Republished with permission from Built to Sell Inc.

A football defensive coordinator needs to protect against an “end run,” a tactical play where your opponent sends the running back wide around the offensive line to try to evade the oncoming tackle.

Just like in football, you have to defend against an end run coming from a supplier that chooses to go around you to get to your customers. The more of your supply you get from a single provider, the more vulnerable you are to that supplier deciding they don’t need you and instead deciding to go straight to your customers.

TheAmazeApp

Let’s take TheAmazeApp as a case in point. Sebastian Johnston co-founded TheAmazeApp in 2014. The idea was simple. Social media influencers could upload a picture of what they were wearing (i.e., a “look”) and tag the items on TheAmazeApp’s database of e-commerce wholesalers. Then, when one of the influencer’s social media followers liked their look and wanted to purchase one or more of the items the influencer was wearing, TheAmazeApp would receive a commission, 20% of which was shared with the influencer.

TheAmazeApp’s founding team raised $800,000 through the San Francisco-based accelerator 500 Startups. By leveraging their influencers to drive traffic, TheAmazeApp quickly grew to 4 million active users per month.

The app was a huge success on the outside, but there was a flaw in their model that held back their valuation.

For the model to work, influencers needed to be able to tag whatever they were wearing, so TheAmazeApp needed to get a comprehensive catalog of hundreds of thousands of the latest fashion items. That meant that TheAmazeApp relied on the data feed of five e-commerce wholesalers who uploaded their data to TheAmazeApp.

TheAmazeApp was increasingly becoming dependent on Zalando, one of their five data suppliers. Zalando is one of Europe’s largest fashion wholesalers and controlled around 70% of TheAmazeApp’s inventory.

The more TheAmazeApp relied on Zalando’s data, the less leverage they had when it came time to sell. Johnston approached all five of his data providers to buy his business, and two expressed interest in buying TheAmazeApp. This buoyed Johnston’s spirits because he knew multiple bidders would give him some leverage with acquirers.

As the process dragged on, one of the two acquirers dropped out, deciding to set up a competitive app—doing an end run—and leaving only Zalando left. Given Zalando knew they controlled 70% of TheAmazeApp’s inventory and that a comprehensive selection was key to their business model, Zalando knew they were in the driver’s seat.

Johnston also knew that if he pushed Zalando too hard, he risked Zalando also doing an end run around TheAmazeApp and setting up their own competing service.

In the end, Zalando acquired TheAmazeApp for between two to three times revenue, which was a relatively modest multiple given the traffic the app was generating just eight months after being funded by an accelerator.

The lesson? The more of your supply that comes from one provider, the more susceptible you become to your provider doing an end run around you. This liability drags down the value of your business and undermines your negotiating leverage when it’s your time to sell. Do what you can to diversify your suppliers to maximize the value of your business.

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.

You’ve likely heard the adage that it is far easier to cross-sell an existing customer a new product than it is to find a new customer.

And if your goal is to grow at all costs, then cross-selling makes sense.

However, all of that sales growth may not do much for the value of your company. If you cross-sell your existing customers too much stuff, it could make your business far less valuable.

When you cross-sell a customer so many things that they begin to account for more than 15–30% of your revenue, expect your value to drop. If a single customer represents more than 30% of your sales, expect an even deeper discount.

Customer concentration is one factor that makes up your score on The Switzerland Structure — one of eight drivers the folks over at The Value Builder System™ have discovered drives your business’s value in an acquirer’s eyes.

To summarize in simplistic terms, the least valuable companies focus on selling lots of stuff to a few people. The most valuable businesses do precisely the opposite: by selling less stuff to more people.

How 3D4Medical Made the Switch

As an example, let’s look at the medical technology firm 3D4Medical. Founded in 2004 by John Moore, the company built 3-D models of the human body, photographed them, and sold or licensed their images to textbook publishers.

By 2010, 3D4Medical was selling images to a handful of large publishers around the world. Then the recession hit, severely impacting the entire publishing business.

To make things worse, new generations of students increasingly wanted to learn online, rather than through textbooks. The advent of inexpensive digital photography, and the resulting increase in competition for the same customers, also didn’t help Moore.
Moore had built a successful company on a handful of customers, but when that segment began to dry up, so did his business. Despite working harder than ever, Moore’s revenue plateaued for four straight years. Instead of punching through to the next level, Moore had his hands full just keeping his company going.

But while Moore had relied on too few customers, he still had something no one else had: thousands of 3-D models of the human body.

Then Moore had an idea.

He decided to re-purpose his 3-D images into a mobile app that medical students could use on their phones. Moore expanded the idea to include professors and medical professionals, who could use his 3-D images on an individual basis to learn, teach, and share with patients and students.

By 2019, 3D4Medical had become the biggest producer of medical apps on every app store. The company boasted over 300 of the top universities in the world as clients. Their app served 1.2 million paying customers and had 25 million downloads.

Thanks to having a diverse set of customers, Moore sold 3D4Medical in 2019 for $50.6 million.

The takeaway? Customer concentration is seen as a significant risk when a potential buyer determines the value of your business. That’s why the most valuable companies are the ones that sell less stuff to more people.

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.

Repeat business drives the value of your company, and you can categorize these sales into one of two buckets:

1. Reoccurring revenue comes from customers who purchase from you sporadically. They’re satisfied with what you offer, and they buy regularly yet not according to a specific timeline.
2. Recurring revenue is predictable, and you get it from customers who buy on a cadence. Usually, in the form of subscription or contract revenue, the main difference is your recurring revenue comes in on a regular rhythm.

Recurring revenue is more valuable than reoccurring sales because of its predictability. Therefore, it’s worth considering how to turn repeat customers into subscribers.

HP Instant Ink

For an example of an organization that turned reoccurring sales into recurring revenue, let’s look at the “HP Instant Ink” program. HP had been in the business of selling printers for decades before launching their toner replacement subscription.

HP would sell you a printer in the old days and hope you would come back and buy your toner cartridges from HP. As cheaper replacement options became available, HP started to lose reoccurring revenue from people who owned HP printers but chose a more affordable alternative to refill their cartridges.

In response, they launched the HP Instant Ink program to solve this problem by offering a toner subscription. HP sends subscribers new toner for their printer each month. You can sign up for a plan based on how many pages you print. If you exceed your page allotment one month, you can top up your account. If you fall short, HP offers to carry over your unused pages. Pricing plans start at $0.99 per month.

How does HP ensure you never run out of toner? They have embedded a reader in their printer’s hardware that sends a message to HP fulfillment when your cartridge dips below a predetermined threshold. Hence, you never run out.

It’s a brilliant little program and gives HP some recurring revenue while driving loyalty to HP printers.

Inspired by the HP Instant Ink program, here are three secrets for turning repeat customers into subscribers:

1. Offer plans based on volume: At HP, their $0.99/month plan allows you to print just 15 pages per month. At the top end, their $24.99 plan gives you 700 pages, and they have a variety of options in between. This range of options gives customers the ability to pick a plan that will work for them most of the time.
2. Allow carryover: Customers who buy from you on a reoccurring basis will appreciate your various plans. However, they may still hesitate to subscribe if they anticipate their volume will fluctuate. That’s why HP allows you to seamlessly buy overage if your printing volume is higher than expected. Subscribers can also carry over unused pages if they don’t need their entire allotment.
3. Never let them run out: One of the reasons consumers prefer buying on a subscription over a one-time transaction is that they never want to run out of what you sell. That’s why HP’s integrated toner gauge reads when your cartridge dips below a threshold. Find a way to measure your customers’ supply of what you sell in real-time to ensure subscribers never run out.

Repeat customers are the lifeblood of any business. If you want to jack up your company’s value, consider ripping a page from HP’s playbook, and turn your reoccurring customers into subscribers.

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.

Many people mix up re-occurring and recurring revenue, but one is much more valuable than the other.

Re-occurring Revenue

Re-occurring revenue comes from customers that have a re-occurring need for whatever you sell and buy from you on an unpredictable yet regular basis.

Imagine a health food store. Customers come in to replenish their supply of vitamins when they run out. The owner is never quite sure when a customer will be back, but she’s pretty sure they will return when they run low on a critical supplement.

Recurring Revenue

Recurring revenue comes from sales to customers that buy from you on a predictable, automatic cadence, for example, a subscription or service contract.

Let’s take the same health food store owner. She recognizes her customer comes in every month or so to buy Vitamin C. She decides to offer a subscription for Vitamin C capsules, where she ships a new bottle to her subscribers each month automatically. The customer doesn’t need to make a dedicated trip to her store, and the owner automatically gets repeat sales.

Compared to one-off transaction revenue, both re-occurring and recurring revenue contribute positively to your company’s value, but one is much more valuable than the other.

For example, Mike Malatesta created Advanced Waste Services (AWS), which helped businesses dispose of their industrial waste. Energy giant Covanta (NYSE: CVA) saw acquiring AWS as the perfect way to enter the industrial waste industry and sent Malatesta a Letter of Intent to acquire AWS for $54.5 million.

Covanta liked that AWS had repeat business from loyal customers that they assumed were on recurring contracts. However, when Covanta started their diligence before closing their acquisition of AWS, they realized some of AWS’s revenue was re-occurring, not recurring, and used that as justification to lower their offer by $4 million.

To convert re-occurring revenue into recurring revenue:
1. Start by segmenting your customers that buy on a re-occurring basis.
2. Look for a segment whose purchase cadence is relatively predictable.
3. Design an offer for your regular, re-occurring customers that makes it more convenient for them to buy on a subscription or service contract rather than on a transactional business model.
4. Aim to give re-occurring customers three compelling reasons to subscribe.

For example, in the case of the vitamin store owner, she could make the case that subscribing to a regular shipment of vitamins is 1) more convenient for the customer because there is no need to drive to the store, 2) more reliable because subscribers would be given priority on available stock, and 3) safer because vitamin subscribers would be given a newsletter describing new clinical trial results of emerging vitamin therapies.

Re-occurring and recurring revenue may sound similar, but when it comes to your company’s value, recurring revenue is far better. Consider converting your re-occurring customers into subscribers, and you’ll build a more predictable—and valuable—business.

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.

Is it better to own a big chunk of a small business or a minority stake in a big company?

It’s one of the fundamental questions all owners must wrestle with. Owning a relatively small slice of a big pie has worked out well for both Elon Musk and Jeff Bezos, who recently traded places on the list of the world’s richest person. Musk still owns around 20% of Tesla, and Bezos controls about 10% of Amazon, so they both have chosen to sell most of their company to fund their ambitions. The success of their bet has been amplified lately given the stock market’s run over the last 12 months.

However, selling part of your business comes with some significant downsides. Let’s take a look at four reasons it’s better to own a big slice of a smaller pie.

Operational Freedom

The most obvious benefit of keeping all of your shares is that you get to decide how to run your company. Nobody can tell you what products to launch or markets to enter. You are the king or queen of your kingdom and can decide the rules.

No Pressure to Exit

Tim Ferriss, the author of five books, including the wildly popular New York Times bestseller The 4-Hour Workweek, recently urged his Twitter followers to consider their endgame before investing in a business: “Before you get into an investment position, know how and when you’re going to get out, or at least how and when you will reevaluate. Getting in is the easy part….”

Once you accept outside investment in your business, you must try to earn your shareholders a return. For your investors to realize a gain, you must sell your company (or part of it). Needing to sell so your investors can realize a return means you give up the option to run your business forever and need to start thinking about how your shareholders will get liquid. Some will pressure you while others will wait patiently, but the exit clock starts ticking once you take outside investment.

Nobody Ahead of You in Line

Sophisticated outside investors often demand preferred returns when they invest in your company, which can undermine your take from a sale.

For example, Ana Chaud started Garden Bar to offer fast-casual salads to Portland hipsters. The first store was a success, but the restaurant industry’s thin margins inspired her to grow to get some economies of scale. She raised two rounds of outside capital, including one from a group of convertible noteholders. Chaud skimmed the term sheet but trusted her investors, so she didn’t think much about a clause that gave noteholders 2.5 times their money if she sold the business before the note expired.

Chaud continued to grow to nine locations, with a tenth on the way, when she attracted an exciting offer from Evergreens, Seattle’s fastest-growing salad restaurant. Things were going according to plan right up until Chaud’s lawyer pointed out the investors clause, which had the potential to wash out all her equity.

Chaud agreed to give the proceeds of her acquisition to investors. She negotiated an earn-out, which she hoped would allow her the possibility of a return on her years of sacrifice. Then COVID-19 hit, Portland restaurants were closed, and Chaud ended up with nothing.

Avoid an $80 Million Mistake

The most obvious reason to hang on to your shares is to avoid dilution. When your company is not worth very much in the early days, it can be tempting to give away equity to attract a key team member, but it could end up costing you dearly if you’re too generous.

Take a look at the story of Greg Alexander, who started Sales Benchmark Index (SBI). Alexander started the sales consultancy at his kitchen table and, early into his tenure, gave two employees a quarter share in his business. Ten years later, Alexander ended up selling SBI for $162 million, prompting him to refer to easily giving up half the company as an “$80 million mistake.”

Given the runaway success of some high-profile stocks of late, it can be tempting to consider raising money to fund your growth, but there are still several benefits to owning a big slice of a small pie.

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.

Finally, 2020 is in the books.

Good riddance.

If your goal is to build a more valuable company in 2021, here are some New Year’s resolutions to consider:

1. Stop chasing revenue. A bigger company is not necessarily a more valuable one if the extra sales come from products and services that are too reliant on you to deliver them.
2. Start surveying your customers using the Net Promoter Score methodology. It’s a fast and easy way for your customers to give you feedback, and it’s predictive of your company’s growth in the future.
3. Sell less stuff to more people. The most valuable companies have a defendable niche selling a few differentiated products and services to many customers. The least valuable businesses sell lots of undifferentiated products and services to a concentrated group of buyers.
4. Drop the products or services that depend on you. If you offer something that needs you to produce or sell it, consider dropping it from your offerings. Services and products that require you suck up your time and cash and don’t contribute significantly to your business’s value.
5. Collect more money up front. Turn a negative cash flow cycle into a positive one and you boost your business’s value and lessen your stress load.
6. Create more recurring revenue. Predictable sales from subscriptions or recurring contracts mean less stress in the short term and a more valuable business over the long run.
7. Be different. Refine your marketing strategy to emphasize the point of differentiation that customers value. Be relentless in highlighting this advantage.
8. Find a backup supplier for your most critical raw materials. Consider placing a small order to establish a commercial relationship and diversify the sources of your most-difficult-to-find materials.
9. Teach them to fish. Answer every employee question of you with “What would you do if you owned the business?” Your goal should be to cultivate employees who think like owners so they can start answering their own questions without coming to you.
10. Create an instruction manual. Document your most important processes so your employees can do their work independently.

Here’s to building a more valuable company in 2021!

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.

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

If so, you’re 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 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 one monthly fee in return for a mobile app where subscribers can summon a repair person to fix just about anything that could break down in a home.

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

Ramer’s first step in creating Super was not to put out a shingle as 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 don’t mind digging into a “honey-do”” list every weekend, but Ramer knows those aren’t his people. Instead, he chose to focus on the sub-niche of homeowners that don’t 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 (or the treadmill) and then subscribe to Peloton’s content package. To make Peloton’s subscription sticky, they didn’t 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 doesn’t have the time to go to the gym. Therefore, they defined their target customer as relatively affluent fitness enthusiasts who don’t have time to go to the gym—a niche of a niche.

Year to date for 2020, Peloton’s share price has more than tripled.

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.

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.