Chapter 5: Building Massive Value in Your Business
Creating a successful business with massive value requires making fewer mistakes and better decisions than your competitors. Mistakes in some areas more significantly affect your bottom line than others. When you learn these common mistakes and pitfalls waiting for you in business, you can avoid them. Learning and implementing the successful strategies and techniques that other businesses employ will benefit you as well.
Shape Up Your Marketing
The greatest potential for both success and failure lies in sales and marketing. For this reason, despite the fact that it may not be included in every job description in your company, everyone is responsible for marketing. Through your employee’s performance, manners and appearance, everyone affects the bottom line. Why? In nearly every business, sales depend upon repeat customers, word of mouth referral, or expanded purchase of additional products and services. Your business’s reputation can spread quickly and everyone contributes to that reputation. People will judge your entire business on their contact with just a few representatives of your company. This means that every single person in your business must be sales conscious!
Another fact that you need to understand as well is that your business is not about what you make or offer as a service. It is actually about selling what you make, or selling your services! In fact, every business is primarily a marketing business. For example, you may believe that you manufacture plastic cups as your business. Your primary business shouldn’t be seen as producing plastic cups however, but selling plastic cups. When you accept this fact, you can begin to concentrate on that activity, and your business will start to grow.
Now, there are other things that you need to have in your business to make sure you can support your marketing and sales efforts. You need to have systems and processes in place that streamline your ability to sell your products and services and support your customers. Having a cumbersome sales system can handicap your sales. In the end, everything in your business must be focused on finding, getting and keeping customers. Selling and marketing to your clients should be accomplished in the most effective and efficient way possible that makes sense to the customer.
Ten Marketing Mistakes
When designing your marketing strategies, you should learn from the mistakes of others. Errors are costly and whenever you can use tried and proven concepts, you should implement them. In fact, you shouldn’t take any chances with your marketing. This is not an area where you want to forge new territory. Stay with the techniques that have worked for other successful businesses. The following are some common mistakes that businesses make when trying to attract customers to their business. You can easily avoid most of them and you will likely have to admit that you’ve made the mistakes as well. Whether you recognise them or not, learn from them. It will help you avoid any really calamitous marketing disasters.
Mistake #1 – Failure to Test Marketing
The first marketing mistake is not testing your marketing. Brochures, sales-letters, and advertising of all types go out to customers and potential customers everyday that is never tested. If you are unfamiliar with the concept of testing your marketing, you may not even know how to do it. Basically, you need to find the most effective way to reach your clients and potential clients. If you don’t compare different approaches, you won’t know which is the most successful. For instance, a simple process such as greeting prospective clients when they contact your business can make a huge difference in converting potential clients into customers. That first point of contact needs to be done correctly. It rewards you to test a number of approaches until you discover the most effective and productive one.
Similarly, if you test the headline on a brochure, do you get a better response if you use one headline over another headline? As soon as you find the one that more people read, then use it. There is evidence to suggest that by testing headlines, you can increase experience up to 21 times improvement. This means instead of getting 10 customers, you get 210 customers for the same price. That is an enormous difference that you cannot afford to ignore, so remember, testing is vitally important! A common way to test your advertising headlines is by using a unique phone number in your ad and tracking your response by phone number.
Mistake #2 – Not Using Direct Response Marketing
The second marketing mistake is running institutional advertising instead of direct response advertising. Institutional advertising may look good, show a nice picture, and have a witty slogan, but it does not motivate the reader to do anything. Direct response advertising is designed to elicit a response. It says something like: “Call this number now for a free CD” or “Do this to get this.” Direct response advertising also allows you to measure everything you do. For example, if you run a new ad in the newspaper, you can tell exactly how many people call about that ad if a call to action is central to the message. So, use direct response advertising whenever appropriate to avoid wasting your selling opportunities.
Mistake #3 – Not Using Your Unique Selling Proposition
Not including or even mentioning your Unique Selling Proposition is the third marketing mistake. Spending valuable resources to develop just the right USP then not using it is costly. Remember, your USP tells customers and potential customers why they should be dealing with you and gives you an edge over your competitors. So don’t keep it a secret. Utilise this important element of your marketing everywhere!
Mistake #4 – Not Expanding Your Services
Number four marketing mistake is a failure to expand your services. You should continuously be looking for ways to give your clients not only what they want, but even more than they expect. In the example of a retail fashion store, if they want to expand their business, they will be looking beyond dresses and accessories. They will explore ways for their existing customers to spend more money with them. They may consider providing something else to buy or a service that gets customers into the store. They could have a fashion parade or a fashion consulting service. Once potential clients are in the store, it is much more likely they will see something they like or the salespeople will be able to interest them in buying. Also, if they charge for the consulting service it is another revenue line to bolster their bottom line.
Mistake #5 – Failing to Address the Real Needs of the Client
The fifth marketing mistake is failing to address the real needs of the client. Do you understand what the client wants? Remember that people buy solutions to their problems. They buy what they need. For example, if a customer buys an expensive new formal gown from a store, they are not buying a dress. They are buying admiration from fellow dinner party attendees. They are buying compliments, or perhaps they are buying motivation to lose the ten pounds they must to fit the dress properly. If you sell and install doors and windows, when your customer buys a front door, they are not just buying a door to keep the weather outside. They may be buying prestige, or trying to keep up with their neighbours. You must always be aware of your customers’ underlying needs when they buy your products and services and design your sales efforts to target those needs.
Mistake #6 – Keeping Your Business Problems a Secret
The number six marketing mistake is not letting the clients know that you have some business problem that may be affecting them. Don’t keep it a secret. You want more communication, not less. This may go against your better judgement if you are a business owner. But, if you have a problem, tell the customer. In essence you should say: “I am sorry” or “I apologize, we have a problem. Here is what we are doing about it.” Most clients will not only readily overlook it, but they will also be pleased that you took the trouble to keep them in the know. The important part of this equation is solving the problem and making sure it does not happen again.
Mistake #7 – Making It Difficult for Your Customers to Buy From You
The seventh marketing mistake is failing to make buying from you as easy as possible for the customer. This is particularly true on websites. How many sites have you visited that are either difficult to navigate or lack the information that should be there? Most frustrating of all is when you actually want to buy, but cannot find how to order and pay. If you finally discover how to order and pay, you may find the site doesn’t accept the form of payment you want to use. For example, the site may accept check, or credit card, but not PayPal. Obviously that site is going to lose sales.
In a direct mail business that I own, I accepted credit cards, but did not accept checks. When I added checks to my accepted forms of payment, my sales not only increased, but I began to receive money orders as well. This simple change increased sales by 20%. Instead of one hundred people buying, there were suddenly 120 people buying. These are customers I had been missing until I began to accept checks and money orders.
Mistake #8 – Failure to Inform Customers for Reason Behind Great Deals
Marketing mistake number eight is failing to tell customers why the deal you are offering is legitimate. People are happier if they understand the underlying reason for your pricing. They may want to buy your product, but hesitate because the price is “too low to be real.” You need to provide them a proper reason to trust you and believe you are giving them a good deal.
For instance, a going-out-of-business sale may not be a good enough reason. Too many businesses have going-out-of-business sales and are still there two years later. So, provide your customer with the real reason. Why are you going out of business? Are you going out of business at this location so you can move to another location? One great example of telling the reason behind your low prices is given by a furniture store that received heavy damage to its building from a large hail storm. The hail smashed part of the roof and some of their furniture was water damaged. They capitalized on this disaster and held a water damage sale. When they advertised the reason for their sale, hundreds of people came from all over the area to buy their furniture at bargain prices. The water damage incident and sale also increased regular sales dramatically. People had confidence that the prices they were getting were actual bargains.
Mistake #9 – Failure to Stay With Marketing Campaign that is Working
Marketing mistake number nine arises out of number eight. Don’t discontinue an effective marketing campaign prematurely. As long as people are still flocking to the store to buy the water damaged furniture, why would you stop the campaign? You need to be very careful, however, with this approach. You should monitor the response you get very carefully and when your sales begin to slow, you should discontinue the campaign immediately. Running the campaign too long can result in loss of confidence in your market. You will be in the same position as the company that runs a going out of business sale, but never goes out of business. Customers will feel deceived and you may have low response to new campaigns that you run.
You need to remember this for all your advertising campaigns. If you have an ad running that requires 20 orders to cover costs, and the first week it generates 100 orders, you should run it again until orders begin to slow. It is only when response to your ad slows down that a new campaign is warranted.
Mistake #10 – Losing Focus for Intended Customer
Lastly, marketing mistake number ten is forgetting to focus on your intended market. If one of your products or services has a wide appeal, you should consider breaking your marketing efforts into smaller segments. By breaking up the larger potential customer demographic into more personalized segments, you can tailor your message to the smaller but still coherent groups within the larger group. This marketing technique is called ‘niche’ marketing. It takes thoughtful and creative planning, but targeting niche groups rewards your extra efforts with extra profits.
As an example, I have a business that focuses generally on small to medium sized enterprises (SMEs). That is a very broad demographic. Focusing on the entire group as a homogenous unit can be difficult. Instead, I break the market into niche groups. One sub-unit that I target is moms who are trying to start a business from home: Mompreneurs, I call them. I develop my messages to address the unique problems encountered by Mompreneurs so that they feel I understand their particular concerns in business. If my advertising tried to be all things to all people and tried to address every possible area of SME’s, I would miss this very exciting market. Mompreneurs would likely feel they were too insignificant to be one of my clients. By targeting their niche precisely, I am more likely to sign them up as clients. I try to do that with all the niche markets that comprise my greater SME customer base.
Growing Your Business
For your business to grow rapidly, your vision must be crystal clear and everybody concerned in your business must be able to easily understand it. They must understand the systems that make it work, and the mechanisms that make it scalable. A business must also operate quickly from day to day in order to grow quickly. You must not be afraid of the speed of development that you may be required to oversee. The operation of a business can be easily compared to the aerodynamic qualities of a moving object. The faster an object moves, the greater the drag that is exerted by the air. Air represents the normal outside influences your business experiences everyday, and drag represents your ability to react to changing market conditions. A high amount of drag does not mean that you are failing in business. However, the more you streamline your business and make it more agile, the less drag holds you back. Streamlining your business and making continuous planning adjustments are the hallmark of successful businesses. Every step to make your business be more responsive to your customers and adjust to changes in your industry should also bring you closer to your core strategy. You must keep your vision and long term goals firmly in sight. Streamlining the day-to-day tactics only enables you to achieve your goals more quickly and easily.
Structuring your business for maximum value requires that the business owner or CEO becomes dispensable. Being indispensable hampers your efforts at creating a business which attracts potential investors and buyers. To become dispensable, you need to employ a “right-hand person.” This person should coordinate the daily operation of the business leaving you free to oversee the task of building your business. Having a second-in-command enables potential investors to recognise your business as one that will continue to run smoothly even if something happens to you. They will envision your business more as an autonomous entity such as a machine not dependent on any one person. For your business to have maximum value, it must be a valuable commodity with or without you at the helm.
Investors will also view the ability of your business to be profitable. You should consider profit as important not only for yourself, but for potential investors as well. In fact, your company should be structured with profit prioritised. Keeping your customers happy is a must, but ultimately your reason for satisfying customers is to make a profit. Having your business generate profits without you being there results in a more valuable company.
Getting the right person to take over day-to-day operations must be done carefully to avoid the numerous pitfalls which can influence your selection. Consider delegating the task of hiring a second in command to someone you trust, or a staffing expert. There are a number of reasons for not doing this job yourself. First, hiring good employees may not be your strong point. For example, I know my personal limitations and I am not good at hiring staff. Because of this, I recommend using experts to winnow the field of candidates. Another reason arises in the likelihood that you will chose a candidate to whom you relate well. If you are intimately involved in the hiring process for your right-hand person, you may feel most at home with someone very much like you. Your right-hand person should mirror a few of your strengths, but should more importantly, complement your abilities by compensating for some of your weaknesses.
Becoming dispensable should be considered a priority, but it can be done in steps. The first move might be to offload some of what you do to an outside contractor wherever appropriate. It may surprise you what can be contracted out, so keep an open mind about this concept. Evaluate your tasks for areas and specific jobs which can be out-sourced or delegated. There are companies on the Internet that can broker just about any skill you can imagine. You may also want to consider keeping these tasks in-house by training your staff to assume some of your less specialized duties. However you accomplish offloading the work, it should be done by someone else. In addition, the faster you offload the work, the quicker you will be able to concentrate on how to go get more clients and leverage your assets to generate more value in your business.
Building Your Business’ Net Worth
What is net worth? This concept can best be explained with a balance sheet. This “net worth” statement provides you with a financial snapshot of your business. It defines the financial soundness of your company at the time of the net worth evaluation. Statements of your net worth can be done any time, but are most commonly set for financial milestones such as the beginning and ending of your accounting period.
To compute net worth you can use the following formula:
Assets – Liabilities = Net Worth
The statement records the value of what you own, or the assets of your business, and the financial claims against those assets, or your liabilities or debts. By comparing your assets against your liabilities, you come up with the net worth of your business. This equity, or the amount that the value of your business exceeds your liabilities, reflects the value of your business and likewise, the extent of your ownership of your business. You would receive this amount upon the sale of your business after collecting all your outstanding accounts and paying all your debts and liabilities.
A fundamental difference exists between a person who works in a wage based, or salaried position and a person who owns a business. Business owners anticipate that their company will grow in net worth. They usually intend to reap the benefits of their increased labour and risk by building equity. The person working in the “security” of a job labours primarily for the amount of money they get every week or every month. They exchange their time for money in a direct ratio. Business owners should also draw a salary. They should be taking a reasonable amount of money out of the business on a regular basis to pay for their normal living expenses. Ultimately, a large number of business owners worry less about their personal expenses, and concentrate on building their business into something that has a high net worth.
Selling Your Business
Let us look at a couple of the statistics related to selling a business. A study by RSM Bird Cameron in 2007, predicted that over the next ten years a very large number of small-medium businesses will be sold. These business sales will result largely from the group of people referred to as the baby boomer generation. The baby boom era produced a generation of people with a high degree of entrepreneurial spirit. For a number of factors they pursued starting their own businesses over corporate employment. So the late 60s, 70s and 80s, saw a higher number of small businesses being started than before. For various reasons the baby boomers wanted to get out of the normal workforce and into the flexible environment of small business ownership.
Now as baby boomers reach retirement age, they are looking to sell their businesses and “cash out”. The study from Bird Cameron estimated that 80% of baby boomer business owners have their entire personal net worth tied up in their business and must sell their business in order to retire. Over the next ten years, this statistic will be reflected in the large number of businesses which become available for sale.
As we discussed previously, many business owners, in fact 33% according to the statistics, have not created an exit strategy for their business. They do not perceive that their business has any value and they intend to simply shut their doors and walk away. These business owners have worked hard to build their business, develop goodwill and customer satisfaction and yet, they do not recognise, or know how to prepare their business for sale.
Preparing a Business for Sale
Unfortunately, 75% of businesses placed on the market never sell. This statistic can be discouraging, but if you properly prepare your business for sale, you can dramatically increase your odds of selling your business and getting the most amount of money for it. First, you need to set your business up to target a certain type of buyer. Let us have a look at that. You need to ask, who is going to buy the business? Most people in the small business world end up selling their business to someone who is actually a staff member of the business, or a competitor. Both of these buyers are going to value your business in a way that does not give you the maximum amount of money. In fact, their goal will be to pay you the least amount of money. Your focus as a seller is to find someone willing to pay you the most amount of money for your business. To find this buyer you need to look outside of your industry to investors rather than buyers who want to work in the business.
To design your business to appeal to investors, it comes back to the concept that your business needs to be able to run without you being there. To illustrate this point, consider a coffee shop where the owner opens the doors every morning and locks the doors every night. As an owner, you come to work, do everything yourself or with the help of a couple of employees, get some money and go home. In this case, only buyers who want to buy a job for themselves will be interested. Remember, these buyers are in the “least amount of money” category.
Your goal, therefore, should be to add value to your business to attract investors. Becoming an “absentee owner” where you own the business but don’t actually work in it, will catapult your business to a much higher net worth than other businesses an investor may consider buying. To add equity, you should think of your business as an entity that can function without you. Using the coffee shop example, if you design your business so that your employees can take care of every aspect of your business without you there, you are free to grow your business. You can “feed” your employees ideas; have them execute the ideas; and build your customer base. The coffee and other products are sold without you being directly involved in the day to day activities. This type of business will be worth more money and attract the interest of investors. In an upcoming chapter on systemising your business, you will learn more about streamlining your business to run efficiently without you.
How to Increase the Value of a Business for Sale
In every industry there are metrics or measures called benchmarks that indicate the value of a company. The higher benchmarks you can attain for your business and the more systemized you can be, the larger price you will obtain for your business. Ultimately the multiplier for all businesses is net profit, or EBITA which stands for Earnings Before Interest Tax and Amortization. Usually the benchmark is determined by applying a formula to this number which results in a net profit multiplier. For financial planning businesses, this multiplier can be 2.1 to 2.3 times net profit. For your industry, it might be 1.5 to 1.7. If you improve on the standard benchmarks for your industry, you have a far better chance of getting 3 to 4 times net profit.
For example, one benchmark that investors typically use when they evaluate purchasing a financial planning business is the funds under management. This is the amount of money that the financial planners for that business have and are actively managing. They make a commission on this amount. This is recurring income that the business can use in making forecasts. If you apply the standard multiplier of 2.1 to 2.3 times the funds under management it will give you an idea of what an investor would be prepared to pay for the business.
For the motel industry the benchmark used is the margin or the amount of net profit for a motel. Another benchmark is utilization which indicates the amount of days each year where all of the beds in the motel are full. You can compare these figures to other motels in the same category in order to evaluate the relative position of a motel in the industry.
As a business owner preparing your business for sale, you need to know the benchmarks in your industry. Once you know the standards expected for your industry, you can optimize your business so your metrics are better than average. For example, consider a motel business with a net profit of 15% and utilization of 60%. If these figures are the industry benchmark, you should work to obtain a net margin of 17% and utilization of 70%. This will enable your motel to exceed the performance of other motels in your category. With both of your benchmarks better than average, your evaluation will likely to be many times greater than a business with only average performance. To an investor, this is a financial exercise. They can look at the numbers and work it out as though you are an investment.
One of the aspects investors consider when making an investment is the risk involved. Depending upon how risk averse the investor is, they will select different investments. They will consider investments based on their own age and how much effort it will take to make a business more profitable. Factored in is how much money they want to invest versus how much money they will make in a few years’ time.
An investor might look at our sample motel business with the net margin of 17%. If they invest $100.00, their return at the end of the year will be $117.00. Now, if the utilization is also higher than average, the investor can look and see what else can be done to improve the metrics for the business. With a 17% business, they are starting at a higher income point than one with only a 15% margin. This one factor alone will make your business more attractive to an investor.
Take Action Exercises
Go through each of the 10 marketing mistakes and grade yourself. 0 = you are making this mistake and 10 = you are not doing this.
What areas can you make an immediate change to?
Decide now to build your business as though you were going to sell it.
What one area would you need to change in order to immediate improve the value of the business?
Make a plan to start implementing this within a week.