Partner Gerry O’Reilly continues his informative series of e-zines aimed at helping you increase the value of your business. These regular emails discuss a range of topics and learnings from business-owners who, through applying some simple principles, have achieved lasting value for themselves and their businesses.
In this update Gerry talks about how a recurring income model can transform the value of your business. And, for those that are looking to realise the value of their business, Gerry looks at four traps to avoid when selling your company.
Recurring revenues drive lasting value
Laura Steward’s company, Guardian Angel, had $400,000 in annual revenue when she called in a valuation consultant to help her put a price on her business. She was disappointed to learn her company was worth less than fifty percent of one year’s sales because she had no recurring revenue and what sales she did have were dependent on her personally.
Steward set about transforming her business into a more valuable company. She made three bold moves.
1. Angel Watch
The first thing Steward did was to design a monthly program called Angel Watch, which offered her business clients ongoing protection from technology problems. She offered customers ongoing remote monitoring of their networks, pre-emptive virus protection and staff on call if there was ever a problem.
Steward calculated what individual clients had spent with her firm over the most recent 12-month period, including the cost of their company’s downtime. Based off those numbers, she then pitched the Angel Watch subscription as a cost saving option to her customers.
90% of her customers switched from hourly billing to the Angel Watch program.
2. Doubling rates
Next Steward doubled her personal consulting rates. That way, when one of the customers who decided not to opt into Angel Watch called her firm, they were quoted one rate for a technician’s time or twice the price to have Steward herself. Not surprisingly, most customers opted for the cheaper option and others chose to re-consider their decision not to sign up for Angel Watch.
3. Survivor clause
Steward also credits a small legal manoeuvre for further driving up the value of her business. She included a “survivor clause” in her Angel Watch contracts, which stipulated that the obligations of the agreement would “survive” a change of ownership of her company.
Steward went on to successfully sell her business at a price that was more than four times the original valuation she had received just two years prior to launching Angel Watch.
The Lesson: Building a recurring revenue model for sales that is less reliant on your daily input, will ensure predictable future revenue streams and maximise your company value.
Four traps to avoid when selling your company
Selling your business is a painful process. Virtually all business owners dislike due diligence, yet most professional acquirers will have a checklist of questions they need answered if they’re considering buying your company. They will want answers to questions like:
- When does your lease expire and what are the terms?
- Do you have consistent, signed, up-to-date contracts with your customers and employees?
- Are your ideas, products and processes protected by patent or trademark?
- What are the loan covenants on your credit agreements?
- How are your receivables? Do you have any late payers or deadbeat customers?
- Do you have any litigation pending?
In addition to these objective questions, they’ll also try to get a subjective sense of your business, and, in particular, how dependent it is on your involvement. This can involve the buyer doing some investigative work and often requires a potential buyer to use a number of tricks of the trade, such as:
Trick 1: Juggling calendars
By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers.
If you can’t accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.
Trick 2: Checking to see if your business is vision-impaired
An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, they may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.
Trick 3: Asking your customers why they do business with you
A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and, therefore, will expect to hear good things. However, the customers may be asked a question like “Why do you do business with these guys?” The acquirer is trying to figure out where your customers’ loyalties lie. If your customers answer by describing the benefits of your product, service or company in general, that’s good. If they respond by explaining how much they like you personally, that’s bad.
Trick 4: Mystery shopping
Acquirers often conduct their first bit of research behind your back before you even know they are interested in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers.
Make sure the experience your company offers a stranger is tight and consistent, and try to avoid personally being involved in finding or serving brand-new customers. If any potential acquirers see you personally as the key to wooing new customers, they’ll be concerned business will dry up when you leave.
The Lesson: Selling a business requires careful planning and an objective eye, which can be a challenge for any busy owners that are personally involved. Find a trusted advisor who can put themselves in the position of potential buyer and stress test the business.
Learn more about how Crowe Horwath can help you build lasting value in your business: