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.

Republished with permission from Built to Sell Inc.

When was the last time you calculated the percentage of your net worth tied to your company’s value?

When you started your business, its value was probably negligible. Unless you purchased or inherited your company, it wasn’t worth much when you opened your doors, but over time, the proportion of your assets tied to your business may have crept up.

Let’s imagine a hypothetical business owner named Tim, who starts his company at age 30. He has a little bit of equity in his first home and a small retirement fund. When he starts his business, it’s worthless, so it doesn’t yet factor into Tim’s net worth calculation.

By the age of 50, Tim has built up $600,000 worth of equity in his home, his retirement nest egg has grown to $400,000, and his business has blossomed and is now worth $4,000,000. Tim’s company has crept up to represent 80% of his net worth.

Tim knows the first rule of investing is to diversify, which he is careful to do with his retirement account. Still, he has failed to achieve overall diversity given the success of his business.

What’s more, he may have unknowingly passed something called “The Freedom Point,” which is when the net proceeds (i.e., after taxes and expenses) of selling his business would garner enough money for him to live comfortably for the rest of his life. Your lifestyle determines your Freedom Point, but when you pass it, it’s worth considering the risk you’re taking.

If this pandemic has taught us anything, it is that nothing is for sure, and a thriving business one day can turn into a struggling company overnight. When your business makes up most of your net worth and selling it would garner enough money to retire, there’s no financial reason to continue owning your business. You may enjoy the challenge, the social interactions, and the creative process of building a business, but keeping it may be unnecessarily risky.

When you’ve crested the Freedom Point and want to diversity—but still don’t want to retire—you have some options:

• Sell a Minority Stake: In a minority recapitalization, you sell less than half of your shares. Often sold to a financial investor such as a private equity group, a minority recapitalization allows you to diversify your net worth while continuing to control your business.

• Sell a Majority Stake: In a majority recapitalization, you sell more than half of your shares to an investor who will most likely ask you to continue to run your business for many years to come. You get to diversity your wealth, keep some equity in your business for when the investor sells, and continue to run your company.

• Earn-Out: When you sell your company, you’ll likely have to agree to a transition period of sorts. One of the most popular is called an earn-out, where you agree to continue to run your company as a division of your acquirer’s business for a specified period of time. Your earn-out may be as little as a year or as long as seven, but the average is three years. Therefore, if you’re past the Freedom Point and can see yourself wanting to step down in the next three to five years, an earn-out may be worth considering.

Building a successful business is rewarding, but when your personal balance sheet gets out of whack, it may be worth considering the risk you’re shouldering and the options you have for sharing some of it.

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.

As we roll into the fourth quarter of the year, you may be starting to consider your business goals for next year.

Given how 2020 has gone, maybe your primary ambition is to survive in 2021. Perhaps you’re going to create a recurring revenue stream or finally hire that general manager. Or maybe you’ve decided to start preparing for an exit.

Whatever your goals are, the most important thing you can do now is write down your plan to achieve them.

A Revealing Study

This point was driven home recently by a study published in the British Journal of Health Psychology. The project was designed to see what impact stimuli would have on participants’ level of exercise. Researchers divided a random sample of participants into three groups.

For the first group, the researchers asked the participants to track how frequently they exercised. They were told to read a passage of an unrelated book before beginning.

For the second group, researchers wanted to measure the impact that motivation would have on their exercise levels. The second group was also asked to track their activity levels and were then told to read a book’s motivational passage that outlined the benefits of exercise for maintaining a healthy weight.

The third group was asked to read the same motivational excerpt as the second group but had the additional task of writing down their exercise goals for the coming week.

The Results

When the researchers sat down to analyze the results, they were surprised to find that among the motivated group (group 2), just 35% exercised once per week. That was slightly less exercise than group 1 (36%) even though they were motivated to work out.

When the researchers analyzed the third group’s exercise log, they were stunned to find that 91% of them had worked out. The only difference between groups 2 and 3 was that the third group was asked to write down their goals. That simple task seems to have almost tripled their likelihood to succeed.

The researchers concluded that motivation alone has virtually no impact on our actions. Instead, it is motivation coupled with a written action plan of how you’re going to achieve your goals that has the most significant impact on your results.

Food for thought as you start thinking about making 2021 your best year yet.

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.

Much is made of analyzing the personality traits of successful entrepreneurs.

Some appear outgoing. Others are introverts. Some lean right, others left. Some are flashy. Others are monk-like with their money.

Their diversity can lead one to the conclusion that there are no common personality traits among successful founders.

Rather than trying to understand who they are, let’s look at what they do.

We’ve had the opportunity to help many businesses improve their value, with some going on to exit their business for seven, eight, or even nine figures. As such, we have a unique vantage point from which to observe the owners who achieve the most financial success. This point of view has allowed us to observe three things the most successful owners do differently:

1. They read business books.

Our most successful customers are voracious consumers of business content. When a new business book hits the bestseller list, most have either read it or summarized its central point.

It’s not just the printed word. Many get information through audiobooks, webinars, or podcasts, others via YouTube.

The actual medium is less important to these successful founders. What’s consistent is their continuous learning pattern and the desire to leverage other people’s smart ideas and put them to work in their own company.

2. They join masterminds.

In the absence of having a board of directors or a boss, successful founders often use a peer board to hold themselves accountable and gain an outside perspective when they’re stuck.

Initially popularized by Napoleon Hill in his class book, Think & Grow Rich, a mastermind gathers a small group of peers to act as one another’s board. Often led by a chair, these groups become lifelines for owners as they navigate big decisions in their businesses and personal lives.

3. They ask questions.

The character trait that makes successful entrepreneurs inclined to read business books and join peer groups is their natural curiosity. They have an unquenchable thirst for knowledge. No matter how successful, they never get full.

You may be surprised not to see the stereotypical attributes of successful entrepreneurs. Many founders are also action oriented, competitive, tenacious, etc., but all those common personality traits are who they are. Our interest is what they do.

Actions are the measure of a person. Take a look at what a founder does to stay sharp, and you’ll see a consistent pattern among the most successful entrepreneurs you know.

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.

Why did you decide to become an entrepreneur?

If you’re like most owners, you aspire to have the freedom that comes from owning your own business:

• The freedom to decide how you spend your time
• The freedom to choose whom to work with and to avoid people who drain your energy
• The freedom to make as much money as you deserve

This desire for freedom often leads owners to aspire for a bigger business, which they think will give them what they want. Unfortunately, most owners who strive for more revenue or profit as their primary goal often have:

• Less time because it’s spent managing an ever-expanding set of offerings.
• Less freedom because complexity inevitably leads to conflict.
• Less money because any available cash is reinvested in growth.

So, in many ways, growing a larger business gets you further from your ultimate goal of freedom.

Instead of thinking of your business as something to push harder and faster, there’s an alternative that may get you closer to what you want. Think of your business as a child, and your role is to guide her into becoming an independent, thriving adult.

If your goal is to create a business that can thrive without you, you will start to make different decisions. That demanding customer who wants your attention on their project no longer looks so attractive. That exciting new product that’s going to require you to sell no longer looks worth it.

By focusing on the role of parent rather than business driver, the demands on your time lessen as your employees pick up more of the load. You may also find your business selling more as you build a team of salespeople rather than relying only on yourself to drive the top line. The ultimate irony is that your business may end up being more valuable than a larger peer where the owner is still mostly responsible for sales.

Acquirers want businesses that will survive the loss of their owner. In many cases, they will pay a premium for companies where the owner is in the background. Consider the case of Damian James, who sold his network of mobile podiatry clinics generating $11 million in revenue for $13.2 million. He credits much of the sale to the fact that he was no longer running the businesses day to day and had reduced his time commitment to just one or two days per week.

David Hauser started Grasshopper, an Internet-based phone system he built to $30 million in annual revenue before he sold it to Citrix for $165 million in cash and $8.6 million in stock. Hauser was down to working just one day per week at the time of the sale of his company.

Growing revenue and profits will be valuable to an acquirer, but if you make them your only goal, you may find yourself with less of what you want. Treat your business like a child who needs guidance to become a thriving adult, and revenue, profits, and ultimate value will come as a by-product.

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.

How’s your workload these days?

If the pandemic has forced you back into the weeds of your business, you’re not alone. Many owners are again doing tasks they haven’t done in years because they have had to lay off front-line staff or their employees have fallen ill or are caring for someone in need.

Being back in the middle of things is neither healthy for you nor your business long term. Personally, it’s a recipe for burnout, and professionally, your business will be less valuable with you doing all the work.

Now is an excellent opportunity to retool your company so that it can start running without you again. These three steps should help:

Step 1: Sell less stuff to more people.

Most companies become too dependent on their owner because they offer too many products and services. With such a full breadth of offerings, it’s hard to find and train employees that can deliver. The secret is to pick something that makes you unique and focus on finding more customers, not more things to sell.

Take Gabriela Isturiz as an example. She cofounded Bellefield Systems, a company offering a timekeeping application for lawyers. Over the next seven years, Bellefield grew to 45 employees. Although many businesses bill by the hour, Isturiz focused exclusively on timekeeping for lawyers, which is one of the reasons she was able to integrate with 32 practice management platforms used by lawyers—a big reason Bellefield’s product was so sticky. It worked out well for Isturiz as she was growing 50% a year with EBITDA margins of more than 25% when she sold her company in 2019.

Step 2: Systemize it.

Next, focus on creating systems and procedures for employees to follow. For example, Nashville-based Bryan Clayton built Peachtree, a landscaping business. Most lawn care companies are mom-and-pop operations, but Clayton built Peachtree up to 150 employees before he sold it to LUSA for a seven-figure windfall.

What made Peachtree so unique? Clayton focused on documenting his processes. For example, one of his customers was a McDonald’s franchisee who owned 40 locations. He was frustrated by how many people discarded cigarette butts in his drive-through, so Clayton offered to clear the debris from the lanes as part of his lawn care process. He then trained his employees on the drive-through clean-up process he had created so it was followed across all 40 of the customer’s locations.

Step 3: Outsource it.

Next, consider outsourcing what you’re not very good at. For example, David Lekach started Dream Water, a natural sleep aid bottled in a five-ounce shot similar to the famous 5-Hour Energy Drink.

Lekach built Dream Water to almost $10 million in annual revenue before selling it to Harvest One, a cannabis company, for $34.5 million in cash and Harvest One stock. Lekach saw his role as “selling Dream Water, not making it.” That meant he outsourced the manufacturing, packaging, and distribution of Dream Water to a co-packer, ensuring Lekach and his team could focus on selling Dream Water.

It’s natural for a leader to step in during a crisis, but that’s not sustainable for the long term. Pull yourself out of the doing, and you’ll build a valuable company for the long term that’s a lot less stressful to run along the way.

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.

Post-Traumatic Stress Disorder (PTSD) is a mental health condition triggered by experiencing a terrifying event. Although not at the level of enduring a war zone, the events of March 2020 may leave you feeling similar symptoms.

If you’re like most business owners, the first quarter of the year was progressing like any other.

Then…bang!

A superbug started terrorizing the world. Professional basketball was cancelled. One by one, the world began to close its doors.

A significant blow impacted your business, unless you offer an essential service. Perhaps you’ve stabilized your company, or you might still be experiencing the worst of it. Either way, you’re probably a different person as a result of this pandemic.

Now, as things begin to slowly reopen, you may notice a change in your outlook. The Mayo Clinic reports four symptoms of PTSD:

1. Intrusive memories: recurrent, unwanted thoughts
2. Avoidance: trying not to think about the trauma
3. Negative changes in thinking and mood: destructive thoughts about yourself and other people
4. Change in physical and emotional reactions: being easily frightened, overwhelming guilt, or substance abuse

Any of those sound familiar?

If so, you may be experiencing the psychological toll a catastrophic event can have on your psyche. There are three constructive things you can do now.

Option #1: Talk to Someone

Soldiers deal with PTSD by talking to a psychotherapist. Speaking to an advisor about how this pandemic has impacted your business can be therapeutic, and we’re here to help.

Option #2: Rebuild a More Durable Business

Another constructive reaction to this crisis is to commit to building a more durable business that can better withstand shocks to the system in the future.

Option #3: Sell

Many owners—especially those that experienced the brunt of the 2008–09 global financial crisis—have been so traumatized by this pandemic that they don’t have the stomach for another disaster. As a result, they’ve decided to start planning their exit proactively.

If you find yourself choosing option 2 or 3, your immediate action plan will be the same. There are some things you can do now that will make your business more durable in the long term as well as more sellable:

1. Focus on your products and services where you have a point of differentiation. You’ll have more pricing authority in the short term, have better cash flow, and be more attractive to an acquirer in the long run.
2. Create recurring revenue streams that generate sales while you sleep. These can be in the form of service contracts, subscriptions, or maintenance plans. Aim to get the majority of your revenue automatically.
3. De-risk your business, ensuring you’re not too reliant on a single customer or supplier.
4. Create an employee handbook and systematize your processes to lessen your dependence on a key employee (or you calling all of the shots).
5. Clean up your bookkeeping.
6. Generate as much cash as possible from customers up front to create a positive cash flow cycle.

If you’re like a lot of the owners we work with, your business is part of who you are. When that gets threatened, it’s natural to feel traumatized. If you can redirect that energy into building a more durable business, you may never have to experience something like this again.

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.