Michael Levison

If you have resolved to make your company more valuable in 2023, 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 stability in revenue and cash flow.  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 basis. Many companies have re-engineered their business models to introduce this strategy.  For instance   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 Model  If you’re a consultant and offer specialized advice, consider whether customers might pay access to a premium membership 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/Monthly Retainers  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. Co-working subscribers have access to office 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.  Of course, any major change to your business model must be made very carefully.  Test it carefully and only introduce it on a widespread basis when you are confident of the customer receptivity. 

In 2012, Jaclyn Johnson founded Create & Cultivate, a media company that educates and inspires women to succeed in business. By 2018, Johnson had grown Create & Cultivate to eight employees when an acquirer offered her a staggering $40 million. Unfortunately, the deal was too good to be true. When the acquirer discovered how dependent the business was on Johnson to succeed, they pulled out. A few years later, Johnson signed an acquisition offer from Corridor Capital for $22 million. While still a lucrative deal, it was a significant decrease from the original offer. Like Johnson, if your company becomes dependent on you, it may end up costing you down the road. The most valuable companies don’t rely on the owner’s involvement to succeed. However, finding extraordinary talent to replace yourself can be challenging.The Biggest Mistake Most Founders Make When Trying to Replace Themselves Finding a general manager, second-in-command, or Chief Operating Officer to replace themselves is one of the hardest projects founders may ever tackle. Whether you rely on a recruiter, paid advertising, or your personal network to find candidates, one of the first steps to shortlisting talent is a comprehensive review of their background. That’s when many founders make the common error of being bamboozled by a Fortune 500 name on a resume or LinkedIn profile. While a stint at a big company may be impressive, the skills held in high regard at a Fortune 500 company tend to differ from what most young companies need. Big companies often have well-established processes, systems, and hierarchies that have contributed to their success. People that thrive in big companies tend to excel at winning within a predetermined framework. However, in a younger, scrappier start-up, there is no framework to follow, which is why big company veterans often struggle in a more entrepreneurial environment. Instead of basing your hires off an impressive name on a resume, look for someone innovative, comfortable with chaos, action oriented, and creative—someone with an entrepreneurial mindset. Here are five strategies you can use to identify innovative candidates when making hiring decisions: With all of the above, you are looking for specific past behaviors and experiences.  To really gain the necessary insights, it is critical that you push for specific examples. Right now, your company probably relies on you for a healthy dose of creativity and innovation. But if your goal is to replace yourself, following these five strategies can increase your chances of identifying innovative candidates that will bring fresh thinking and creativity to your organization. Even if you have no short or intermediate term plans to replace yourself, have a strong number two in your organization will reap a lot of other benefits.

There is never enough money to invest in developing products when you’re running a self-funded business. When you’re running your company out of cash flow, most of your resources go into selling your existing products and services, leaving little left over to fund your new product ideas. You could keep plugging away with your existing product or service lineup, but you will leave yourself exposed to competitors that dream up a better offering. The other option is to develop unique new offerings for customers that ask you to customize your solution, but that can eliminate any scale in your business as you end up developing something unique for every opportunity. The other option is to offer to develop a custom product for one client with the understanding that you will retain the rights to the intellectual property (IP) associated with developing their unique solution. The most famous example of getting your customer to fund your new product development comes from Microsoft. As legend has it, co-founder Bill Gates negotiated a deal with IBM that paid Microsoft $430,000 to develop the DOS programming language, which IBM was given a license to use. However, Gates retained ownership over the code, which allowed him to sell it under the MS-DOS brand. How Brian Ferrilla Got a New Product and a Premium Valuation In a more recent example, Brian Ferrilla ripped a page out of Bill Gates’s playbook when he started Resort Advantage to help casinos adhere to new anti-money-laundering laws. Criminals were laundering money through casinos, and Ferrilla’s software helped casinos spot the bad guys. Ferrilla started by selling a simple version of his product to small casinos and eventually got a call from MGM, the granddaddy of casino operators. MGM needed extensive customizations to Ferrilla’s product, but instead of building a custom solution that MGM would own, Ferrilla offered to waive the customization charges in return for retention of the ownership of the product. Ferrilla reasoned that since MGM was one of the biggest players in the gaming industry, whatever levels of security and features they wanted, other operators would also value. MGM got their custom solution, and Ferrilla retained the rights to an underlying product that the entire gaming industry valued. In the end, Ferrilla was glad he kept the rights to his IP when his $3 million business, with just 15 employees, was acquired for more than $10 million. Had he slipped into the trap of making custom software for each of this customers, Ferrilla’s business would have likely been worth less than half that as custom software development shops offering a unique solution for each customer usually trade at around one times annual revenue. Think About Making Your Customer Your Partner on a New Product or Service Another spin on the same concept would be to approach a key customer on becoming a partner in the development of a new idea.  I am not referring to a financial partner but, rather, more of pilot program partner.  In many cases, the development of a new product or service really just needs a customer that will patiently work with you while you work through the inevitable issues.  Often times, the biggest challenge with getting a new product or service off the ground is finding a place to test and refine it.  Most of the time, clients never want to be the guinea pig.  They are happy to work with you once the kinks have been worked out and they don’t have to expose themselves to any risk. Of course, to get a client to take a risk, the have to benefit from serving in this role for you as well.  Here are a few ideas to consider: The biggest risk in new product development is that the company will invest a lot of resources and then nobody will buy because they don’t want to be the test case.  Finding a partner that is willing to work with you, even if you have to offer meaningful incentives, goes a long way to reducing your risk.

Does your business offer a service or a product that you differentiate through a higher level of service?  If so, you’re probably disproportionately impacted by the economic disruption caused by the coronavirus pandemic. Consumers are cutting back on services to avoid human contact and conserve cash, but we are still buying products that solve a specific problem.  Businesses are buying products like Zoom, and Slack for teleconferencing and consumers are dropping services in favour of products. Italy was the first western democracy to experience the brunt of the coronavirus pandemic, and it changed everything about daily life, right down to what people bought from Amazon. For example, in the week after the Italian government quarantined most of its citizens, there was a 236% increase in Italians buying sports gear, presumably to set up a home-based exercise routine instead of services like personal training. Instead of going out to enjoy the service at a great restaurant, we’re buying more alcohol. According to a recent Nielsen survey, overall sales of spirits like tequila and vodka were up 75% from the same period last year. Service Providers Are Pivoting to Provide A Product Many businesses have reacted by turning their services into what appears to consumers as a tangible product: To take advantage of our gravitation towards buying products, service providers can take the following eight steps: Step 1: Niche Down The first step is to narrow your focus to a single type of customer. Many people feel uncomfortable with this stage – in particular in times like these when you need more customers, not less. It’s counterintuitive, but the first critical move in turning your service into a product is niching down because services can be adapted and customized for a variety of customers. In contrast, products need to fit one type of buyer. Picking one niche also helps you design a great product and efficiently reach potential customers through things like Facebook groups set up to serve a specific target. Niche down further than you’re comfortable, then niche down some more. Consider: Step 2: TVR-Rank Your Services  Once you’ve niched down more than feels comfortable, the next step in turning your service into a product is to identify the services you offer, which are Teachable to employees, Valuable to your customers who have a Recurring need for it. At The Value Builder System™, we call this finding your “TVR.” Grab a whiteboard or blank piece of paper and make a list of all the services you offer the niche you picked in step 1. Then score each service on a scale of 1 to 10 on the degree to which you can teach employees to offer the service, how valuable it is to your niche and how frequently they need to buy it. Pick the service that scores the highest and move to Step 3 (you can always come back to this step if you want to consider multiple products). Step 3: Get Clear on Your Quarter Inch Hole Harvard Professor Theodore Levitt was famous for saying, “people don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” Be clear about what problem your product solves for your niche. For example, “The Emergency Taco Kit” makes cooking at home fun for quarantined Angelinos, while the “Disinfect & Protect” product sanitizes cars for essential service providers who need to keep driving.  Step 4: Brand It With a service, you’re typically hiring a person. Still, with a product, you’re selling a thing. Unlike people who have names, something like the “Emergency Taco Kit,” “Disinfect & Protect” and the “Personalised Music Message” have brands.  Step 5: List Your Ingredients Service businesses customize their deliverables in a unique proposal for every prospect, but product companies list their ingredients. Pick up any package at a grocery store — whether it’s a bottle of dishwasher detergent or a box of cereal — and you’ll see an itemized list of what’s inside the box, which is why your offering needs to list what customers get when they buy. Step 6: Pre-Empt Objections When selling a service, you have the luxury of hearing your prospect’s objections first-hand, and you can dynamically address them on-the-spot. When selling a product, you don’t have the benefit of a person to overcome objections, so consider what potential objections customers might have and pre-empt them. When selling the “Disinfect & Protect” car cleaning product, Spiffy anticipated the four most common concerns customers raise and pre-empts each in their marketing material. For example, Spiffy assures prospects that they have:  Step 7: Price It Services are quoted by the hour, day or project and usually come at the end of a custom proposal. Products publish their price. Step 8: Manufacture Scarcity One of the benefits of a service business is that you always have sales leverage because your time is scarce. You can’t make more hours in the day, so customers know they need to act to get some of your time. With product businesses, you need to give people a reason to act today rather than tomorrow. This means you need to manufacture a reason to act through things like limited time offers, limited access products etc. Service providers have been walloped, but if you make your service look and feel more like a product, you may be able to take advantage of our society’s flight to tangible products in uncertain times. 

Finally, 2022 is in the books.  Good riddance.  If your goal is to build a more valuable company in 2023, here are some New Year’s resolutions to consider.  Some may seem obvious and a bit basic but it never ceases to amaze me how often they are overlooked. Here’s to building a more valuable company in 2023!

Small businesses often operate as if their sole purpose is to fund the owner’s lifestyle, but the most valuable companies are run with financial rigor. You may be years from wanting to sell, but starting to formalize your operations now will help you predict the future of your business. Then, when it does come time to sell, you will get more for what you’ve built because acquirers pay the most for companies when they are less risky. There’s nothing that gives a buyer more confidence than clean books and proper record keeping.  Jay Steinfeld is a great example of how to run a business like a public company. Steinfeld studied Accounting at the University of Texas and joined KPMG after college. His wife owned a small retail store selling blinds and window treatments. The store was successful, but by 1994, Steinfeld had noticed a little Seattle-based outfit that was trying to hawk books online.  This company with the peculiar name “Amazon.com” started to succeed in selling books online and Steinfeld wondered if he could get consumers to buy blinds online. Soon after, Blinds.com was born. Unlike many of the first-generation online companies that were run with little financial controls, Steinfeld grew Blinds.com like an accountant. He was determined to run his business with the same rigor as a publicly listed company. He built an experienced management team and took the unusual step of assembling an outside board of directors even though Blinds.com was private and Steinfeld owned all of the stock. The board met quarterly and each of Steinfeld’s senior managers were asked to prepare and deliver formal presentations to his board. Steinfeld hired a big four firm to complete a full audit of his financials each year even though all he needed to satisfy Uncle Sam was a simple tax return. By 2014, Blinds.com had grown to 175 employees and, at more than $100 million in revenue, was the largest online retailer of blinds in America. Even though Home Depot had close to $90 billion in sales at the time, Blinds.com was outperforming them in its tiny niche, which – coupled with their fastidious bookkeeping — made Blinds.com absolutely irresistible to Home Depot. On January 23, 2014, Home Depot announced its acquisition of Blinds.com. Running your business like it’s public will make it more predictable as you grow and ultimately a whole lot more attractive when it comes time to sell.