27 Jun Unleashing the Potential of Recurring Revenue

Last month, Darden, the company behind the Olive Garden restaurant chain, made headlines with its acquisition of Ruth’s Chris, the renowned American steakhouse, for a staggering $715 million.

This purchase implied a valuation of approximately one times Ruth’s Chris’ annual revenue from the previous year or around ten times their adjusted EBITDA for 2022. While this was a significant achievement for a large corporation, it also highlighted how Ruth’s Chris’ lack of recurring revenue had potentially hindered its value.

Breaking the Myth: Recurring Revenue Beyond Software

Recurring revenue is often thought to be exclusive to software companies. However, it is crucial to recognize that traditional businesses can also tap into the advantages of creating recurring income streams.

A prime example is Gamal Codner, the visionary founder of Fresh Heritage, a brand specializing in men’s grooming products that initially centered around beard oil for pre-shave softening.

Codner faced a challenge when he realized that acquiring customers through Facebook ads, at a cost of roughly $15 per customer, left little room for profitability with an average order value of $30.

Understanding the need for a change, Codner decided to diversify his product line and introduce the VIP Club – a subscription program that offered automatic shipments of Fresh Heritage products.

Going Beyond Discounts: A Subscription Program with a Purpose

Codner conducted an extensive survey involving approximately 500 customers, leading to a remarkable discovery. He found that his target customers were less enticed by discounts and more drawn to the idea of becoming alpha males in their respective fields.

This aligns perfectly with Fresh Heritage’s goal of building a unique brand that specifically appeals to growth-oriented men, those who prioritize boosting their self-confidence.

To incentivize men to join the VIP program, Codner moved beyond conventional financial incentives. He strategically fostered a sense of community and belonging by emphasizing membership in a group of like-minded individuals dedicated to personal excellence.

Quarterly local meetups were established, offering valuable opportunities for members to network and share experiences. These empowering gatherings swiftly became a driving force, attracting new customers to the remarkable experience provided by Fresh Heritage’s VIP program.

Converting Customers into Loyal Subscribers

Continuing his customer acquisition efforts through Facebook advertising, Codner successfully converted them into loyal subscribers, significantly increasing their lifetime value. The average order value skyrocketed to over $60, and with the subscription program attracting 3,000 members, Fresh Heritage’s EBITDA margin soared to an impressive 40%.

This exceptional achievement caught the attention of BRANDED, an aggregator of digitally native direct-to-consumer brands, who presented Codner with an irresistible acquisition offer in 2022.

Unlocking the Value of Recurring Revenue

The story of Fresh Heritage exemplifies how incorporating recurring revenue streams can greatly enhance the value of a business. As demonstrated, one does not need to operate in the software industry to create a steady income stream.

By understanding what your customers desire on an ongoing basis, you can uncover the foundation for a compelling subscription offering that fuels the growth and profitability of your enterprise.

31 May Strategies to Safeguard Your Equity While Boosting Business Cash Flow

When faced with the need for additional funds to fuel business growth, entrepreneurs often find themselves grappling with tough choices. Selling equity shares provides immediate cash but dilutes ownership, while bank loans come with high costs, growth restrictions, and personal guarantees.

However, there exists a third alternative: customer financing. By persuading customers to prepay for products or services, entrepreneurs can secure working capital without sacrificing ownership or incurring interest expenses. This article explores the concept of customer financing and provides insights into how it can be effectively implemented.

The Success Story of Brad Lorge and Premonition

In 2015, Brad Lorge founded Premonition, a technology company specializing in logistics software for large enterprise companies. While revenue from prominent clients was promising, the decision-making process and implementation timelines were often lengthy and costly.

To avoid risks associated with failed implementations, Lorge adopted a unique approach to financing the growth of his startup: customer financing. By securing prepayments from customers, Premonition leveraged these funds to drive its expansion.

In March 2022, Premonition achieved an annual contract value (ACV) of $3 million, and its subsequent acquisition by Shippit for $20.5 million valued the company at nearly seven times its ACV. Remarkably, due to customer financing, Lorge and his partners still retained 80% equity when they sold the company.

Harnessing the Power of Customer Financing

Customer financing offers business owners a powerful tool to raise capital while
maintaining control over their equity. If you’re considering adopting this strategy, follow
these steps:

1. Understand Customer Needs and Motivations

To convince customers to prepay, it’s crucial to comprehend their needs and motivations. Identify what incentives or guarantees you can offer in return for prepayment.

For example, could you promise expedited delivery times in exchange for a project deposit? Tailor your approach to align with both your business and customer requirements.

2. Productize Your Service

For service-based businesses, another approach to encourage customer prepayments is through productization. Transform your service into a standardized offering with a clear scope, pricing, and deliverables.

This approach simplifies the sales process, enhances efficiency, and delivers a predictable customer experience. By presenting your service as a product, customers are more likely to be comfortable paying upfront for the offering.

3. Offer Incentives and Discounts

Consider providing incentives or discounts that incentivize customers to prepay. These could be exclusive discounts, additional services, or early access to new features. Craft offers that align with your business model and resonate with your target customers, creating a win-win situation.

Benefits of Customer Financing and Productization

Implementing customer financing or productizing services brings several advantages to business owners:

1. Retain Equity

By opting for customer financing, entrepreneurs can secure capital without giving up valuable equity stakes in their businesses. This allows them to maintain control and benefit from future growth and success.

2. Avoid Bank Loan Obligations

Unlike bank loans that involve repayment obligations and personal guarantees, customer financing provides a debt-free way to access working capital. It frees businesses from the burdens associated with traditional financing methods.

3. Predictable Cash Flow

Customer prepayments offer a steady cash flow stream, enabling businesses to fund their growth plans and investment needs. With reliable upfront payments, entrepreneurs can confidently pursue their expansion strategies.

When seeking financial resources to fuel business growth, entrepreneurs have more options than just selling equity or resorting to bank loans. Customer financing and productization provide alternative paths to access capital while safeguarding equity stakes.

By understanding customer needs, offering incentives, and adopting a productized approach, entrepreneurs can effectively leverage customer financing to secure the necessary funds for their business expansion.

25 Apr 5 Strategies to Find the Right Candidates to Replace You as a Business Owner

In 2012, Jaclyn Johnson started Create & Cultivate, a media company that educates and inspires women to succeed in business.

By 2018, she had grown Create & Cultivate to eight employees. It was then that she received an offer to purchase her business for an incredible $40 million. Unfortunately, the deal was too good to be true. When the acquirer realized how dependent the business was on Johnson, they withdrew their offer.

A couple of years later, Jaclyn sold Create & Cultivate to Corridor Capital for $22 million. While still a lucrative deal, it was a significant decrease from the original offer.

The moral of the story? If your company is too dependent on you, it may end up costing you down the road. The most valuable companies don’t rely on the owner’s involvement to succeed. Unfortunately, finding extraordinary talent to replace yourself can be challenging, to say the least.

The Biggest Mistake Most Owners Make When Trying to Replace Themselves

Finding a general manager, second-in-command, or Chief Operating Officer to replace themselves is one of the hardest projects business owners may ever tackle.

Whether you rely on a recruiter, paid advertising, or your personal network to find candidates, one of the first steps to shortlisting talent is conducting a comprehensive review of their background. It’s at this point that many business owners make the common error of being impressed by a company name on a resume or LinkedIn profile.

While working for a large company may be impressive, the skills that tend to be held in high regard at a Fortune 500 company often differ from what most small to medium-sized companies need.

Big companies often have well-established processes, systems, and hierarchies that have contributed to their success. People who thrive in big companies tend to excel at winning inside of a predetermined framework.

Unfortunately, many small to medium-sized companies don’t have as significant a framework to follow. This is why many big company veterans often struggle in a more entrepreneurial environment.

If you truly desire to land a worthy replacement, don’t base your hiring decisions on the impressive company names on their resume. Instead, focus on finding someone who is innovative, comfortable with chaos, action-oriented, and creative – someone with an entrepreneurial mindset.

To find them, try using these five strategies when making hiring decisions:

1. Look for Problem-Solvers

Innovation often involves finding creative solutions to problems. Look for candidates who have demonstrated the ability to think strategically and been able to come up with innovative solutions to challenges they have faced in the past.

2. Determine How They Solve Problems

During the interview, ask candidates to describe their approach to problem-solving. How have they produced innovative solutions in the past? This will give you insight into their thought processes. You’ll also get a clearer understanding of their willingness to take risks and ability to think creatively.

3. Evaluate Their Learning Agility

Innovative employees are often those who are open to learning. They also tend to be adaptable. Look for candidates who have a history of taking on new challenges and learning new skills.

4. Assess Their Ability to Work in Teams

Innovation often involves collaboration. Look for candidates who have demonstrated the ability to work effectively with others. Ask about their past experiences working in teams and how they contributed to the team’s success.

5. Consider Their Creativity

Look for candidates who have a creative portfolio or have pursued creative hobbies or projects outside of work. This can be a good indicator of their potential to bring new and innovative ideas to your organization. Right now, your company probably relies on you for a healthy dose of creativity and innovation.

If your goal is to replace yourself, following these five strategies can increase your chances of identifying innovative candidates who will bring fresh thinking and creativity to your organization. They can also lead to a significantly higher payday when you sell your business.

28 Mar The “4 Letter Word” You Can Use to Increase the Value of Your Business

Wouldn’t it be great to have a magic slot machine? Imagine what it would be like if, each time you pulled the arm, you made more than you bet. How much time would you spend cranking that arm?

You can gamble on a lot of things when it comes to the value of your business, but only one strategy has a virtually guaranteed return. Most companies are valued on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). As a result, every extra dollar of profit you earn in the short term will translate into a winning spin down the road.

When someone is interested in acquiring your business, they will want to look at three years worth of your financial reporting. Every extra dollar of profit you can generate will make a significant impact on the offer you receive if you are considering an ownership transition in the next thirty-six months.

Derek Morin and His P.U.R.E Method

Derek Morin, the founder of Tabarnapp, which creates after-market sales applications for Shopify website owners, was obsessed with finding every dollar of profit available.

When his partner, who handled the finances, left the company, Morin was forced to look closely at his profit & loss (P&L) statement. As Morin saw potential areas for improvement, he made notes in the margin next to each line item he wanted to change.

To save time, he started using a single letter beside each entry to represent the action he
wanted to take:

P stood for “Plus”, something profitable that he wanted to grow.
U stood for “Unnecessary”, an expense he could eliminate.
R stood for “Replaceable”, a cost that could be replaced with a better or cheaper option.
E stood for “Equal” and was used for items that should be left untouched.

Morin realized his shorthand notes could be organized into a memorable acronym he referred
to as “PURE.”

Morin treated the PURE method like a game. Every month he scoured his P&L with the same four-letter system. He then challenged his team to act on each item that needed improvement. He became obsessed with squeezing out a few more dollars of profit every month. His game worked.

In 2020 Morin bought out his business partner in a deal that valued the company at around $400,000. Two years later, after applying the PURE methodology of improving profitability, Morin sold Tabarnapp in an agreement that netted him a roughly tenfold increase in the value of his business.

The Downside of Using Your Company’s Bank Account As a Slush Fund

Treating your company like your piggy bank can have a negative effect when you are ready to sell. Co-mingling personal and business expenses and letting other costs go unchecked may help you reduce taxes in the short term but could end up costing you more in lost value in the long run.

To prevent this from happening, keep your P&L “PURE”. That way, you’ll increase your chances of hitting the jackpot when it’s time to sell your business.

24 Feb 3 Ways to Create a Culture of Ownership Inside Your Business

There are a lot of factors that determine a company’s value. Arguably, the most important is the answer to the question “how would my business perform without me?”.

You need your employees to make an owner-like effort every day for your company to thrive when you’re not around. The best way to do this is to create a vibrant culture of ownership inside your business.

Three ways to get your employees to care as much as you do:

1. Cast Your Employees as the Stars of a “David vs. Goliath” Movie

In 2008 Gavin Hammar started Sendible, a platform that allows companies to manage all their social media accounts from one place. Sendible grew steadily until 2016, when a large competitor entered the space, resulting in a sales plateau. Hammar gathered his employees and explained the challenge they were facing.

Instead of sugarcoating the issue, Hammar encouraged his team to think of themselves as underdogs in an “us-against-the-world” battle. Hammar then went to work positioning his company as a smaller, more personal option. He started a podcast, shared photos of his employees online, and answered customer questions via asynchronous video, and sent personalized LinkedIn messages to every new customer.

With an enemy to battle every day, Hammar’s employees followed his example and gave extra effort to humanize themselves and the company. As a result, Sendible started to grow again. By 2021 the company was flourishing, which is when Hammar accepted a lucrative acquisition offer from ASG.

2. Provide Perks Others Can’t or Won’t

Another way to create a thriving culture is to offer perks your competitors can’t or won’t. Natalie and Chris Nagele are the power team behind the software as a service (SaaS) company Postmark. Unlike most hard-driving software executives, the Nageles were committed to creating a great place to work.

Rather than take on outside investment and the corresponding pressures of demanding investors, the couple decided to self-fund their business. Obsessed with helping her employees do more meaningful work, Natalie began researching ways to inspire her staff. She came across data from the Henley Business School suggesting that implementing a four-day workweek created a healthier workplace culture.

Inspired by Natalie’s findings, the Nageles considered implementing a four-day workweek. They didn’t need the permission of their board or outside investors, because the couple owned the company outright. After a short discussion, the couple decided to try it.

Transitioning to a three-day weekend created a culture in which their employees enjoyed working, resulting in consistent growth for Postmark until 2022, when the Nageles sold the company in a life-changing exit.

3. Gamify Your Business

You can also inspire your employees to give owner-like effort by gamifying your business. Josh Davis founded the freight brokering company Speedee Transport. Brokering freight is all about gross margin – the difference between what you charge the customer and how much it costs to hire a driver to move the stuff.

Rather than simply telling his employees to focus on gross margin, Davis made a game of it. He created quoting software with a virtual gross margin scoreboard for his employees.

The software gave each employee a very public, objective, and transparent scoreboard they could follow to determine whether they won or lost that day. Davis then tied his employees’ compensation to gross margin, which created a healthy competitive culture within the company.

After gamifying his business, the company saw tremendous growth. Within two years, Speedee Transport grew from two to forty-five employees. This rapid expansion caught the attention of an acquirer, who offered to purchase Speedee Transport for a truckload in 2019.

Recap

One of the secrets to building a valuable company is to get your employees to work as hard as you do. Owner-like effort comes from making your people feel like part of a shared mission and giving them a working environment that brings out the best in them.