We have written a couple of articles in the past about the expectations of lenders, investors, or even the government when it comes to financing or grants, but this is an area that seems to be the most misunderstood and where we receive many calls. This question comes up the most in respect to those starting businesses which in many cases just have an idea and have not started a business and are pre-revenue.
Having a Sound and Defined Business Strategy
There tends to be a misunderstanding of those who are looking to start a business of what is required by a lender, investor, or grant provider to gain an understanding of your business. In all cases, a full business plan is required that documents the detail of your business in every area to a level that shows you have thought through your business and can demonstrate them in the plan how you got to the numbers and how you intend to execute on the plan and generate the revenue that is projected.
Having a business strategy is the responsibility of the owner(s) in the business. If you have not defined your business strategy and understood all areas of your business, you will not be able to get a business plan developed. The exception being unless are willing to pay for the consulting required to help you develop your business strategy. Developing your business strategy is not part of a business plan development engagement, it is expected that as the business owner that you have this already developed.
For not having a developed business, a start-up will pay 25-50% more than a mature business for having a business plan developed. In 7 years, we have had only two start-ups who could answer the questions we provided about their business to develop a business plan. If you cannot tell us the information and convince us how are going to generate revenue, how are you going to convince a bank, Investor, or the government to give you funding?
Having Skin in the Game
There is a misconception by many who are thinking about starting a business that there is a large pot of gold out there waiting for them to access for them to start a business primarily from banks and the government. Starting a business is a risk, but it is your risk, and your choice and no one made you choose this path. A true entrepreneur takes risks because without taking risks there is no true gain. There is never a time that starting a business is safe.
You have to invest in your own business. Whether that is taking out a loan against your personal assets, using your RRSPs, or using an inheritance from Uncle Bob, no one will give you any funding if you have not invested yourself. You need to ask yourself why would they invest in your business if they do not see that you even believe in your business enough to invest and take the risk with them.
A true entrepreneur works for “free” until the business is making money and all other expenses are paid. You will not have anyone give you financing or investment or a grant to cover your salary. If you need to get paid, then you need to go to work for someone else who can provide you with a salary. We have clients who have not taken wages for years to reinvest in their business. They have used that “skin in the game” such as their RRSP’s, severance, or other sources of money to cover their personal expenses until such time their business can pay them.
Why Banks, Investors, and the Government Lend or Provide Grants
Banks and Investors (whether public or private) are businesses themselves and indirectly so is the Government as they all are looking for a return on their investment. They are not providing money to businesses in “hope” of seeing a return. They are going to provide the money to those where they see the lowest risk and the greatest return.
Banks make money from the interest you pay on the loan they give you. If your business fails, they lose their money and the interest. The risk level may differ by the bank and what industries they shy away from, but if you are a start-up without any history of revenue, the same metrics are being evaluated. Your personal assets will also be assessed. Next, they will look at why you need the money. They are only really going to look at assets or anything that is tangible that they see will aid in generating revenue such as marketing. They will cover a percentage of the assets and the marketing if they feel you can make your payments based on your personal assets and business plan. Banks will follow up to make sure you are executing on the plan as outlined, especially if you are late with any payments.
Investors invest in companies that they believe they will make 2-3 times return on their investment. They want to be out of your business with that return typically within a maximum of a five-year period. They are taking a risk on you and your business, and in many cases, their expertise and contacts will be the reason that they get their money back as well as make you money. For that privilege, you must give up a portion of your business. If you default on your payments, you could have your business taken from you. If you are not earning any money, there is nothing really to give up – they are the ones taking a leap of faith in your products, services & you. If you have not generated revenue from your business, your business is worth close to $0.00 They will look at your investment in the business as well as the potential, but if you can find an investor pre-revenue, do not be surprised if you are not the majority shareholder. The days of high-tech ideas worth millions pre-revenue are few and far between.
The Government provides grants to improve economic development and employment. The grants they provide have a purpose whether provincial or federal. There are grants for manufacturing, as there is a goal of getting manufacturing back in Canada. They are grants for employees and training to help people get hired and trained, so they do not end up on unemployment. They provide grants in the North due to high unemployment rate and closure of businesses to stimulate the economy. The money is not available to give away. They are providing grants for a purpose, so they are looking at the same risks banks, and lenders look at as well. If you are lucky enough to receive a grant, your business will be monitored to ensure that you followed through with the plan as outlined.
What Are They All Looking For?
There are many criteria that all three look for when they are determining whether your business will be approved:
If you are starting a business and are going to need some level of financing, it is important to understand what is required before approaching someone to write a business plan, which you believe will be the key to getting the money you need. You have to have developed your business and be able to articulate every area of your business. It is not the consultant’s job to develop your business.
You also have to be committed and show that you are investing in your business along with understanding what someone will cover with financing. Those providing funding will not cover salaries or items that they cannot attach in some way to reduce the risk.
Having a business plan written does not ensure you will receive funding and no one can promise you this as there are too many factors, including your credit. We always qualify a client fully before proceeding with a business plan, as it does neither the client or us any favour, if we do not believe they will be approved for financing. Our company and individual names are on every plan which adds credibility and assures the one providing funding there has been a level of due diligence. If we do not feel your business is bankable, we will tell you right up front and tell you what you need to do before approaching anyone to have a business plan developed. We have had potential business owners argue with us about not agreeing to do their plan, but it would hurt our reputation and would not help them if we had taken their money knowing that there was not a chance of receiving financing due to the fact the idea has not been developed enough to be a viable business.
How many times have you been asked who your target market is and depending on whether you are business to consumer or business to business, you have answered – anyone or any business? The reality is that this is not true and is usually where a start-up or small business owner can get in the most trouble and end up spending time and money that does not provide you the return you want or need.
What is your target market? If you could select a business or consumer that was a perfect fit for your product or service - this is your target prospect. Once you understand their characteristics, you can then apply those broadly to come up with your target market. As you will find, this will narrow every consumer or business to the types of consumers or businesses that are best suited for your product or service.
Here are some questions that can help you in determining your target market. By not asking the right questions, you can be potentially be targeting the wrong audience.
Determining your target market will now help you determine how to market and sell. If your target market is manufacturing companies that are less than 100M in revenues that are owner operated in Ontario, do you not believe that how you would market and sell to them would be quite different than just any business worldwide? If your product was best sold to consumers between 18 and 35 from households in Ontario where the income was 50K and higher, do you not believe you would market and sell differently than you would to anyone of any age anywhere and any socioeconomic level? The answer to both is absolutely.
Target markets will help you determine what marketing mediums you will utilize and even what branding you will use. If your target market is manufacturing companies and you are spending much of your marketing spend on Facebook and Twitter, there is a very large chance your return on your investment is less than 1%. If your product is a retail product targeted at 18 to 35 and you are not utilizing social media, you are missing out on reaching a good percentage of your market that use social media to help them make buying decisions.
Target markets will also aid in determining how you sell the product. Does your target market expect to purchase products online? Does your target market usually buy the types of products you are selling directly or through distributors? Is your product one that would benefit from being in certain retail stores? If you are selling products in a manner that your target market is not use to buying an equivalent product or service, then this could be a very costly mistake, as you are spending money on the wrong channels.
Defining your target market can help in making you stand out from your competition. Your product or service may be able to provide value to other markets that your competition does not which can give you a competitive edge.
Once you know your target market it is very important to understand the size of that market and whether you have competition in that market. Understanding these two components will help you in determining your potential for revenue. If there are only 3000 companies that fit your target market and there are 3 competitors, this is quite different than there being 150,000 and you being the first to market.
Needless to say, focusing on the wrong target market or too broad of a target market can end up costing you in time and money. The more you understand who your real target market is and focus on how to market and sell to them, the more success you will see in your sales efforts.
As we start work with a client, there are many times that the owner will say, “My accountant does not provide me advice on my business, they only compile my statements and do my taxes”. What most business owners do not understand is that in most cases, they are only paying their accountant to perform those two tasks when they visit them once a year. In order to provide you advice on your business, the accountant would need to come in and learn more about your business in a lot more depth than your accountant does for what they are doing now. To fully understand this, it is imperative to understand the difference between financial accounting and management accounting, along with what functions you are asking your accountant to perform.
Financial accounting is for presenting the financial position of your business to its external stakeholders in order to understand the health of your business. External stakeholders can include your Board of Directors, other stockholders, investors or lenders. Your financial statements represent the results of your business over a specified time period and are used to compare present results to your past results to see if how your business is performing. Financial statements reporting is based upon what has happened, so they are ‘backwards’ looking.
As a private corporation, your financial accountant creates financial statement compilations (Notice to Reader). Your compiled financial statements are then used as the basis of calculating your business income tax. Your accountant may make recommendations based on the information you provide them, but they are not going digging into your financials to uncover any issues or misclassification's or any wrong doings – that would be done through an audit or review and is not what you are paying for when you ask them to compile your statements. The reports they provide with the compiled statements do not provide an opinion or give any assurances that the statements are in accordance with Generally Accepted Accounting Principles (GAAP). In some cases, an investor or lender may require you to have an audit or review which will require the financial accountant to go through your financials in detail to provide some level of assurance that the statements are free from material mistakes and fairly represent the operations of the company.
It is very important that when you review financial statements that you look at the beginning of the report to see one of 4 things:
Management accounting is used by business owners and other management to make decisions concerning the day to day operations in your business. Management accounting is based on current and future trends and does not require exact numbers to be used. Because you often have to make decisions in a short time period through a fluctuating environment, management accountants rely heavily on forecasting of markets and trends when working with you. Management Accounting combines accounting, finance, and management with professional insights and methods.
Unlike financial accounting where financial statements reporting is based upon what has happened; management accounting makes use of these statements combined along with analytical tools and techniques and will focus primarily using ‘forward’ looking analysis and reporting suited to managements needs.
Financial Accountants and Management Accountants
It is important to understand your requirements and your expectations when you hire or engage an accountant, as well as understand what functions they are able to perform for your business. Not all and in fact most do not perform all functions. In some cases you might have a financial accountant to compile your statements and help you file your business taxes. You might then need to engage a management accountant to come in and help you with functions such a performing feasibility studies or helping you with functions such a budgeting, pricing, costing, productivity analysis, or profit analysis. In many cases you will have accountants that will perform some functions of each based on their background and clientele. If you have an accountant that performs all of the functions you require, it is essential that you engage them for all the purposes you require. As with any professional you hire, they are not going to just provide you with advice on a particular issue with your business when that is not what you have hired them to do.
Have you ever sat in a meeting discussing what to do next and the realize that you keep having the same conversation each year, yet nothing seems to get done?
There is a methodology that can ensure things get done. The methodology employs many tools such as Visioning, Grounding, Gap Analysis, Strategy Maps, Balanced Scorecard, Budget Programming, Organizational Alignment, and Performance Management.
The process always starts with Visioning. This is a highly futuristic discussion; it is all about what you want to be when you grow up. Assemble dreamers and technologists for this exercise, as it is important to create a vision that is unconstrained by the issues of today. Companies that create and work towards a strong and succinct vision, continuously enhance the value of the organization for its shareholders.
The next step, “grounding,” deals with getting back to earth, back to reality. This process step scans your organizations by undertaking a situational analysis of your current state. At a high level, it asks what is working well and what is not, and ends with analyzing your current financial state and position, and customer base.
Now that you have a vision and are well grounded in your current state of the nation, it is time to determine where the gaps are and itemize them. There will be a list of differences between where you are now, and where you want to be. You also need to assess what forces are working for you, and what forces are working against you. All of them put together; this becomes the change agenda, a high-level plan for achieving their desired state.
A strategy map describes how an organization intends to create value for its shareholders. It maps how the company’s intangible assets are used to create sustained shareholder value. Processes such as innovation, customer service, and support, can become highly differentiating as companies seek competitive advantages. The strategy map visually represents how the intangible assets of a company (Learning and Growth), through its internal goals and objectives, provide value to customers, creating a sustained financial performance which enhances shareholder value. The strategy map, in this case, emphasizes “what” is important to the organization, and what must be accomplished.
“What gets measured, gets done.” Measurements are at the root of motivation and control. The Balanced Scorecard provides a mechanism that uses the Financial, Customer, Internal, and Learning and Growth perspectives that map how strategy is translated into action using lead and lag indicators. Lead indicators are often concerned with ‘inputs,' while lag indicators are measurable (observable) ‘outcomes.' The logic is, if I get lots of ‘leads,' I will achieve my ‘lags.' When developing the balanced scorecard, a check to ensure current operations, as well as strategic objectives are achieved.
Wondering why things didn’t get done; yes, you had the vision; yes, you are well grounded; yes, you had the strategy; yes, you had the metrics; but, no, you did not allocate sufficient resources to execute. It is important to segment and identifies strategic expenses. In the book The Execution Premium (Kaplan, Norton), the concept of “StratEx” is introduced; “Strategic Expense.” There is CoS (Cost of Sales), Opex, CapEx, and now there should be StratEx.
Budget Programming maps the one-year financial goals and objectives of the company to important initiatives (strategic and operational) which are actioned by your intangible assets known as employees. By identifying key initiatives, the Capital Expenditure, Operating Expenditure, and Employee Expenditure (Intangible assets), and then labeling these Strategic Expenditures, you set the priorities of the company for the long term. Budget programming ensures cross functional, organizational alignment of spending, resources, and priorities. Budgets need to identify “’who’ needs to do ‘what,' to ‘whom’ by ‘when,' and for ‘how much.'
When determining the ‘who needs to do what, to whom, by when, and for how much,' it is important to ensure organizational alignment. The expected outcome is the right organizational structure with effective and efficient processes operated by knowledgeable and skilled employees (intangible assets).
Once the Budget Programming and the assessment and assignment of all the resources in the organization have been completed, the question is can the budget be rolled up and approved?
Business Performance Management
The most important step in the process is the business performance management aspect of running the company. The tasks, objectives, metrics identified in the budget, balanced scorecard, and strategy map all come together to create a system of performance management. In this system, daily, weekly, monthly, quarterly, and annual meetings complete with agenda and measures are delegated (not abdicated) to management teams and their staff. Reporting processes are put in place that advice management at all levels of the company on how well the strategy is being executed.
You can see how employing a compliment of many tools such as Visioning, Grounding, Gap Analysis, Strategy Maps, Balanced Scorecard, Budget Programming, Organizational Alignment, and Performance Management can guide a company’s management team to ensure “things get done.” Bypassing any of these steps can quickly become a cause for concern, since critical information may be missing, and weakened by holes in the foundation upon which the plan rests upon.
Have you ever wondered why the marketing that you have implemented in your business has not worked for you or why you are not getting the return on a marketing program your sales group talked you into in order to generate leads? You may have even decided that marketing just does not work for you.
The problem with marketing is that it needs to go hand in hand with your sales strategy and needs to be utilized for your industry, your sector, your specific market, and your geography. If that has not been properly assessed, then there is a very good chance that you will never get a return if you just continue to try marketing mediums based on the thought that the same marketing works for any business. It is true that all businesses should have a website, but the type of website and the features that it should possess can be quite different.
Think about business in general and customers A manufacturing company, a retail store, a financial services firm, a hi-technology company, a restaurant all have very different customers and products. Their customers make buying decisions in many different ways. If you know and believe that to be true, then why would you expect that you can market to them in the same way. Take a website for example. A website of a retail store or restaurant is a business to consumer sale. The website needs to be aesthetic and draw customers in. There may be specials or what is on sale on the first page to draw their interest, there may also be contests or the ability for the customer to rate their products online. The website for an industrial manufacturing website and the type of customer is very different. If you have pictures flashing or rotating for that type of customer – the chances of losing them is high as the customer’s needs are very different. This customer is trying to determine if the products you manufacture will work in their business and it is more about the content, case studies of the product, and technical specifications. It still needs to be pleasing to the eye, but a very different look and feel than from the consumer who is looking for a good Indian restaurant near them. The same is true about other marketing pieces and programs that you implement. If your marketing does not address the customer’s needs, the money you probably spent was wasted.
You actually may be doing the right marketing for your company, but your sales force may not be following up on the leads you have received. If you have run a lead generation campaign or have leads from events or the web and they are not followed up correctly as well as a timely manner, the lead and the money that you spent acquiring the lead may be lost. It is not only important that you have the right marketing, but that your sales group is prepared to act on the leads and turn them into sales. The reasons for this happening could vary. It could be as easy as communicating what the expectations are, inexperience or lack of training of the rep, or it could even be you have the wrong type of sales rep for selling your products in your industry.
A marketing and sales assessment will take a look at your current marketing and sales activities, processes, and strategy and understand what has worked and what has not and why based on your specific business, as well as looking at your industry, sector, market, and geography and determining what else should be looked at in order to achieve the growth that you are looking for in your business.
Before you decide to spend money on new marketing and sales initiatives, it is important to understand if they will work for your business. Even if they do, it is important to implement it properly based on your customers. If you are an industrial business and someone convinced you to use social media and are wondering why you are not drawing traffic to your Facebook page, there is a very good reason – your customers are not using Facebook. On the other hand, having YouTube Videos that show how your product works or your manufacturing process may be a very worthwhile social networking medium. Understanding what works for your business will save you money and will help you achieve your goals for growth.
You are in business in order to make money, and sales feeds the business engine. The goal is to generate enough sales to cover your expenses and make a profit. If you do not have an understanding of how many leads you need to generate and turn into sales, this can become a cash flow issue very quickly.
As a business owner, it is important that you understand where your leads are coming from and what the potential is for them closing. In addition, those that do not close you will want to have an understanding of why they didn’t close? Hopefully, this article will provide you some insight into how to create and track your sales pipeline for your business so that you are able to keep an eye on your profitability.
Develop Your Sales Process
Whether you document this or not, every business has a sales process. Typically there will be similarities within industries, but in many cases, a sales process can be different for every business. So you ask what is a sales process exactly? A sales process consists of the steps that you follow in order to take a cold lead either to close whether that sale is won or lost. There is no right or wrong process; it is about what steps you find work the best for you and your sales people in being able to “win the sale.”. It is also important to understand that not every sale will go through every step of your sales process, and others will require that you follow each step. You may also have several sales processes within your business depending on the type of product/service you are selling or based on the target customer.
Example: Company A has a product that can be sold to the following.
Developing Your Sales Funnel
Once your process steps are defined, you will want to assign percentages of probablity to close to each process step. This will provide you with with a view of the progression of the sales and their potential for closing. This step may take you some time especially if you are just starting out or are not currently tracking the progression of your sales today. The idea is about understanding how many leads you need to make the sales you have forecasted for your business and the progression through the funnel to become a closed sale. The further the lead progresses in the sales cycle the better the chance you have of it closing.
Over time you will be able get a clear picture of your sales probabilities and closure ratio. If you have 100 leads and 30 turn into sales then you have a 30% sales closure ratio.
The calculation to determine the amount of revenue potential in your sales funnel will be:
Depending on the business, some will build their sales process, probability percentages, and funnel based on what they feel are qualified leads, and others start at the lead phase because there is some qualification done prior such as web form which collects qualification information.
Tracking & Reporting
If you are performing the sales function or you only have 1 person responsible for sales within your business, this could be as easy as creating Excel spreadsheets to keep track of the information needed:
If you have several people responsible for sales within your organization, it is highly suggested that you invest in a CRM (Customer Relationship Management System). There are many systems out there to choose from depending on the level of functionality you require. There are a few that have a free version for 2 licenses and others that offer limited functionality. Here is a list of three which I would recommend for small businesses that only have one or two people looking after sales.
As your business grows, it is important that you have a handle on sales within your business to understand how your business is performing and if you are generating the expected sales that you need for your business. If you are not tracking your sales, then you do not really have a good handle on your business, and this is when many businesses end up in financial trouble.
There are other side benefits of tracking your sales processes, probability percentages, and pipelines that will help you run your business as well. Here are just a few.
This article focuses on sales but is just one area where it is important to understand the workflow, processes, and measurements that need to be in place to know the pulse of your business. Generating revenue is the most important task within any business because, without revenue, there is not a business. Start setting up your sales processes, probability percentages, and tracking before you begin hiring salespeople into your organization. What you will find is that you will modify all of this over time as you uncover ways to increase your probability of closure and need to add more steps in your sales process to in order to do this.
Many times as a business owner there are problems that come up within our business, and we think we know the answer to the problem We then implement a solution in order to find that problem is not resolved and is reoccurring. Sometimes this is an issue because we are too close to business, or because we were not given the right information. Has a similar situation in your business occurred to the one below that ended up occurring over multiple departments within your organization?
What is a Problem?
Problem: A measurable gap or deviation between an observed state and the expected state, norm, standard, or status quo.
In this business example, we can use a business owner who is reviewing his financial statements. The business owner sees that his gross margin (Sales – Cost of Sales) is 50%. Is this a problem?
The answer: It depends. There are some questions that need to be answered first.
There is a fair amount of difference in each scenario. First of all, it depends what industry you are in; each industry tends to have its own structure.
In the other scenarios, where there will most likely be multiple products, issues of pricing, costs of sales, product mix, sales expenses, and even transaction posting errors can be suspect. A common source of frustration with owners is that expected programs or products were not released on time, ran into quality issues with products, late to market, unexpected competition to name a few.
Perhaps the most difficult answer to get is “What should have been?”. This often implies gathering the facts without bias or personal influence from anyone involved. You need to gather objective evidence that support observations, not evidence that support a theory we might believe, or a conclusion (hypothesis) that we might jump to early in the process.
In order to set in motion a problem-solving exercise, the problem needs to be clearly articulated. Problems are about the relationship between variables; the fact that the margins are 50% is not a problem in of itself; the fact that the margins ‘should have been,' or were ‘expected to be’ 60% is problematic. The problem statement needs to be focused on a particular issue, address the relationship between variables, and should contain the foundations of its own solution; namely what should have been.
In scenario 2 above; the fact that i) margins were 50%, ii) margins were expected to be 55%, and iii) margins should have been 40% represents multiple problems. These problems deal with the variables of 1) what is versus what was expected, 2) what is versus what should be, and 3) what was expected versus what should be. Each of these will derive its own unique solution, and there may be no one solution to address the 50% observation without relating it to owner expectations (realistic?), execution dynamics, or product performance influenced by market dynamics.
Whenever you are surprised by an observed result, sit down and ask yourself these four basic questions:
If you find that you find yourself in situations where problems are occurring but you are not always able to determine the root cause; this is where we find we are able to truly help business owners. Contact us to help you,
What is your business worth? How do you, value your business? If someone came into your office with a cheque to buy your business, what would be the number on it?
Q: What is the value of your business?
A: Only what someone is willing to pay for it. So how do you figure out what someone is willing to pay?
Sell all your assets, pay off all your debts, see what is left over, and that is the lowest value for your company. On the other hand, we all dream of the Unicorn purchaser who is willing to pay obscene multiples to come walking through that door. Rare as a Unicorn purchasers are; they still do exist. The value of your company lies between these two points; where they lie, depends on your company’s risk profile. Risk profile? Yes – ultimately, it is about how you run your company. A poorly positioned company is high risk, a well-positioned company is a low risk; and yes, there are things you can do to change that.
There are four things that impact the value you can get for your company. Things that happen in the economy, things that happen in the stock market, things that happen in your specific industry, and things that happen in your company. You may not be able to do much about the first two, maybe something you can do to influence the third, but lots of opportunity to influence the fourth element in your favour. It is that fourth element than can drive those obscene multiples you sometimes hear and often dream about. So, what can you do to improve value? First, by understanding how someone buys value.
When someone buys your company, they are not buying your past. You have already invested your past earnings into your sailboat, so this is of no value to an acquirer. Buyers are interested in the future. The acquirer probably has a bigger sailboat and a vacation property they want to keep well maintained, so to them it is all about the future, and since the future has not happened yet, this means, “buying into ‘risk’.” Your job is to reduce the risk of your business, not in your eyes, but in the eyes of an acquirer.
Some key strategies that have born some statistical relevance to reducing risk and improving value include:
Well, after analyzing more than 20,000 businesses, it has been determined that companies with a Value Builder Score of 80 or more receive offers that are 71% higher than the average business. Want to know how you fare?
If you ask most business owners what drives the value of the business, most will tell your first and foremost is financial performance. Financial performance is important but is only one of several variables that affect the value of your business. When it comes time to look at selling your business your business down the road, there is much more to it than just having steady revenue and a good profit margin.
Most businesses worry about the value of their business when they are ready to sell their business. Unfortunately at that point, it is way too late to make any changes. Instead, if you focus on the areas that drive your business value early on in your business, you have a better chance of receiving the value and earnings multiples you want for your business down the road.
There are other drivers that will affect your business value and the multiplier that you will eventually receive for your business that many business owners do not consider. To change many of these, it will take time, so it is important that you look at them early on within your business, so you are running your business in a way that if you had to sell it tomorrow that you would receive the value you deserve.
Dependence on the Business Owner
There are times we will ask a business owner how involved they are in the every day business including sales with clients. In some cases, the business owner will smile and tell you how they know every one of their clients by name and how the clients will come to them anytime they have a problem. In other cases, the business owner will tell you how they really can't afford to take a vacation as the business would stop if they were not there. Unfortunately, this is a problem as if the business revolves around the business owner, then this greatly reduces the value of your business, as the business is not worth anything without you in it. This increases the risk of someone down the road buying the business, because, in most cases where the business owner is ingrained in the business, there are not any documented processes and procedures. They usually reside in the business owner's head, so is not a business that could be easily transitioned. This will affect the value. This is why most service driven businesses do not obtain the same value and a lower earnings multiplier as a product-driven business.
Dependence on One or Two Key Customers or Employees
It is great to have large customers, but it is a problem when your business relies on one or two key customers where they make up the majority of your revenue. There is nothing that is a sure thing, and if something happens, one of those client's leaving could put you our of business. It is important to make sure that if you find yourself in this situation that you look at how to reduce your dependence on them through selling to additional customers, looking at other geographies, or even other products and services that you can sell as add-ons to other customers or new customers. This also takes time and may involve hiring sales reps or even to look for other products & services to develop or resell. This is not something you can change overnight, so it is important not to wait until your want to sell your business, as this will greatly impact the value you receive as this is a very high risk to the buyer.
There is a similar situation when your business is reliant on one or two key employees. If today you only have one sales rep, and they make all of the sales for your business and others in the business are not involved with the customer, this can be a potential issue as well. What would happen if something happened to this individual or they left tomorrow - ask yourself - would your business still survive? Do you have your customer list and contact information, or did that walk out the door? Reliance on any one person can have an impact on the value of your business as well. A question you need to ask yourself for each of your employees is if they quit tomorrow would your business be impacted.
Dependence on the owner, customers, and employees is just one other driver that will impact the value of your business, but as you can see by the examples, none of these items are things that you can change in your business overnight. It doesn't even really matter if you never plan to sell your business, as your business is exposed to risk in any of the instances and is something that should be part of your strategic plan to address.
If you would like to understand what the other drivers are or how your business would score today, take the time to take the Value Builder Survey and Get Your Value Builder Score.
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This is a question that has come up quite a bit lately with several of my clients. The business has grown to a point where the business owners need to focus working on the business instead of in the business making sales. They now feel that they should grow their business and hiring feet on the street will get them there.
The real answer to the question of when are you ready to hire is that usually when you have to ask you are not ready. It is primarily because your current infrastructure does not support having a new sales person who is a new employee and even though they may come from your industry, they are not familiar with your particular business and it will take a few months for them to hit the ground running. It is a fallacy that hiring a sales rep will automatically free you up to do the things you want and need to do in the business, in fact for the first few months it will most likely increase your workload until the individual is comfortable with your products and services, business processes, and the culture of your business.
Before you consider hiring your first sales rep be able to have an answer to the questions posed below. There is more to it than just having the funding for a head count.
If you have answers to all of the questions above or have a plan of how you are going to address them, then you are ready to hire your first sales personnel for your business. Hopefully this provides you a list of things to think about which will help you determine if and when you are ready. As you work down the list, it is important to document your answers as this will help you not only for hiring the first sales rep, but for every sales rep you hire as you continue to grow your business.
RK Fischer & Associates