing the questionnaire, you will immediately receive a Sellability Score out of 100 along with instructions for interpreting your results.

Take the Quiz here: The Business Sellability Audit™

 

Seven Powerful Ratios Entrepreneurs and Business Owners Need To Start Tracking Now

By: Scott Plaskett, CFP & John Warrillow

Doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth but by the infant mortality rate, a ratio of the number of births to deaths.

Similarly, baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base as a percentage of the number of times they get the chance to try.

Acquirers also like tracking ratios and the more ratios you can provide a potential buyer, the more comfortable they will get with the idea of buying your business.

Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power.

If you’re planning to sell your company one day, here’s a list of seven ratios to start tracking in your business now:

1. Employees per square foot

By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designed your space. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee.

2. Ratio of promoters and detractors

Fred Reichheld and his colleagues at Bain & Company and Satmetrix, developed the Net Promoter Score®  methodology, which is based around asking customers a single question that is predictive of both repurchase and referral. Here’s how it works:  survey your customers and ask them the question “On a scale of 0 to 10, how likely are you to recommend <insert your company name> to a friend or colleague?” Figure out what percentage of the people surveyed give you a 9 or 10 and label that your ratio of “promoters.” Calculate your ratio of detractors by figuring out the percentage of people surveyed who gave you a 0–6 score.  Then calculate your Net Promoter Score by subtracting your percentage of detractors from your percentage of promoters.

The average company in the United States has a Net Promoter Score of between 10 and 15 percent. According to Satmetrix’s 2011 study, the U.S. companies with the highest Net Promoter Score are:

  • USAA Banking 87%
  • Trader Joe’s 82%
  • Wegmans 78%
  • USAA Homeowner’s Insurance 78%
  • Costco 77%
  • USAA Auto Insurance 73%
  • Apple 72%
  • Publix 72%
  • Amazon.com  70%
  • Kohl’s 70%

3. Sales per square foot

By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a respectable retailer might be $300. With real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.

Specialty food retailer Trader Joe’s ranks among companies with the highest sales per square foot; Business Week estimates it at $1,750 – more than double that of Whole Foods.

4. Revenue per employee

Payroll is the number-one expense of most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. In a 2010 report, Business Insider estimated that Craigslist enjoys one of the highest revenue-per-employee ratios, at $3,300,000 per employee, followed by Google at $1,190,000 per bum in a seat. Amazon was at $1,010,000, Facebook at $920,000, and eBay rounded out the top five at $530,000. More traditional people-dependent companies may struggle to surpass $100,000 per employee.

5. Customers per account manager

How many customers do you ask your account managers to manage? Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with. It’s hard to say what the right ratio is because it is so highly dependent on your industry. Slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction). That’s when you know you have probably pushed it a little too far.

6. Prospects per visitor

What proportion of your website’s visitors “opt in” by giving you permission to e-mail them in the future? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony how to convert more of their website traffic into customers. Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic. They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.

Dr. Blanks and Mr. Jesson suggest the easiest way of increasing opt-in rate is to reward visitors for submitting their e-mail addresses by offering them a gift they’d find valuable. Information products – such as online white papers, videos and calculators – make ideal gifts, because their cost per unit can be almost zero. Using this technique and a few others, Conversion Rate Experts achieved a 66 percent increase in the prospects-per-visitor rate for SOS Worldwide, a broker of office space.

7. Prospects to customers

Similar to prospects per visitor, another metric to keep an eye on is the efficiency with which you convert prospects – people who have opted in or expressed an interest in what you sell – into customers.

Conversion Rate Experts’ Dr. Blanks and Mr. Jesson recommend you monitor the rate at which you are converting qualified prospects into customers, and then carry out tests to identify factors that improve that ratio. Conversion Rate Experts more than doubled the revenues of SEOBook.com, the leading community for search marketers, by converting many of SEOBook’s free subscribers into customers. Techniques that were found to be effective included (perhaps counter intuitively) restricting the number of places available; allowing easier comparison between SEOBook and the alternatives; communicating the company’s value proposition more effectively; and simplifying its sign-up process. The trick is to establish your benchmark and tinker until you can improve it.

Acquirers have a healthy appetite for data. The more data you can give them – in the ratio format they’re used to examining – the more attractive your business will be in their eyes.

Wondering if you have a sellable business? The Sellability Score is a quantitative tool designed to analyze how sellable your business is. After completing the questionnaire, you will immediately receive a Sellability Score out of 100 along with instructions for interpreting your results.

Take the Quiz here: The Business Sellability Audit™

 

What Your Birth Certificate Says About Your Exit Plan

By: Scott Plaskett & John Warrillow

In our experience, your age has a big effect on your attitude towards your business and how you feel about one day getting out.

Here’s what we have found:

 

Business owners between 25 and 46 years old

Twenty- and thirty-something business owners grew up in an age where job security did not exist. They watched as their parents got downsized or packaged off into early retirement, and that caused a somewhat jaded attitude towards the role of a business in society. Business owners in their 20’s and 30’s generally see their companies as means to an end and most expect to sell in the next five to ten years. Similar to their employed classmates who have a new job every three to five years; business owners in this age group often expect to start a few companies in their lifetime.

Business owners between 47 and 65 years old

Baby Boomers came of age in a time where the social contract between company and employee was sacrosanct. An employee agreed to be loyal to the company, and in return, the company agreed to provide a decent living and a pension for a few golden years.

Many of the business owners we speak with in this generation think of their company as more than a profit center. They see their business as part of a community and, by extension, themselves as a community leader. To many boomers, the idea of selling their company feels like selling out their employees and their community, which is why so many CEO’s in their fifties and sixties are torn. They know they need to sell to fund their retirement, but they agonize over where that will leave their loyal employees.

Business owners who are 65+

Older business owners grew up in a time when hobbies were impractical or discouraged. You went to work while your wife tended to the kids (today, more than half of businesses are started by women, but those were different times), you ate dinner, you watched the news and you went to bed.

With few hobbies and nothing other than work to define them, business owners in their late sixties, seventies and eighties feel lost without their business, which is why so many refuse to sell or experience depression after they do.

Of course, there will always be exceptions to general rules of thumb but we have found that – more than your industry, nationality, marital status or educational background – your birth certificate defines your exit plan.

Wondering if you have a sellable business? The Sellability Score is a quantitative tool designed to analyze how sellable your business is. After completing the questionnaire, you will immediately receive a Sellability Score out of 100 along with instructions for interpreting your results.

Take the Quiz here: The Business Sellability Audit

KEY009 | Group Benefits – How Business Owners Can Change Their Group Benefits Plan From An Expense To An Investment

Group Benefits – How Business Owners Can Change Their Group Benefits Plan From An Expense To An Investment.

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In This Episode

In this edition of The Key To Retirement, we’re going to talk about Group Benefits and how business owners can change their plan from an expense to their business to an investment in their business.

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The Danger Of Market Timing The Sale Of Your Business

By: Scott Plaskett & John Warrillow

The other day I was speaking with a successful CEO in his fifties who runs a heating and air conditioning company generating eight million dollars in revenue and over one million dollars in profit before tax.

Even though he was tired and nearing burnout, he was planning to wait another five to seven years before selling his business because he “wanted to sell at the peak of the next economic cycle.”

On the surface, his rationale seems to make sense. If you speak with mergers and acquisitions professionals, they’ll tell you that an economic cycle can impact valuations by up to “two turns,” which means that a business selling for five times earnings at the peak of an economic cycle may go for as low as three times earnings at a low point in the economy.

The problem is, when you sell your business, you have to do something with the money you receive, which usually means buying into another asset class that is being affected by the same economy.

Let’s say, for example, you had a business generating $100,000 in pre-tax profit in an industry that trades between three times earnings and five times earnings, depending on the point in the economic cycle.

Furthermore, let’s imagine you sat stealthy on the sideline until the economy reached the absolute peak and sold your business for $500,000 (five times your pre-tax profit) in October 2007. You took your $500,000 and bought into a Dow Jones index fund when it was trading above 14,000.  Eighteen months later  – after the Dow Jones had dropped to 6,547.05– you’d be left with less than half of your money.

Even though you cleverly waited till the economic peak, by March 9, 2009, you would have effectively sold your business for less than 2.5 times earnings.

The inverse is also true. Let’s say you waited “too long” and sold the same business in March 2009. And because you were at the lowest possible point in the economic cycle, you only got three times earnings: $300,000. Notice that’s 20% more than if you’d sold at the peak and bought an index fund at the top of the market.

Just like when you sell your house in a good real estate market, unless you’re downsizing, you usually buy into an equally frothy market. Which is why timing the sale of your business on external economic cycles is usually a waste of energy.

External vs. internal economic cycles

Instead, I’d recommend timing the sale of your business when internal economic factors are all pointing in the right direction: employees are happy, revenue and profits are on an upward trend, and there is still lots of market share for an acquirer to capture.

When internal economic factors are pointing up, you’ll fetch a price at the top end of what the market is paying for businesses like yours right now, which means that – for good or bad – you get to use your newfound cash and buy into the same economic market you’re selling out of.

Wondering if you have a sellable business? The Sellability Score is a quantitative tool designed to analyze how sellable your business is.  After completing the questionnaire, you will immediately receive a Sellability Score out of 100 along with instructions for interpreting your results. Take the test here: The Business Sellability Audit

Use Your Business to Put Your Kids Through School

Along with an RESP, a small business-owner has another ace up his or her sleeve to pay for a child’s education – an Employee Profit Sharing Plan (EPSP).

An EPSP allows you as a small business-owner to income split with your children. By directing a portion of your income to your children through the use of an EPSP, you can effectively reduce the overall tax paid on the total household income. EPSPs are also exempt from payroll deductions like CPP and EI and do not require the withholding of any taxes. The money you pay your children can be used to pay for their education, while also being taxed at the child’s tax rate.

When you add up the savings of both lower taxes and no CPP or EI payments, your dollar is stretching that much further.