Tag Archives: relationship building

Six Power Ratios to Start Tracking Now

Republished with permission from Built to Sell Inc.

Doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth, but by the infant mortality rate – a ratio of the number of births to deaths.

Similarly, baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base – as a percentage of the number of times they get the chance to try.

Acquirers also like tracking ratios, and the more ratios you can provide a potential buyer, the more comfortable they will become with the idea of buying your business.

Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power.

If you’re planning to sell your company one day, here’s a list of six ratios to start tracking in your business now:

Employees per square foot

By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designed your space. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee.

Ratio of promoters and detractors

Fred Reichheld and his colleagues at Bain & Company and Satmetrix developed the Net Promoter Score® methodology.[1] It is based on asking customers a single question that is predictive of both repurchase and referral. Here’s how it works: survey your customers and ask them the question, “On a scale of 0 to 10, how likely are you to recommend <insert your company name> to a friend or colleague?” Figure out what percentage of the people surveyed give you a 9 or 10, and label that your ratio of “promoters.” Calculate your ratio of detractors by figuring out the percentage of people surveyed who gave you a score of 0 to 6. Then calculate your Net Promoter Score (NPS) by subtracting your percentage of detractors from your percentage of promoters.

The average company in the United States has a NPS of between 10 and 15 percent.  Reichheld found companies with an above-average NPS grow faster than average-scoring businesses.

Sales per square foot

By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a respectable retailer might be $300. With real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.

Revenue per employee

Payroll is the number one expense for most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. Google, for example, enjoyed a revenue per employee of more than one million dollars in 2015, whereas a more traditional people-dependent company may struggle to surpass $100,000 per employee.

Customers per account manager

How many customers do you ask your account managers to manage? Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts, and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with. It’s hard to say what the right ratio is because it is so highly dependent on your industry. Slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction). That’s when you know you have probably pushed it a little too far.

Prospects per visitor

What proportion of your website’s visitors “opt-in” by giving you permission to e-mail them in the future? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony on how to convert more of their website traffic into customers. Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic. They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.

Acquirers have a healthy appetite for data. The more data you can give them – in the ratio format they’re used to examining – the more attractive your business will be in their eyes.

[1] Net Promoter, Net Promoter Score, and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

How Your Age Shapes Your Exit Plan

Republished with permission from Built to Sell Inc.

Your age has a big impact on your attitude toward your business, and your feelings about one day getting out of it.

For example, one person who runs a boutique mergers and acquisitions business refuses to take assignments from business owners over the age of 70.

He has found that septuagenarians are so personally invested that they can rarely bring themselves to sell their business – frequently calling off the sale halfway through, claiming they just wouldn’t know what to do with themselves if it closed.

While it’s always dangerous to generalize – especially based on something as touchy as age – a few patterns emerged in the research for Built to Sell: Creating a Business That Can Thrive Without You.

Owners aged 25 to 46

Twenty- and thirty-something business owners grew up in an age when job security did not exist. They watched as their parents got downsized or packaged off into early retirement, and that resulted in a somewhat jaded attitude towards the role of a business in society.

Business owners in their twenties and thirties generally see their companies as a means to an end, and most expect to sell in the next 5 to 10 years.

Similar to their employed classmates, who move to a new job every 3 to 5 years, business owners in this age group often expect to start a few companies in their lifetime.

Aged 47 to 65

Baby boomers came of age in a time when the social contract between a company and an employee was sacrosanct. An employee agreed to be loyal to the company, and, in return, the company agreed to provide a decent living and a pension for a few golden years.

Many of the business owners in this generation think of their company as more than a profit center. They see their business as part of a community and, by extension, themselves as community leaders.

To many boomers, the idea of selling their company feels like selling out their employees and their community. That’s why so many chief executive officers in their fifties and sixties are torn: they know they need to sell to fund their retirement, but they agonize over where that will leave their loyal employees.

Sixty-five plus

Older business owners grew up in a time when hobbies were impractical and discouraged. You went to work while your wife tended to the kids (today, more than half of businesses are started by women, but those were different times), you ate dinner, you watched the news and you went to bed.

With few hobbies and little other than work to define them, business owners in their late sixties, seventies and eighties feel lost without their business – that’s why so many refuse to sell or experience depression after they do.

Of course, there will always be exceptions to general rules of thumb, but frequently – more than your industry, nationality, marital status or educational background – your birth certificate defines your exit plan.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

The Downside of Just Milking It

Republished with permission from Built to Sell Inc.

If you have considered selling your business of late, you may have been disappointed to see the offers a business like yours would garner from would-be acquirers.

According to the latest analysis of some 20,000 business owners who have used The Value Builder System, the average offer being made by acquirers is just 3.7 times your pre-tax profit.  Companies with less than a million dollars in sales garner significantly lower multiples, and larger businesses may get closer to five times the pre-tax profit, but regardless of size private company multiples are still significantly less than those reserved for public company stocks.

Given the paltry offer multiples, you may be tempted to hold on to your business and “milk it” for decades to come. After all, you might reason that if you hang onto your business for four or five more years, you could withdraw the same amount in dividends as you would garner from a sale and still own 100% of the business.

This logic – let’s call it the “Just Milk It Strategy” – seems sound on the surface, but there are some significant risks to consider.

You Shoulder the Risk

The biggest downside of holding on to your business, rather than selling it, is that you retain all of the risk. Most entrepreneurs have an optimism bias, but you need only remember how life felt in 2009 to be reminded that economic cycles go in both directions. While business may feel good today, the next five years could well be bumpy for a lot of founders.

Disk Drive Space

If you think of your brain like a computer’s disk drive, owning a business is like constantly running anti-virus software. Yes, in theory you can do other things like play golf or enjoy a bicycle trip through Tuscany and still own your business, but as long as you are the owner, your business will always occupy a large chunk of your brain’s capacity. This means family fun, vacations and weekends are always tainted with the background hum of your brain’s operating system churning through data.

Capital Calls

Let’s say your business generates $500,000 in Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), and you could sell your company for four times EBITDA or keep it. You may argue it’s better to keep it, pull your profit out in the form of dividends, and capture the same cash in four years as you would by selling it. This theory breaks down in capital-intensive businesses where there is usually a big difference between EBITDA and cash in the bank. If you have to buy machines, finance your customers, or stock inventory, a lot of your cash will be locked up in feeding your business and the amount of cash you can pull out of your business each year is a fraction of your EBITDA.

Tax Treatment

Depending on your tax jurisdiction, the sale proceeds of your business may be more favourably treated than income you would garner by paying yourself handsomely with the Just Milk It Strategy. You may actually need to pay yourself $2 or $3 for every $1 you can net from the advantageous tax treatment of a business sale.

You Can Do Better

Finally, you may be able to attract an offer higher than three or four times your pretax profit. The businesses we work with who have a Value Builder Score of 80 + get offers that are, on average, 6.1 times their pretax profit. Some of the owners we work with do even better, stretching multiples into double digits.

If you’d like to get your Value Builder Score, please let us know by replying to this email and we will make arrangements for you to complete the 13-minute questionnaire.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

90 Days That Will Define Your Business Forever

Republished with permission from Built to Sell Inc.

You’ve done the hard work of winning a new customer, but it’s what you do in the next 90 days that determines if it’ll stick around.

The first 90 days of any new relationship are critical:

  • A president has about three months to inspire the electorate and gain the political capital he needs to govern.
  • A young team prospect has but a few months to impress his coach before being sent down to the minors.
  • A new CEO has 90 days to learn her job before the rank and file start expecting tangible leadership.

The Onboarding Window: The First 90 Days

For a young company, the first 90 days of a customer relationship are equally important. Research into the subscription business model shows that getting a customer to effectively start using your product in the first 90 days leads to an increase in lifetime value of up to 300 percent for some companies.

Take a look at marketing software provider Constant Contact, which used to struggle with the first 90 days of a new customer relationship. In the old days, Constant Contact took a “who, what, when” approach to onboarding new customers. Who stood for who a customer wanted to send an email campaign to; what stood for what the customer wanted to send; and when described the timing of the campaign. After users signed up for its service, Constant Contact would ask customers to upload their email database (the who in the three-step onboarding process). This required the new user to upload a customer list–which is the trickiest part of the onboarding experience. It required the customer to leave Constant Contact’s site and struggle with how to export a contact list–often from a jury-rigged database kept in Excel or Outlook. The process was awkward, and many new customers stopped using Constant Contact because they hit a barrier before they had a chance to fall in love with the Constant Contact software.

What, Who, When

Wanting to stem new customer churn, Constant Contact changed its on boarding to focus first on the what. Immediately after signing up, new users were encouraged to create their first email campaign. Suddenly customers were seeing their campaign come to life in front of their eyes. Constant Contact offered customers a library of stock images that looked more beautiful than anything a business owner had used in the past. Customers could see firsthand how professional their company was going to look. Only after the customer had completed the what stage and earned the emotional reward of seeing its first campaign come to life, did Constant Contact switch to the who part of creating a campaign. The difference was, by this point, Constant Contact had enough relationship equity with the customer to get it over the hump of uploading its database.

This minor reordering of the onboarding flow led to a dramatic reduction in customer churn–which is the death knell of any subscription business.

Whether you’re in a subscription business, or still using a transaction business model, how you treat a customer in the first 90 days will go a long way in determining their overall satisfaction. To benchmark your customer satisfaction against world class brands, get your Value Builder Score now https://www.ironshield.ca/sellability-score/

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.