Have you ever noticed that you get some of your best ideas in the shower? Every morning, you’re stuck there for a few minutes doing something you’ve done since you were a child. Your mind knows it has a couple of minutes to think.

Employees get the same mental holiday when you specialize and give them systems for routine tasks.

How Ethos3 Unleashes the Creativity of Their Team

Ethos3 is a Nashville-based design company specializing in creating presentation designs. Doing
just one thing allows them to systematize their processes much more efficiently than most other design firms. They have a standardized business development method. It’s a templated proposal that includes the number of slides you’ll get, the number of revisions, and the pricing formula. For project management, they use teamwork.com. Again, there’s a set of templates for each stage of the development process, and the project delivery approach is the same every time. It’s a recipe – just add water.

When you give people a procedure to follow for the boring stuff, they can stop worrying about what to do and pour their creative talent into how to do it. Ethos3 has finished second in the World’s Best Presentation Contest, and Apple pioneer Guy Kawasaki is among its fans.

As entrepreneurs, it’s easy to assume that everyone likes the adventure of bushwhacking their way through life, not knowing what’s around the next bend. In fact, a lot of your employees would prefer some consistency and structure.

Systems are not the enemy of creativity. And author and consultant Kathy Kolbe has developed a personality test that proves it. The so-called Kolbe Index ranks users on four personality attributes.

Fact Finder describes the extent to which someone likes gathering data before making decisions.

Follow Through measures how much someone likes systems, structure, and routine.

Quick Start quantifies one’s inclination to start new things.

Implementer measures one’s knack for building stuff.

Kolbe’s test shows that we all have a little bit of each attribute, yet we all also have a dominant operating style. Most entrepreneurs score high on “quick start” and low on “follow through.” It’s a classic combination. Most of us love starting things but quickly tire of the details.

Most of your employees will score higher than you on follow through, which means they need more structure to thrive. They may also score higher than you on fact finder, suggesting they need more data than you would before making a decision.

Specializing, and giving your team standard operating procedures, gives your employees the mental breathing room to be creative and the structure they need to thrive.

Republished with permission from Built to Sell Inc.

Specializing in one product or service allows you to focus on delivering that thing better than everyone else. It enables you to hire (or train) specialists in your field, improving the quality of your work, which leads to happier customers. And satisfied customers buy again and refer their friends.

That’s 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 sector. Every industry and profession 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.

Furthermore, focusing on one sector 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 a sector. You may be an expert in an industry, but chances are, they’re not (particularly when you first hire them). Focusing on a sector accelerates how quickly your staff can become fluent in your industry’s lexicon, which allows you to delegate customer relationship management faster and more successfully.

Specializing in an Industry Led to a 20x Increase in Revenue

For example, look at 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 sector.

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 $10 million 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.

Republished with permission from Built to Sell Inc.

If you’re trying to figure out what your business might be worth, it’s 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, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

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 $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.

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 profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit 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’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit 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.

Republished with permission from Built to Sell Inc.

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 Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).

If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be 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 four models to consider:

Products That Run Out

If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest) in running to the store to re-stock on Pampers. Dollar Shave Club, which was acquired by Unilever in 2016 for five times revenue, sells razor blades on subscription. The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions.

Membership Websites

If you’re a consultant and offer specialized advice, consider whether customers might pay access to a premium membership website where you offer your know-how 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 make a company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so 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. ZipCar subscribers can have 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.

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.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight-part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Republished with permission from Built to Sell Inc.

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 called 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, when an employee leaves, you can quickly swap them out with a replacement to take on duties of the job.

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, its bottleneck. Best of all, it will be worth a lot more to a buyer whenever you are ready to sell.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight-part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.