Be an Ethical Entrepreneur, Marketer, and Business Builder

Should a parent of a toddler start a business?

Nine years ago at the age of 26 I bought my first business.
Since then, I’ve bought and sold 3 businesses, started a 4th, got married, and now have a 17-month old.

So, if I had to start that process from scratch today, would I do it with a young, growing family?

To set the stage, you will not find a bigger supporter of entrepreneurs and capitalism (not to be confused with cronyism).

I love business.
The challenges, the changes, the rewards, the people and the lives that are enriched by it.

Though I made many mistakes, I would be an entrepreneur all over again if I could go back in time.

However, would I start a business from scratch as a 35-year old with a wife and baby???

If I was giving my sister or best friend, who both have 2 children and are in their mid-30’s, advice on whether to start a business, here are a few questions I’d ask.

Do you hate your job?
Like really hate it.
Does your spouse cringe when you sit down at the dinner table because she knows it’s just going to be a barrage of negativity?
Do your friends “get busy” when you call because they know it’s just going to be a complaining session?

First, if that’s just your personality, fix it.
But if that’s truly the opposite of your personality (seek the honest feedback from people you trust), then get out as fast as you can.

No job is worth anxiety, depression, or a heart attack.
More importantly, no job is worth alienating your spouse, friends, and family.

Consider trying to fix the culture at your current job while you start looking for a new job.

But, instead of another job, should you just start a business?

Questions to ask yourself before starting a business as a parent

  1. Do you have at least 6 months of living expenses saved up (preferably 12)? Trying to start a business without the cash to survive for AT LEAST 6 months while you have a family to support is simply selfish and irresponsible. Can you make it work? Maybe. Is it worth risking your livelihood and providing for your family? No. If you are unemployed and can’t find work, then, by all means, start a business. In fact, according to The Millionaire Next Door, this is one of the most common reasons people start a business – they have no other option.
  2. Do you have access to the capital you’ll need (in addition to your living expenses) to fund the business? This doesn’t have to be a lot but you generally will need some money to invest in marketing, software, sales materials, uniforms, gas, insurance, etc.
  3. Do you have potential backup jobs available? Most businesses fail. Don’t delude yourself going in. Accept the risks and face them. Part of that is having a backup plan. Only fools believe blindly in their business idea.
  4. Do you have multiple business ideas that you can launch in a short amount of time if needed? Hedge your bet a bit. If your full-time job is to make a business successful and you currently have no clients or income, be prepared to try a few different ideas while you’re living off of your savings.
  5. Are you living below your means? If not, then don’t even consider starting a business. Making a business successful is about delayed gratification which means continually trading your short term time and money for a long-term result. If you already spend your full paycheck, then you aren’t ready for the financial sacrifices of getting a business off-the-ground.

In summary, there’s a myth that entrepreneurs are stubbornly obsessed and risk everything to follow that one great idea!

That’s not true at all.

Smart entrepreneurs fail fast and ditch the bad ideas or pivot them to good ideas and THEN, once they’ve proven they have a good idea through finding some paying clients, stubbornly pursue it.

This is why your first 1-3 businesses are learning businesses.

Why do you want to start a business?

Most people answer some version of more money and more time.

That’s a reasonable answer.

What most people don’t consider is, to get more time you need money. And if you don’t have a lot of money right now, then you need to invest lots of time.

As an example, if you have $2 million dollars in the bank, you could put that in a few Dividend Aristocrat stocks that generate 5% dividends, live off of the $100k in annual dividends, and never work again.

That’s an extreme example of buying back all of your time.

In a small business, once you invest the time to build your business, then you can use the profits to hire people to do your work – once again, you’re buying more time.

If you don’t have time or money, then you can’t start a business.

Granted, if you do have money, forget about starting a business and just buy one. Rare is the business model you can start from scratch that will grow your wealth faster than acquiring an already successful business (or business model).

Keep in mind up to 8 out of 10 new businesses fail whereas nearly 7 out of 10 acquired businesses succeed. (Depending on which study you read, those numbers do vary a bit but the point is still valid, buying a successful business is a lot less risky.)

How long does it take to be successful?

To become an overnight success takes 10 years.

Michael Masterson wrote a book called Seven Years to Seven Figures that claims you can be a millionaire in 7 years.

Mark Cuban didn’t take a vacation for 7 years.

Jeffrey Immelt, CEO of GE, worked 100 hour weeks for 24 years before becoming CEO.

Brad Sugars breaks it down a bit more in the time it takes to be a millionaire:

  • For most people – at least 10 years.
  • For those with a head start, like lots of experience, capital, or the right connections – 7-9 years
  • All of the above plus you’re super-lucky and amazingly talented – 3-5 years

This is important to keep in mind if you have a 2-year-old running around. How much time with your family are you willing to miss to hit your desired success?

There is no right answer and I can’t answer that question for you.
BUT it is a real, serious question that you need to answer with your spouse.

And if you think I’m exaggerating about the time and sacrifices needed to be successful in business, maybe you’ll believe Elon Musk, Mark Cuban, or the CEO of Pepsi who says her intense dedication to her job may have made her a worse parent.

Ouch.

Is starting your business and making it successful the most important thing in your life?

Listen – of course, you’re going to say no. I would say, no.

You will say your spouse, your children, your family, your faith, your health are all more important.

Fair enough. I’ll second that.

However, in the last week, how much time have you spent truly with your spouse? Sleeping and watching TV together while on your phones doesn’t count.

How about with your children? Again, watching TV doesn’t count.

On your health (working out and preparing healthy meals)?
Praying?

Now, how much time did you spend working?

If time is your most important asset, where are you investing it?

If you took your limited time working out, with children, with your spouse, praying, and with family and friends and you had to cut it in half for the next 3-5 years to make your business successful, would you?

What if you had to cut it in half again? (That takes us down to ¼ the amount of time you currently spend on the most important things in life.)

Of course, if your evenings and weekends are spent watching TV, surfing the internet, or posting on social media, then you have some time available.

But the point still stands.

At this stage in your life, can you invest the time needed to make your startup successful?

Recently, a coaching group for budding entrepreneurs was working on accountability partners.

This line of thinking boggles my mind.

How committed are you to success if you need an accountability partner for your business!?

Mentor? Absolutely.
Coach? Sure.
Cheerleader? Awesome.

But someone to hold you accountable to do what’s needed to succeed?
If you need that, why even start?

Sacrifices I made as a young, single start-up founder

  1. I slept on an air mattress for almost a year in an apartment with no furniture.
  2. I charged up a 0% interest credit card to cover living expenses (over $5,000 worth). However, I never paid a dime in interest charges or late fees.
  3. To chase the opportunities, in a span of 10 years I moved from WI to PA to NM to NC, back to NM, back to NC and finally back to PA including a few short stints staying with friends and family in-between.
  4. I worked a lot. Let’s not blow this out of proportion, I’m no Jeffrey Immelt or Marissa Mayer, however, I also rarely went an entire day without working. Some weeks were probably 80 or 100 hours. Most were probably around 60. A bit higher if you include all the books I read to learn how to build a business.
  5. I worked out a lot more than I do now. With a family, I’m just not willing to give up that much time from my family now. These days I work out 4-5 days/week in about 15-20 minute sessions. No more 5 mile runs or 10-mile bike rides.
  6. I didn’t take any income from the business I started for about 3 years. (I lived off of consulting income.)

Could I do all of these things now, again, with a family to support?
Yes.
One way or another, I could scrimp, scrounge, sacrifice, and save to make it work.

More importantly, would I be willing to?
No.

To most, that answer sounds completely and utterly unbelievable.

And if you had asked me that same question 18 months ago, I would have given you a different answer.

As cliche’ as it sounds, having a family changes everything.

Earlier I asked if your business idea is the most important thing in your life because, unless you’re unbelievably lucky and brilliant, it will take precedent in your life if you want to succeed.

Today, with a 17-month old and a wife, the sacrifices to start a business aren’t worth it to me.

Here’s why…

Most mornings I get my son up, get him some milk, change his diaper and get him ready.

Most evenings I play with him, wrestle with him, teach him and just have fun for a few hours. I then bathe him, get him ready for bed, read to him, and snuggle until he falls asleep at which point I put him to bed.

Most weekends I don’t do any work beyond maybe checking some emails. Just typing that out seems strange to me since it was my habit for so long to get “caught up” with work on the weekends.

These days my wife and I make it a priority to spend time with both of our families and do something fun with our son nearly every weekend. (Just this past weekend. for instance, we took him to the PA Trolley Museum to visit Daniel Tiger.)

As I was starting on my entrepreneurial journey, this family schedule would have been impossible.

For me, no business is worth giving that up.

Again, if I had no other options, was unemployed, and needed to put food on the table, I would start a business and make the sacrifices necessary to support my family.

So what are you going to do?

Ask yourself the above questions, discuss them with your spouse, and determine if starting a business at this stage in your life is what’s best for you and your family.

To your success,
Bryan

P.S. If you started a business with a young family and still were able to work a “normal” schedule to spend time with your family, you’re a bit of a unicorn. I’d love to hear from you so please leave a comment.

photo by: joejungmann

4 steps to increasing the value of your business 33%

How to prepare for the death of a small business owner with a “Bus Plan”

When I was a sophomore in college my dad woke me up one morning with a phone call.

“Did you hear?”
“I’m not even awake, hear what?”
“Well… uh…”
My dad never stammers.
I have no idea what I said after that. My body was overwhelmed with confusion, denial and emotion.

It didn’t make any sense.

My best friend since kindergarten’s dad had died. He was in his early 50’s.

He walked outside to get the dog and fell over. His wife was a nurse anesthetis and there was nothing to be done.

My friend called a bit later.
“Did you hear.”
“Yeah, I’m on my way home”
“Ok. Thanks”

I was at college 6 hours from where he and I grew up in the same neighborhood.

My friend’s dad had sold his business a few years prior so his wife, 2 sons in college, and daughter in high school didn’t have to upset their lives to step in to help with it.

Over the last 5 years my business has helped about 70 small businesses scientifically improve their online lead generation with PPC, CRO, and websites. One of our very first customers died unexpectedly a few years ago. His wife had to step in, take over, learn the business, and she eventually sold it.

On a daily basis, small business owners die or get hurt and can’t work.

Ben Feldman, who at his peak sold more insurance by himself than 1500 of the 1800 insurance agencies in America, used to say,

“When you walk out of life, your insurance money walks in for your family.”

His carefully chosen wording helps illustrate how a small business owner can’t shirk his responsibilities to his family, the families of his team, or his customers when he unexpectedly “walks out on life.”

If you’re a small business owner with at least 5 team members, you NEED a “What-if-I-get-hit-by-a-bus-tomorrow” Plan. (Smaller businesses are likely going to dissolve without the owner but one once you have a stable, profitable enterprise, create your plan.)

There are 4 huge benefits to a Bus Plan:

  1. It ensures all the stakeholders in your business are taken care of when you wake up dead one morning.
  2. It increases the value of your business by about 1x multiple.
  3. It frees you up to focus on growth and acquisitions or, if you enjoy working IN your business, it helps you to become more profitable.
  4. It allows you to take a real, I-don’t-have-to-put-out-any-fires-while-out-of-the-office, vacation.

Brad Sugars defines a business as,

“A commercial, profitable enterprise that runs without me.”

Unless you have a “Bus Plan” in place, the business can’t run without you.

Additionally, if you ever need to sell your business, show a broker your bus plan and often the multiple for your business will increase by 1 fold.

In real numbers, if your business generates $150k in cashflow and the industry norm is 2-4x cashflow, you’ll often end up around 3x or $450k for a sale price. However, a bus plan will help push your valuation to the higher end of 4x or $600k.

In other words, executing a solid plan for your business to keep running after you wake up dead can increase its value by 33%.

This is because a bus plan proves that your business isn’t dependent on you which reduces the risk for the buyer and helps her get a more predictable return on her investment in your business.

That, of course, assumes you can even sell your business without a bus plan. Up to 4 out of 5 businesses that go on the market never sell.

It also has the hidden benefit of forcing you to systematize your business like Michael Gerber teaches you how to do in The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It and Sam Carpenter obsesses over in Work the System.

A systematized business allows a new owner to easily learn to run it and then frees him up to focus on growth to get a faster ROI – which makes the business more attractive and valuable.

How to create your Bus Plan

  1. List out everything you do as an owner.
  2. Indicate who can take over each responsibility and what software, tools, or outside vendors they will need to work with for each one.
  3. Prepare emails to each of the following:
    1. Your customers to explain what will happen now.
    2. Your team members to explain that you prepared for this because you wanted to make sure they can continue to support their families and customers.
    3. Your family because they need to understand you prepared for this plan.
  4. Go through a test run.

To save you the hours it took me, add a comment at the bottom and, once I get a few comments, I’ll make my Bus Plan cheat sheet available for you.

Step 3 is the hardest.
There’s something a bit unsettling about writing emails to people as your dead self.

But it’s absolutely necessary because, it forces you to think through what you will want to say to assure them their livelihood and families will continue to be taken care of.

Obviously, to take the time to write out these letters ahead of time demonstrates to your team and customers how much you truly appreciate them.

Your test run will look like this:

  1. Review with your team exactly what their new responsibilities will be. Create the necessary How To’s and instructional videos to train them.
  2. Go off the grid for a week. Let someone else check your emails and voicemail (and hand over your cell phone if it’s business only.) You certainly can’t tell your clients you’re pretending the owner is dead, so allow your team to contact you via your personal cell if there is a true emergency.
  3. Have your team keep track of things they couldn’t do or had a hard time completing and send you a list at the end of the week. Address all of those issues.
  4. Go off the grid for a second week.
  5. Rinse and repeat annually.

Don’t forget to update your Bus Plan annually.
Set a reminder on your calendar or have your annual update coincide with your insurance renewals.

A few quick tips:

  • Review your plan with your accountant and lawyer. Often it may require a buy-sell agreement where a partner, key team members, or a family member will buy your business from your spouse at your death. This requires professional legal and tax planning help.
  • Have adequate insurance. If your family isn’t going to have your income ever again, an insurance policy is crucial. You have car insurance, fire insurance, and health insurance even though you may never total your car, have your house burn down, or get cancer. You will “walk out on life” and you can’t predict when. Get life insurance.
  • Review the plan with your spouse and adult children. No one wants to talk about what will happen when you die, but it’s necessary. You don’t have to like it. You do have to do it.

Creating your Bus Plan may be the quickest way to increase the value of your business, ensure a great vacation, and show your team members and customers how much they mean to you.

To your long and prosperous life,
Bryan

The best way to grow your business without venture capital or outside investments

In our current internet economy, you can flesh out the viability of almost any idea for very little money.

These are the first steps. Get customers. Get revenue. Get profit.

Bill Gates sold DOS before he owned it in the Pirates of Silicon Valley.

Bill Gates sold DOS before he owned it in the Pirates of Silicon Valley.

Your best option is to sell something you don’t have. Yet.

Bill Gates did this in the movie Pirates of Silicon Valley when he sold DOS to IBM before he bought it. Watch the movie. It was brilliant.

When I started my Performance Engine Tuning business, I got my first client and check before I invested a penny in the $2500 oscilloscope I needed to troubleshoot engine sensors.

When I started business coaching, I got my first 2 clients before I had any coaching systems in place. I quickly made them from the systems I had developed at my previous business though, and 3 years later those clients are still with me.

When I launched my internet marketing business, I received my first check to build a website before I knew how to build a website (unless you count that one I built on GeoCities in 1996).

Are you seeing a pattern here?

In all of those instances, I delivered what I promised and more, even though I had nothing to provide for my clients when they first paid me.

The only way to know if you have a good idea is to find someone to pay for it.

Get cash without giving up ownership or taking on debt.

Raise capital without losing any ownership or starting your new business by taking on debt.

If you absolutely need capital to make your idea work, probably the best option for “selling” your idea and finding customers is CrowdSource Funding with websites like KickStarter.com.

CrowdSourcing is brilliant because people give you money before you have a product.

  1. You get money
  2. You prove your idea has a customer base
  3. You retain 100% ownership and control.
  4. You even get some free marketing in the process.

KickStarter lends itself more to product-based businesses where you can provide an easily replicated product to your KickStarter investors.

In some instances you do need cash. Let’s say you have a complicated software product that is hard to “sell” without showing people it’s available.

Then do what ZenPayroll.com did and write some blogs, get some articles written about you, market on Google Adwords and Facebook ads to send people to a landing page where they can opt-in to your email list to be kept up-to-date on your products.

ZenPayroll started doing this before they had a product to sell. I signed up for their email list months ago and look forward to when they have a product that works in the 4 states I employ team members.

Building an email list isn’t nearly as good as getting money out of people, however having an email list with thousands of names on it before launching your product is a huge advantage.

Even authors know that you build your crowd first, through blogging and social media, before you write your book. That way when your book comes out you know it will sell and publishers will be lining up to work with you.

With the cheap 3d printers, you can build, test and sell prototype parts one at a time without expensive manufacturing contracts.

The bottom line is, there are dozens of inexpensive ways to get customers or very interested prospects before you have a product.

The Scaling Trap

Like all of my businesses that I mentioned above, do everything manually first, then once you know their are people willing to pay you, start systematizing, automating, and streamlining so that you can eventually scale.

NEVER scale your business before you have paying customers.

Here are a few other great options for your first business.

  • Start in an incubator. There are hundreds if not thousands of colleges around the country with incubators. These often provide cheap rent and access to professors and other entrepreneurs who can provide you with good advice. It’s also a good way to network with other startups to find new clients.
  • Buy an existing business. Five years after buying an existing business, 80% of them are still around. The reason for this is pretty simple – no one buys unprofitable small businesses. So if you’re buying a business, all you should have to do is “fix” a few things in the business to increase its profitability. If possible, buy a franchise. It’s also easier to get funding to buy an existing business with SBA 7a loans.
  • Grow the business profitably. This is the route I’ve always taken and the one promoted in Rework by Jason Fried. Only grow as fast as you can maintain profitability. This forces you to bootstrap and quickly weed out inefficiencies. The fewer inefficiencies, the more profitable you become, and the easier it is to grow in an ever improving cycle of growth.

How to raise money for your startup

Debt is not inherently bad and, when well-planned, can be very useful.
One of my first businesses was a house I bought in college to rent out rooms to save on my own rent.

For that business, I had to take on debt to buy the home.
It was a great investment and the same can be true for a lot of business debt however not all sources of capital and debt are equal.

Preferred methods of obtaining capital in order of highest to lowest preference:

  1. CrowdSourcing – You get money, retain 100% ownership, have not debt and receive free marketing.
  2. Banks – They generally charge very reasonable interest rates, you still retain 100% ownership, and they don’t tell you how to run your business.
  3. Family and Friends – Be very careful with this as you don’t want to sacrifice valued relationships and you don’t want to invite your friends and family to “dictate” what you should do with your business. Ideally you won’t need this until your 3rd-4th business once you have a proven track record of success and you’ve made most of the dumb mistakes we all inevitably make.
  4. Employee Owned – Employee-owned businesses can provide a great source of cash as well as a highly-committed team.
  5. Venture Capitalists – Once you’ve proven to have a profitable business, have worked out most inefficiencies, and are ready to scale, this can actually be a reasonable option.
  6. Go Public in an IPO – You only do this when you need 10’s or hundreds of millions of dollars. The costs to meet SEC regulations alone will run well over 6 figures annually so this has to be your last resort.

Most people get hyper-focused on one or 2 common ways to grow a business. That tunnel vision comes from a lack of understanding all of your options.

Widen your gaze to put together the best growth and funding plan for your business.

To your business-funding success, Bryan

P.S. My last blog addressed some major downsides of Venture Capital however, I disdain people who point out problems without listing any solutions. Hopefully this article provided you ideas on some better alternatives.

photo by: Tanzen80

Avoid Venture Capital and Outside Investors for your Startup

One of the most exciting days for a startup company is the day they receive money from an investor. The day someone believes in your idea so much they show up with their checkbook. The TV show Shark Tank unabashedly captures the exuberance that comes with that financial backing.

This guy is not your friend.

This guy is not your friend.

However, the opposite should be true…

Instead of popping open champagne in celebration, a lonely evening with a bottle of scotch would be more appropriate. Getting VC money, particularly if your business is pre-profit, is practically a kiss of death.

You have a better chance of winning at craps in Vegas than your company does of succeeding and becoming profitable after your VC check.

Let me clarify that VC money and outside investors, are the same thing. Whether money comes from a major VC company or your father-in-law, outside investment too early is the real problem.

The facts are simple, 75% of venture backed businesses fail according to research by Shikhar Ghosh, a Harvard Business School lecturer.

By comparison, overall only 55% of business startups fail after 5 years. In other words, venture backed businesses are 36% more likely to fail than startups overall in the first 5 years.

So if you’re spending most of your time as a startup seeking out VC funding, you are, statistically speaking, setting yourself up for failure.

Why are so many startups obsessed with outside investments?

The answer is pretty simple. The VC’s want you to be.

Anyone familiar with silicon valley knows of Peter Thiel and how he made his billions on Paypal (a company he co-founded) and Facebook which he bought into in 2004 for $500k in exchange for more than 10% of ownership.

What most people don’t realize is that he’s also invested in over 40 other companies of which you’ve probably never heard of any of them.

This is how venture capitalists work. Even if only 1 out of 4 businesses last, they can still be way ahead of the game. More importantly, they can still win big with an IPO even if the business fails shortly thereafter.

In other words, they don’t much care if your business succeeds.

Why do VC-backed businesses fail at such a high rate?

The Business Genome Project studied over 3200 startups to find out why they fail and their results should be common sense…

The #1 reason 74% of startups fail is premature scaling.

In other words, pre-profit, pre-revenue, or sometimes pre-customer start-ups start hiring and investing in infrastructure.

This is, quite frankly, insane!

Until you can get a sale and a customer, you have no business whatsoever trying to “grow” your business through hiring.

The reason these VC-backed businesses fail is the same reason government is so inefficient. The startup is now playing with someone else’s money.

The founder now no longer feels the pain of losing everything or the need to scrape by on table-scraps when he has $1,000,000 in the bank today after having $0 yesterday.

In the 2 years since my internet lead-generation business started, I’ve had numerous offers from investors that I’ve never accepted for one main reason:

The only thing more money would do for us now is make us less efficient more quickly.

This is true of every business in the early stages.
Even the 25% of VC-backed businesses that succeed are made less efficient with large checks.

As a start-up, you lose either way.

If you get VC money, most likely you’re going to fail. If you don’t fail, then you just gave up a very sizable chunk of your business and control.

The whole concept that to be successful at business you must take risks is ridiculous. The greatest entrepreneurs rarely take major risks and any risks they take are painstakingly calculated. The Heath brothers discuss this in their free Kindle book, The Myth of the Garage.

High risk examples of VC-backed businesses

If you’re still looking forward to that first VC check, let me give you a few examples of businesses that went that route.

  • SnapChat – Valued at $4 billion dollars with $0 in revenue and no plans for generating any revenue.
  • 4Square – Valued at $600 million dollars with $2 million in revenue.
  • Living Social – After being one of the hottest tech startups in the country, it posted a $566 million 3rd quarter loss in October 2012 and I wouldn’t bet on it being around in 10 years.
  • Groupon – Which IPOed at over $26 to drop all the way to $2.60 only to now start rebounding back to $10.65 while still losing $.15/share.
  • Yodle – Though this business is currently profitable and will probably stay that way, they took a major gamble when they took a profitable start-up with $700k in revenue and leveraged it until it wasn’t profitable again until they had over $100 million in revenue. That’s an extremely large risk to take. I do commend them, however, for proving the business model first.
  • Zynga – IPOed in December 2011 around $9.50 before being hyped up to $14.69/share and since tanking to $2.09 and hovering between $2.60 and $4 for the last 52 weeks. Not surprisingly, it’s still not profitable.

Even when you take a group of industry veterans who should know better and put them together to make a “super team”, the injection of too much money too quickly inevitably causes inefficiency and often failure as we saw in the case of BlueGlass SEO.

This list could go on all day. The number of great business ideas and innovations that have been harmed by too much money too early is far larger than those helped.

The concept of riding your idea to change the world a la Mark Zuckerberg is so strong, here’s a list of companies who turned down $100 million dollar buyout offers including Viddy, 4Square, Qwiki and Path.

Keep in mind, many of the VC’s who invested early in the businesses above made a killing when those companies went public or simply sought additional rounds of funding. They made their money on the hype of the IPOs not on the profits of the businesses.

The point is, it’s good business for the VC’s but rarely good business for the businesses themselves.

Private Companies with Higher Profit than their Peers

Here are a few examples of how growing profitably has created great companies.

  • Chick Fil-A – $400 million in revenue with no outside capital investments (privately owned)
  • Leo Burnett – $600 million in revenue with no outside capital investments (privately owned)
  • State Farm – no outside capital investments and now has over 18,000 agents.
  • Northwestern Mutual – privately owned and the largest provider of individual direct life insurance in the US

All of these businesses were case studies from the book The Loyalty Effect.

What’s most impressive is that the author didn’t seek out privately owned companies with no outside investments when searching for the most profitable businesses within an industry.

Instead, once he found the most profitable businesses in an industry he realized those were a few things they had in common.

He then examined these businesses and their industries and learned that avoiding outside investments was a major factor in their successes.

Lessons from VC’s

As of the end of 2012:
Apple’s Market Cap was $392BN on Revenue of $156.5 BN for a multiple of 2.5x revenue
Amazon’s Market Cap was $115BN on Revenue of $61BN for a multiple of 1.88x revenue
Netflix’s Market Cap was $12BN on Revenue of $3.6BN for a multiple of 3.33x revenue
Facebook’s Market Cap was $64BN on Revenue of $5.1BN for a multiple of 12.5x revenue
Recently 4Square’s Market Valuation was $600 million on Revenue of $2M for a multiple of 300x revenue

In other words, to match the revenue multiplier of Facebook, 4Square will have to grow its revenue by 2,400% to $48 million.

Maybe 4Square has something up its sleeve to grow revenues 24 fold in the next few years… After all, these VC guys have made billions so they know what they are doing.

Not exactly.

It’s a gamble. A big one. One that’s reliant on public opinion more than actual business fundamentals. That’s what VCs bank on. That’s why Thiel quickly sold the majority of his shares when Facebook went public while making $1 billion dollars.

In other words, early-stage VC’s couldn’t care less if most companies they’ve invested in fail. All they need is for the company to go public to cash out. Even then they only need a small percentage of their investments to go public to make money.

Take the story Tony Hsieh told in his book Delivering Happiness.

After making $30 million on his first web venture, he became a VC and lost almost all of his money by investing in around 30 different ideas. He finally decided to take Zappos over himself and pour in everything he had left in terms of time, money, and passion.

Considering he grew Zappos to over $1 billion in revenue before selling to Amazon, you could say that one paid off. But he was extremely close to losing everything.

He didn’t have to drive himself to the brink of bankruptcy (something he seemed to learn as well) to build a profitable business.

Most ideas don’t need millions of dollars prior to turning a profit to prove a concept. That’s one thing that made Zappos unique. The founder who came to Hsieh with the idea actually proved that it worked by creating his own crude website, selling shoes, and then going down to local shoe retailers to buy the shoes and ship them off.

That method wasn’t profitable but it did PROVE that people would indeed buy shoes online. Once you know that, it’s a lot easier to determine how buying shoes at wholesale, eliminating expensive store fronts, and utilizing an efficient nationwide delivery system can make internet sales of shoes highly profitable.

Considering Hsieh seems to have forced out the original founder (a topic he doesn’t explain in his book) that’s also more proof that VC’s are rarely your friend.

Unfortunately, the rare stories of companies like Instagram and 4Square, along with Shark Tank and the Inc 500, do not put the focus on how to grow a business profitably. They put the focus on securing funding, top-line growth, and cashing out.

That’s how the VC and early-stage outside investors like it.

Unfortunately, that’s very rarely what’s best for your startup.

To your startup success, Bryan

P.S. People who point out problems without providing solutions rarely fully understand the issue. Hopefully my next blog on funding your startup will provide you ideas on some better alternatives to venture capital.

Want to dramatically increase the value of your business in 4 weeks?

Go on a 4-week vacation!

Seriously… Until you, the owner, can take a 4-week vacation, your business is still too dependent on you and therefore is potentially worth 1-2 multiples of your cashflow LESS than if you take that vacation!

As a business broker and business coach I have a very unique perspective on small business ownership… I get to see businesses that are just getting started, decades old and will be run by the same owner for a few more decades, and businesses in the process of being sold to a new owner. No matter where your business is, it is never too early to have a plan to make your business NOT dependent on you, the owner. (Can you see where I’m going with the mandatory vacations, yet?)

There are 3 main reasons for this:

  1. You’ll be more satisfied because you’ll have to work less.
  2. Your team will be more effective since they’ll have ownership of their jobs.
  3. Your business will be worth more when it is time to sell.

Unfortunately most small businesses are heavily dependent on the owner. The owner is needed to sell, service, or deliver the products or services of the business OR the customers and team expect the owner to make important decisions and solve problems. If this sounds like you, let me hit you right between the eyes; you have a BIG problem that you need to start changing right away. If you wait until you’re ready to sell or retire to start transitioning yourself out of your business, then your selling price will be lower. Trust me, I know this from direct experience selling small businesses.

Now that you’re ready to start engineering a business that runs without you, here are the first 3 steps.

  1. Stop using the term “owner” – Throw away every business card that says this. Train yourself to never respond as “owner” when someone asks. If your sales pitch includes, “and you get to deal directly with the owner if there’s a problem,” immediately stop saying that. Give yourself a new title like Team Leader, General Manager, President, or CEO and NEVER use the term owner again.
  2. Empower your employees to take ownership – If your employees know you’re the one to solve all problems, you need to start changing that immediately. Empower them to make decisions. Some decisions will be good and some will not. In the long run you’ll have less on your plate, your team will feel more involved, and your business will be more sellable. Utilize procedures, scripts, and checklists to help your team members feel more confident with their power and to make sure everyone colors inside the lines.
  3. Train your customers to not rely on you – Believe it or not, your customers will do whatever you train them to do. If your customers are trained to call and ask directly for you (or the owner), you need to stop that right away. No one should ever need to talk to the owner because the Team Leader (or whatever title you choose) or someone else on the team should be able to take care of any problem. Ultimately you’ll replace yourself with a different Team Leader to completely transition yourself out of the business. At that point your customers will be trained to ask for the Team Leader, not the owner or you personally. In the mean time, train your employees to ask everyone, “What did you need help with today?” before transferring a call to you. If necessary, have your staff tell the customer, “Bryan will be tied up all afternoon. Give me a minute to direct you to someone else who can help.” If he still insists, when you do call him back, apologize for the delay and let him know the name of the person on your staff who can help him more quickly next time and that she will be expecting his call. For a big account, have your employee call the customer and introduce herself.

In my experience, the BEST way to accomplish #2 and #3 above is to take regular vacations. It forces your team to get used to solving problems on their own. More importantly, it forces you to NOT solve every problem. We entrepreneurs always want things done “our way” however if you want to build a sellable business, it will be worth more if it can run without you.

One last suggestion. After you return from each vacation, make notes on exactly what was waiting for you when you returned. Then humanize or systematize every item on the list so someone else can take care of that task the next time you leave.

To your vacationing success, Bryan

P.S. If you’re not the owner of a business but are instead the current GM or Team Leader this blog applies to you, too. Use this information to start transitioning “lower level” work away from you to other people on your staff. This will allow you to focus more on growing the business.

P.P.S. If you’re considering selling your business in the next 5 years, sign-up for my email course to learn exactly what you need to do to prepare your business to maximize your sale price.

You’re a business owner – you did not buy yourself a job!

This is it. This is the most important concept to grasp as a business owner… This colors and influences every decision you make in your business.

Brad Sugars has another way of saying this. His definition of a business is, “A commercial, profitable enterprise that works without me.” Did you read that last part? Without Me!

In other words, if your business requires you then it’s not a business… You have just bought or created a job for yourself. See the difference? Michael Gerber in The E-Myth Revisited refers to this as the owner being the Technician.

Why is it so crucial that your business can run without you? There are hundreds of reasons but I’ll give you 3.

  1. It’s worth more – A business that is sold including a trained, experienced manager is always worth more than one that doesn’t have one. Consider there are basically 2 types of people who buy business. Investors buy businesses to make a return on their cash investment and these guys REQUIRE a trained manager in place. Entrepreneurs often buy businesses to make a return on their money but to also give themselves something to do. In other words, they want to be the Team Leader or CEO. However, if you have one of these people looking to buy your business how hard do you think it’s going to be to convince them that they can buy the business, get the return they want, AND work on what they want when they want? Worst-case scenario they can easily remove the existing manager if they really want to, however most people won’t do that.
  2. You’ll enjoy it more – All business owners want the same thing – A business that predictably puts money in their bank account with the freedom to choose when they work and what they do. The only way that dream is possible is if you have a go-to guy or gal running the operations every day whether you’re there or not. Now if you like actually doing the plumbing for your plumbing business or tax returns for your accounting business who is going to tell you not to? No one. You’re the owner. You can still choose what you want to do when you have someone else in charge of putting out the fires.
  3. The business will be better for it – If your job and responsibility every day is to work ON your business and not IN it, what do you think is going to happen to your business? Let me tell you. It’s going to get better. When you can start spending your time working on improving your referral system, customer experience, team building and retention, and shopping for better vendors (you know, all those things you don’t have time for now) isn’t it obvious that the business is going to be better?

So if you’re the technician in your business and there’s is just no way you’ll be able to leave for 3 months on a European vacation and return to a healthy business what are you going to do?

You basically have 2 options:

  1. Teach yourself everything you possibly can about building a business to run without you. In other words, learn about business. Not your specific business or industry or niche. Just about building businesses in general. To do this, you’ll realistically need to read about a hundred books and put into action all the things you learn from them. Start with the books on my Entrepreneur Books list. You’ll also want to start learning from owners whose businesses do run without them and start attending seminars and webinars to help you learn how to maximize 3 essential parts to every successful business – Sales/Marketing, Finance/Accounting, and Service/Operations. If you’re this kind of hands-on, self-taught person, then by all means take this route. This is obviously what I have done and continue to do. It will literally take you several years and in the process you may realize that your business just isn’t capable of that vision and decide to sell it and look for one that can accomplish your goals.
  2. Work with a Business Engineer to help get you on the fast-track. Enlist the help of someone who has already done the items in number 1 with one or more businesses and who can quickly evaluate the status of your business and help you put together the plan to move it to the next level. If you’re located anywhere in the US or Canada and have Internet access and a phone line, we can help. Contact me to learn more about the process. You can also read my blog about why business coaches and consultants won’t work to get a better idea of what Business Engineering is all about.

So what are you doing to do today and this week to take that step from a job owner to a business owner? Don’t put it off. If nothing else, email me saying you enjoyed the read and would like to try either option 1 or 2 above and would like to know where to start.

To your business-owning success, Bryan

Your business DOES need an exit strategy!

In the last few days I read an article on Entrepreneur.com and the book Rework where people have said buying or starting a business with the idea of selling it is horrible. They gave various reasons why this disgraceful practice will hurt your business including it leads to a lot of bad things, you won’t focus on customers, and you will be too distracted by cashing out to do a good job.

Respectfully, I disagree with Jason Fried, David Heinenmeier Hansson, and Michael Mothners. Firstly, it seems obvious that all of them have only been involved in growing or starting their own businesses so I’d suggest their experiences in different types of businesses with different owners is a bit limited. For instance, Fried and Hansson suggest that business owners looking to sell are generally trying to get acquired. Huh? In the 100 plus business owners I’ve worked with I don’t recall ever hearing about someone wanting to get acquired. That’s just a bit of the authors projecting their experience as a software company and of the software industry overall to all businesses and it just isn’t that way for businesses outside the technology realm. Mothners also owns a technology company so I’m guessing his disdain for exit strategies is based on the idea of companies popping up just to get bought out by Microsoft or Google.

In the real world of brick-and-mortar businesses few owners have that vision. As a matter of fact, most owners have no idea when they should sell their business, how to sell it, or even what it’s worth. What’s worse is few appreciate that if they’re working IN the business everyday instead of ON it their business is worth significantly less once they stop working there. My point is that why make a statement such as, “building a business to sell it is a bad idea” when the negative situations that they are concerned with are probably less than 1/10th of 1% of the total transactions and businesses? There are nearly 250,000 businesses sold in the US each year and that only represents about 20% of the total businesses listed. In other words, only 1 in 5 businesses grossing under $10 million/year will sell. It doesn’t sound to me like building to sell is the problem or you think more people would be able to actually find a buyer.

So what are the real problems small business owners face?

  1. They don’t know how to build a business. In Built to Last: Successful Habits of Visionary Companies, Jim Collins discovered that businesses that remain profitable for decades (even centuries) remain that way because they are great BUSINESSES not because they have great products. Most business owners focus on delivering a certain product or service without figuring out how to build a great business.
  2. They don’t know how to distance themselves from the business. In other words, they make the business completely dependent on themselves. If they’re not there working, selling, servicing or whatever, the business isn’t running. That means when they go to sell the business it’ll be worth a whole lot less without them there. Not only that, the only people interested in buying it will be buyers who also want to work in the business not investors. Working buyers generally don’t have as much cash as an investor looking for a steady return on his money.
  3. They don’t know what their business is worth or how to increase its value. The result of that is they always want more money for it than anyone else is willing to pay.

So what’s the solution to fix all of these real problems that I would estimate nearly 80% of business owners have? An exit strategy, of course. Here’s why an exit strategy is so important:

  1. It forces the owner to look at how to make the business great. Few people (myself excluded) want to buy a business that isn’t run well. They generally want a business with a strong, steady history of cashflow with minimal headaches and issues. If your primary focus is simply to grow and work in your business it’s very hard to step back and look at the big picture of your business being a finished product that runs so smoothly someone else would love to own it.
  2. Owners will need to figure out how to remove themselves from the business. You can’t sell the business if you’re required to run it, so an exit strategy will help you focus on working ON the business more than IN it.
  3. They will have to come up with a reasonable value for their business. Most business owners have an idea of how much they’d like to get for their business when they sell it. Unfortunately, that number doesn’t usually correlate with what it’s actually worth. With an exit strategy you need to look at a reasonable value for your business today and then set a game plan for increasing it’s value to the point where you can sell it for what you want. No exit strategy and chances are you’ll never really look at it’s value. This is very sad because most business owners only sell when they’re ready to retire. In essence, their business is their retirement plan. So if they go to sell and find out their business is only worth half of what they thought, that makes for either a tough retirement or a lot more years of work.
  4. It forces a time table for the 3 items above. Without an exit strategy with a specific time frame, few owners will ever do the things above even if they know they should. “There’s always tomorrow, or next month or next year to get that done… I have customers to take care of today.”
  5. Buying, building and selling businesses is generally a much faster system for creating wealth than buying, building and keeping. I’ve explained this in previous blogs so I won’t address it again here. This philosophy is probably what is thought of as a “bad idea” however, in my experience, this generally greatly benefits the businesses being acquired and resold. Why? Because people who are doing this understand how to make a business better. Not just a shell game of cleaning up the books, but a business that takes care of its customers, employees, vendors and owners better. Truly an improved business comes out the other end when an experienced person takes over to increase the value of a business to sell. I’ve written a 5-part series of blogs outlining how someone can go about buying a business and quickly improving it.

In summary, be wary of advice from business experts who have only owned or run 1 business or in a single industry and then attempt to extrapolate their experiences and lessons to all businesses in all industries. The real world, where over 5 million businesses exist in the US, is quite a vast landscape. More importantly, if you’re ever looking to retire or sell your business, you need to work on an exit strategy immediately. Make it a priority to get done this week! Contact me if you have any questions on how to structure a reasonable plan.

To your successful exit strategy, Bryan

Business Valuation – Public, Private, and Internet Businesses

As I’m reading Adam Penenberg’s book Viral Loop: From Facebook to Twitter, How Today’s Smartest Businesses Grow Themselves, 2 main themes have caught my attention. Firstly, the power and consistency of creating a viral loop for your business. Secondly, though the item I’m blogging about first, is how differently businesses can be valued.

I’ve written regularly about valuing small businesses based on the mantra “it’s all about profits”, and yet have learned of dozen’s of businesses worth hundreds of millions to billions of dollars with little to no profits to back that up. Penenberg references HotorNot, Hotmail, Paypal, Ebay, Bebo (even though they didn’t use their venture capital money), Myspace, Facebook, BirthdayAlarm, Netscape, Ning, Twitter and others that almost universally had substantial losses each month when venture capitalists started investing millions or 10’s of millions of dollars into these businesses. A good friend of mine, and MBA student, had argued with me many times that business is all about getting customers. I always countered that you can have a million customers but if you lose $1/month on each one, that’s not a good business. It seems, however, that both of us weren’t looking at the entire scope of business.

So when we value businesses, there are basically 3 primary groupings to consider:

  1. Small, closely-held businesses (which is what I most often write about)
  2. Internet Businesses
  3. Public Companies

In small, closely-held businesses, I am right. It’s all about profits and your business should be valued on that. If you’re buying one of theses businesses and it has a loss, you may just want to offer to take it off of the seller’s hands for them so they don’t continue to incur the losses. These are your every day “main-street” (pardon the cliche’) businesses that you find for sale on Bizbuysell.com and other websites. Theses businesses are generally your first step toward wealth creation.

Internet Businesses open up an entirely other ball of wax. These businesses rarely have any income and certainly no profits early on in their life-cycle, however manage to attract anywhere from hundreds of thousands to hundreds of millions of dollars in investment capital before turning a profit. Does that mean it’s not about profits for these businesses and that’s not their top goal? Of course not. That’s just crazy talk. The difference is simply this. These investors appreciate that their is profit potential when you’ve captured the daily attention of hundreds of thousands or millions of internet users. One particular story that caught my attention was the start of Hotmail. Initially Hotmail had no users, no website (didn’t even have the hotmail.com domain name) but they had an idea and managed to raise $300,000 for a 15% stake in a company with no customers or income or profits, in return for being the first company to come to market with webmail. About 2 years later, that initial $300,000 investment from the venture capital firm was turned into $60 million dollars as Hotmail was sold to Microsoft for $400 million dollars. Without going into the details, the power of a viral business model made this all possible. So our question is, how did the venture capital firm decide that a 15% stake in JavaSoft (which eventually became Hotmail) was worth $300,000? Negotiating. The only thing JavaSoft had was an idea. Through negotiating they decided the idea was worth $2 million and so 15% was worth $300,000. For the dozen’s of businesses I’ve mentioned above that have followed a similar trajectory, obviously there are hundreds that failed. Beyond that, Microsoft, has certainly profited far more than their original $400 million investment in Hotmail in the last 10 years so don’t ever lose site of the importance of profits. 😉

Public Companies can potentially bring another set of rules. Firstly, you can’t buy a public company for less than it’s stock is worth. In other words, if a stock is trading for $10 and there are 100,000 outstanding shares, the business is worth $1 million dollars ($10 x 100,000) and you can’t pay less for it. In theory, the company’s stock price should be based on it’s profits (generally called earnings) however many public companies have price to earnings values ranging from 5:1 to 50:1 or higher. This simply means that the business is “worth” anywhere from 5 to 50 times more than its profits. If a business is currently losing money, it’s price to earnings ratio effectively doesn’t exist. So, for instance, if the business above had $100,000 in profits, it’s PE or Price to Earnings ratio would be $1,000,000 to $100,000 or 10:1. Make sense? So the natural question is, what determines a business’ stock price? And the answer to a great degree is the same as with an Internet Business. It’s based a lot on speculation. More specifically, if a bunch of people think a business is a great business, and so buy a lot of stock, the price of that stock will go up regardless of whether the business has profits or not. In theory, over the long-term the stock price will match the actual value of the company which is how guys like Warren Buffet have made billions investing in companies that are undervalued.

So what does this mean to us? If you have no profits but can convince a bunch of people you have a great business anyway, you can make a lot of money. 😀

The reality is actually, if you can convince buyers, venture capitalists, or investors that your unprofitable business has the potential to return remarkable profits in the future, you may just be able to throw EBIDTA out the window and value your business on whatever feels right at the  moment. In other words, no matter where or what your business is, your business is worth whatever you can convince someone to pay for it.

To your success, Bryan

P.S. If you’re looking for a real-life argument between a small business “profit is king” entrepreneur and a “customers are king” large business builder, check out Perry Marshall’s blog.

How to fix your business FAST – Part 5 – Build Recurring Revenue and Prioritize

There are 3 reasons to build recurring revenue to fix your business:

  1. It can generate immediate cash.
  2. It will generate consistent cash over time.
  3. It will increase the value of your business if you’re looking to sell.

Since your business is struggling, building recurring revenue by offering payment plans for your equipment and services is not what we’re focusing on right now. At the moment, we need to generate cash today with little up-front investment, which I covered in detail in my blog on this topic. For that reason I won’t spend any more time on it again. Since August 2009, my business has created an additional $314/month in recurring revenue. That doesn’t sound like a lot (and it certainly isn’t considering our potential), however we’re just starting this program, everyone is still learning how to sell it, and our up-front costs, for a predictable $3768/year, are very close to nothing. Our goal is to have $500/month by 2010 and $3000/month by 2011.

In reality, the idea behind building recurring revenue and improving your sales and marketing is the same. Your goal at these last 2 steps is to develop a way to create consistent cashflow. Whether that means you need to sell something new to your customer again and again, or you need to bring in new customers regularly, a great sales and marketing system will generate predictable income for your business. I would venture to suggest that if you had a sales system in place during boom times, you wouldn’t have nearly the problems you do now in a slow economy.

So let’s summarize once again what it takes to fix any business in trouble (and though I write passionately for small businesses, nearly everything can be applied to Fortune 500 companies):

  1. Change yourself – By making a commitment to do so, particularly by working ON your business instead of IN it, and making by making lists.
  2. Know your numbers – If you don’t know where you are, you have know idea where your problems lie and can’t develop a plan of attack to fix them.
  3. Cut Costs – As drastically as necessary based on your current circumstances.
  4. Improve Efficiency and Productivity – Since your business is not doing well, your profit per person is obviously lower than it needs to be for you to succeed.
  5. Improve Marketing and Sales – Though this is number 5, you need to work on it along with the rest to make sure you always have money coming in.
  6. Build Recurring Revenue – Make this a priority. It can help you through the next tough time.

Several times I’ve mentioned the importance of lists, systems, and procedures. These items are not just for your team members, they’re for you (and me). You need your checklist to fix the weak links in your business systematically without losing focus. You also need a daily schedule to block off your time for each of the 6 items above. You literally need to block off time for each one without any phone calls, emails, door knocks or other interruptions.

My final bit of advice is 3-part:

  1. Steal the best ideas you can. This can be from your competitors, other similar business, businesses you see on TV, from reading books, asking people who are doing well, taking classes, or almost any other business related source. Granted, there are a lot of people who don’t provide much “meat and potatoes” advice, however when you find a source that does, learn as much as you can. As I like to say, “It’s always better to learn from others’ successes than your own mistakes.”
  2. Apply the pareto principle. 20% of what I’ve covered in the last 5 blogs will give you 80% of the results. The trick is determining which 20%, right? Well if you know your numbers this isn’t that tricky. Your numbers will tell you where you have the greatest potential for improvement. This is how you will prioritize everything.
  3. Know when to cut your losses and move on. If you’ve legitimately done almost everything we’ve reviewed over the last 5 blogs and you’re seeing little to no improvement, you need to move on. Don’t be the guy who holds onto GM’s stock thinking “they’ll never go bankrupt.” Salvage what you can and sell either the whole business or the assets and move to the next project. No amount of money can ever buy you more time, so if your time isn’t being invested in a business that’s moving forward and making your life better, you need to get out of that business.

In less than 5,000 words we’ve reviewed literally dozens of directly applicable things you can work on today to improve your business. Take action and make the improvements.

To your success, Bryan

P.S. If you’re looking for a business to buy, find one that does very few of the things reviewed in the last 5 blogs yet is still making money.

How to fix your business FAST – Part 2 – Know your numbers!

The world lives and dies by numbers. Granted I am an engineer by education so I may be a little bias…

Even more importantly, the world gets answers to questions by the correct numbers. If you’re looking at the wrong numbers, you’re never getting answers to your questions. Let me give you a quick analogy. In the world of internal combustion engine building we’re all looking for a few major numbers – namely horsepower and torque. So we hook an engine up to a dynamometer (a device that measures the power output of an engine) and now we know the horsepower and torque numbers. So what? How do I improve those? Well to do that you have to look at a lot of other numbers such as bore and stroke, number of cylinders, 2 or 4-strokes per cycle, manifold pressure, air-to-fuel ratios, cam lift and duration, ignition timing… And the list goes on and on and on… Without knowing how that engine is currently configured, I can’t possibly tell you what to “fix” to help it make more power.

Your business has 3 “big” numbers, they are # of customers, revenue and profit.  Those are your horsepower and torque. All they tell you is where you’re at right at this moment. They don’t tell me how we got there or how we’re going to make more power (profit) the next time around. Even if you don’t know a single thing about engines, I’m hoping that analogy makes sense. The bottom line is, you have to know your numbers and they have to be the CORRECT numbers.

Let’s break your numbers down into a few basic categories (you’ll notice these are the same as I reference when talking about the 3 leaders every business needs):

  1. Finance/Accounting
  2. Sales/Marketing
  3. Service/Operations

Finance/Accounting – These are the numbers you get from your bookkeeper.

  1. Profit & Loss
  2. Balance Sheet
  3. Current Receivables (along with the aging)
  4. Current Payables (along with the aging)
  5. Cash in the bank

These are the numbers that provide questions, but no answers. Your bookkeeper only knows enough to start asking a few questions. Things like,

  • “I see you spent $40,000 last year on marketing, what was your return on that?”
  • “Your cell phone bills average $115/person, have you shopped around for a cheaper plan?”
  • “You have $6,000/year in Meals & Entertainment, is that necessary or can that be cut back?”
  • “It appears that sales are down 20% but costs are only down 10%, why is that?”
  • “15% of your receivables are more than 60 days past due, what are you doing to collect money?”

As you can see, none of the reports under Finance/Accounting provide any answers except maybe to the question, “Do we have enough money to cover next payroll?” That doesn’t mean we don’t look at these numbers because this is where we measure the results. If we add a turbocharger to an engine, ultimately we want to see that reflected in higher horsepower and torque. The same is true for your business.

To start answering the questions about why your business has less customers, less revenues, and less profits, you need to use Brad Sugar’s business chassis. Buy his book Instant Cashflow, learn the chassis, and use it. You can also learn about the business chassis on Brad’s blog.

Sales/Marketing – Now we’re getting into the fun stuff. Here’s a quick list of the numbers you should know in this realm:

  1. Number of New Leads (daily or weekly, though some establishments will even look at this by the hour of day)
  2. Conversion Rate (i.e. the % of leads who become customers)
  3. Number of New Customers (how many people have bought from you?)
  4. Average Dollar Sale (revenue/total # of transactions)
  5. Average # of Times a Customer Purchases from you Each Year (total # of transactions/total number of customers)
  6. Cost per Lead (for each marketing project)
  7. Cost per Sale (for each marketing project)

Do you see where we’re going with this? If our sales are down, now I can pinpoint if it’s because we’re getting less leads, converting less leads to customers, selling a lower dollar amount per transaction, and/or because our customers aren’t coming back as often. Now we’re getting somewhere! With these numbers you’ll even be able to pinpoint that you’re getting less leads because that radio ad you started 6 months ago is no longer making the phone ring. In the next few blogs, when I get to the step about Improving Marketing and Sales, we’ll look at specific ways to improve each of the numbers above.

Service/Operations – This is your back-end. Once you’ve sold a product, this is how you deliver it, service it, restock inventory, order more inventory, schedule service, and everything else that’s in essence “behind the scenes”. The important numbers for Service/Operations can vary quite a bit from industry to industry however the concepts are the same so make the proper adjustments for your industry.

  1. Profit per income generating person – this could be per plumber, electrician, waitress, sales associate, barista or anything else. If a person on your team has the ability to generate income, you need to know this number.
  2. Income per income generating person – this is important because often these individuals have more control over the income they generate than the costs they incur. That doesn’t mean their choices don’t affect the costs of the business, I’m just saying that a plumber can’t much affect the cost of gas or the distance to his job or the markup for parts or the hourly rate.
  3. Turn-over – how long does it take between buying something for inventory and selling it. Car dealerships look at “average days on lot”, retail stores look at “average day on shelves”, service-based businesses might look at “number of days from inquiry to finished service.”
  4. Profit-margins – In other words, the mark-up of each product or service. If you’re a service-based business you need to determine the cost/hour for your billable people to determine your profit-margins.
  5. Customer Complaints – You might be surprised how close your customer complaints as a % of customers served mimics your net profits.
  6. Uncompleted Work – For retail or restaurant style businesses you don’t really have an equivalent for this. People walk into your business, they buy something, you provide it immediately, and your work is done. For service-based businesses, however, this information is crucial. If work isn’t getting done, or you’re getting behind, or customers aren’t being notified of delays, you’re going to have problems. You need to know how many outstanding work orders, quotes, and return phone calls are out there so they don’t ever slip through the cracks.
  7. Free Work – This means you screwed up an order and gave someone a free meal, or a free hour of labor, or a free part, or a free legal consultation, or you had to go back to their home or business to fix a problem you didn’t fix the first time. You screwed up and had to make amends and the cheapest way to do so was to do it for free.
  8. Daily, Weekly, and Monthly Break-Even – In other words, do you know exactly how much you need to sell today, this week, and this month to break-even. Some businesses will even break this down to per shift if there are multiple shifts within a day.
  9. Lost Customers – Since my blogs have talked quite a bit about recurring revenue, you need to have a very close watch over your recurring revenue customers. If one of them calls to cancel services, you better have someone trained to try and save that account. This is almost impossible to track if you have a retail style business.

Those are your numbers. Obviously there can be more, however those are the most universal and the ones I’d look at for just about every business from a law firm to a candy store to a hospital.

To your “number-knowing” success, Bryan

P.S. If you’re wondering how you track all of these numbers, the simple answer is with industry-specific software. If you don’t have any, make it a priority to purchase or lease some right away.