Republished with permission from Built to Sell Inc.

There’s a steady breeze from the northwest, which cools the warm Caribbean afternoon. Framed between a palm tree and the turquoise water, you notice a man reading. He appears to be working, which seems strange given his appearance: shaggy blonde hair, linen shirt, surf shorts and flip-flops.

You squint and realize the man is Richard Branson and he just happens to be running Virgin Group Ltd., a multibillion-dollar conglomerate. He is working where he usually does,at Necker Island, a 74-acre retreat he owns in the British Virgin Islands.

Branson, of course, is far from a negligent founder, he has managers running the various businesses that make up the Virgin Group and visits his companies regularly, but he does not manage the day-to-day operations of any of his businesses, which frees up his time to think.

The train conductor vs. the thinker

Your role as a CEO can be divided into two buckets: one for managing and the other for thinking.

The managing bucket is where, metaphorically speaking, you ensure the trains all run on time. In this role, you’re establishing goals for your employees and holding them accountable for achieving their targets. You’re making sure your products and services are of a high quality and that your biggest customers are happy.

When you’re wearing your manager hat, you’re scouring your company looking for small enhancements every day. This obsession with continuous improvement is what big companies call “six-sigma thinking,” but you probably just think of it as building a great company.

The other bucket is reserved for thinking and it’s where you create the future of your company. In this visionary time, you get to design new products, imagine new ways of serving customers, or contemplate where you could take your business in the years ahead.

Your visionary hours are spent dreaming and imaging what your business could be, instead of worrying about what it is today.

The most valuable companies

The question is, how much of your time should you devote to each role? If your goal is to create a more valuable business—one that someone might like to buy one day—our data reveals that you should start gradually increasing the time you spend on thinking and hire someone else to do the managing.

For example, after analyzing more than 20,000 businesses who have received their Value Builder Score, we have discovered that companies of owners who know each of their customers by first name (i.e., managers) trade at just 2.9 times their pre-tax profit, whereas the companies of owners who do not know their customers’ first names (i.e., thinkers) trade at closer to 5 times pre-tax profit.

Further, companies that would suffer if their owners were unable to come to work for three months, receive significantly lower offers when compared to companies that would not feel the absence of the owner for a month or two.

Finally, in a recent survey of merger and acquisition (M&A) professionals, we asked who they like to see an owner hire if they can only afford one “C-level” executive. The M&A professionals overwhelmingly identified a general manager/second-in-command as the most important role a founder can fill ahead of a chief revenue, marketing or financial officer.

In short, the owners of the most valuable businesses have found managers to ensure the trains run on time while they spend an increasing amount of their energy thinking about what’s next for their 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.

Microsoft’s recent $26.2 billion acquisition of LinkedIn provides an illustrative example of a strategic acquisition – the type of sale that usually garners the most gain for the acquired company’s shareholders.

You may be wondering what a billion-dollar acquisition has to do with your business, but the very same reasons a strategic acquirer buys a $26 billion business holds true for the acquisition of a $2 million company.

The financial vs. strategic buyer

A financial buyer is buying the future stream of profits coming from your business, whereas the strategic buyer is buying your business for what it is worth in their hands. To simplify, a financial acquirer buys your business because they think they can sell more of your stuff, whereas a strategic buyer acquires your business because they think it will help them sell more of their stuff.

One might argue that Microsoft overpaid for LinkedIn given that LinkedIn only generated a few hundred million dollars in EBITDA last year, meaning the good folks in Redmond paid an astronomical multiple of LinkedIn’s earnings.

But earnings are not the only thing strategic acquirers care about when they go to make an acquisition.

Microsoft‘s acquisition of LinkedIn is a classic example of a strategic acquisition. The Redmond-based technology giant has been undergoing a major transformation from being a software company focused on operating systems to a business concentrating on cloud-based software applications. Microsoft enjoys a dominant market share in the basic tools white-collar business people use to get their job done, but other software packages have begun to nip at the heels of their dominance in many product lines.

Take Microsoft Office for example. Many businesses have started to use competitive offerings from Google and Apple. Even more companies cling to older versions of Microsoft Office software, even though Microsoft is keen to move everyone over to the cloud-based Office 365.

In purchasing LinkedIn, Microsoft saw an opportunity to suck data from LinkedIn into Microsoft’s cloud-based software applications, making them irresistible. Imagine you’re a sales person and you just landed a big meeting with a new prospect. You enter the appointment as a Microsoft Outlook event and suddenly the details of the event feature everything LinkedIn knows about your prospect.

Now you can make small talk about where they went to school, the previous jobs they have held and know the scope of their current role – all without ever leaving Outlook.

Microsoft is betting this kind of integration across its platforms will compel more people to upgrade to the latest software applications. While your company is likely smaller than LinkedIn, the same thing that makes a giant buy another giant holds true for smaller businesses. To get the highest possible price for your business, remember that companies make strategic acquisitions because they want to sell more of their stuff.

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.

When it comes to the value of your business, what happened in the past is much less important than what is likely to happen in the future.

One of the most important ways you can shape the future of your business is to create some recurring revenue. Recurring revenue comes from those magical sales you make without really trying. Good examples of recurring revenue models include ongoing service contracts, subscriptions, and memberships – basically any sale situation the customer has to proactively opt out of, instead of in to.

Recurring revenue is critical for the value of just about any small business, and it is equally important for the world’s largest businesses.

Why ICD bought Porto Montenegro

If you’re looking for a fun example of why recurring revenue matters, take a look at The Investment Corporation of Dubai (ICD) and their acquisition of Porto Montenegro Marina and Resort. If you happen to be the heir to a European royal dynasty or are a Silicon Valley billionaire, you’ve probably parked your boat in Porto Montenegro. Along with 450 berths for the world’s largest super yachts, there’s a 5 star hotel, ultra exclusive residential properties and 250 high-end boutiques to indulge just about any fancy.

Porto Montenegro is the brainchild of Peter Munk, who is best known as the founder of Barrick Gold Corp. Munk fell in love with the natural beauty of the Adriatic coastline and saw an opportunity to buy an old naval ship yard and transform it into one of the world’s most exclusive travel destinations.

So why on earth would ICD, the principle investment arm of the Dubai government, be interested in buying a glorified parking lot in the middle of an old naval base?

Well it turns out that super yachts need a lot of regular maintenance. In fact, the average super-yacht owner spends 10% of its value every year on repairs and maintenance. ICD wanted the steady flow of recurring revenue from maintenance contracts with the well-heeled owners who moored their yacht at Porto Montenegro.

Tomorrow vs. Yesterday

Porto Montenegro is a billion-dollar reminder that recurring revenue is important for large companies, but creating an annuity stream can be even more important for smaller businesses. It can be tempting to celebrate the large project wins or a big sale to a one-off customer, but when it comes to valuing your business, acquirers may discount those as aberrations and focus on the steady flow of your recurring 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.

Have you set a goal for your company this year?

If you’re like most business owners, you’re striving for an increase in your annual sales. It’s natural to want your company to be bigger because that’s what everyone around us seems to celebrate.

Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone.

But growth can come at a steep price and can even detract from your ability to build your personal wealth.

The Contrasting Exits of Michael Arrington

For example, let’s take a look at an entrepreneur named Michael Arrington. Arrington started Achex in 1999. It helped facilitate payments in the early days of the internet, and Arrington was focused on growing it. He accepted two rounds of outside capital to fund the company’s expansion.

Achex was ultimately sold to First Data Corporation for $32 million in 2001. Unfortunately, because Arrington had been focused on growth above all else, he had not only raised two rounds of financing but also reduced his personal stake in the company down to next to nothing. As he told Business Insider, “When I started my first company, Achex, we raised $18 million in venture capital in 2000 from DFJ. The company later sold for $32 million, but due to a 2x liquidity preference (common in those days), the founders essentially got nothing, just a few hundred thousand dollars to not block the deal.”

Arrington then went on to start the technology blogging website TechCrunch in 2005. This time Arrington wanted to grow the business, but not at the expense of his equity. Instead, they grew the company within their means and funded the business largely out of cash flow. Arrington still owned 80% of the company, according to Business Insider, when he sold it for approximately $30 million.

Apparently Arrington had learned his lesson—growth is good, but not at the expense of all else.

The Alternative to Growth at All Costs

The alternative is to sell to a strategic buyer. They will care less about your future profit stream and more about what your business is worth in their hands, typically calculating how much more of their product they can sell by owning your business. Strategic buyers are usually big companies, so the value of being able to sell more of their product or service because they own you can be substantial. This often leads strategic buyers to pay more for your business than a financial buyer ever would.

For example, Nick Kellet’s Next Action Technologies created a software application that takes a set of numbers and visually expresses them in a Venn diagram. Next Action Tech-nologies was generating approximately $1.5 million in revenue when they received their first acquisition offer; Kellet’s first valuation was for $1 million, a little less than revenue, which is a pretty typical from a financial buyer.

Kellet knew the business could be worth more to a strategic buyer, so he searched for a company that could profit by embedding his Venn diagram software into their product. Kel-let found Business Objects, a business intelligence software company looking to express their data more visually. Business Objects could see how owning Next Action Technologies would enable them to sell a whole lot more of their software, and they went on to acquire Kellet’s business for $8 million, more than five times revenue – an astronomical multiple.

Preparing For Every Eventuality

The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company’s value, but your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company’s value, and your personal wealth. For example:

You may have to dilute your personal stake in the company by taking on outside capital. Depending on the return your investors are looking for, and the performance of your company after you take on outside investors, your smaller slice of the larger pie may be worth less than a larger slice of a smaller pie.

Cross selling your largest customer more products and services may be a relatively easy way to grow your top line, but if they already represent more than 15% of your sales, the extra revenue may dilute the value of your company because acquirers discount companies with too much customer concentration.

Giving lazy customers 90 days to pay may keep them buying, but those charitable payment terms may detract from the value of your business because an acquirer will have to fund your working capital.

You could choose to invest your sales and marketing resources into winning a big, one-time project that would boost your sales but this may not boost the value of your business, which may be more positively impacted by a smaller amount of recurring revenue.

Growth is important and how big your company can get is one of the eight drivers of your company’s value. But growth is only one of eight factors—to learn about the other seven, get your Value Builder Score.

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.