Where to start, when your growth stops

Why would two companies in the same industry, with the same financial performance, command vastly different valuations? The answer often comes down to how much each business is likely to grow in the future.

The problem is that a lot of successful businesses reach a point where their growth starts to slow as the company matures. In fact, the price of doing a great job carving out a unique niche is that the specialty that made you successful can start to hold you back.

If you make the world’s greatest $5,000 wine fridge, you may have a successful, profitable business until you run out of people willing to spend $5,000 to keep their wine cool.

Demonstrating how your business is likely to grow in the future is one of the keys to driving a premium price for your company when it comes time to sell. To brainstorm how to grow beyond the niche that got you started, consider the Ansoff Matrix. It was first published in the Harvard Business Review in 1957 but remains a helpful framework for business owners today.

Sometimes called the Product/Market Expansion Grid, the Ansoff Matrix shows four ways that businesses can grow, and it can help you think through the risks associated with each option.

Imagine a square divided into four quadrants representing your four growth choices, which include selling:

  • Existing products to existing customers,
  • New products to existing customers,
  • Existing products to new markets, and
  • New products to new markets.

The choices above are presented from least to most risky.  In a smaller business, with few dollars to gamble, focusing your attention on the first two options will give you the lowest risk options for growth.

Existing products to existing customers

It’s natural to feel like you’re being greedy when you go back to the same customers for more of their dollars, but the opposite can often be true. Your best customers are usually the ones who know and like you the most and are often pleased to find out that you’re “someone they trust” are offering something they need.

Greg is a hardware store owner who came to understand the Ansoff Matrix. Greg earns a 150% mark-up on cutting keys, but his cutter was hidden in a corner of the store where nobody could see it. As a result, he didn’t cut many keys. One day, Greg decided to move the key cutter and position it directly behind the cash register so everyone paying for his or her hardware could see the machine. Customers started seeing the cutter and realized “often to their pleasant surprise” that Greg cut keys.  Not surprisingly, Greg started selling a lot more keys to his loyal customers. The key cutter didn’t woo many new customers, but it did increase his overall revenue per customer.

If you want to sell more of your existing products to your existing customers, draw up a simple chart of your products and services. Don’t be afraid to dust off those old products that you haven’t paid much attention to lately. List your best customers‚ names down one side of the paper and your products across the top. Then cross-reference your customer list with your product list to identify opportunities to sell your best customers more of your existing products.

New products to existing customers

Another approach to growth is to sell new products to existing customers. For example, there is a BMW dealership owner in the Midwest whose typical customer is a family patriarch in his forties. When he felt like he had saturated the market for well-heeled forty-something men in his trading area, he thought about what other products he could sell his existing customers. But instead of defining his customer as the forty-something man, he decided to think of his customer as the financially successful family and his market as their driveway.

Instead of trying to sell more BMWs into a market of diminishing returns, he bought a Chrysler dealership so he could sell minivans to the spouses of his BMW buyers.  He then realized that a lot of his customers had kids in their teens so he bought a Kia dealership to sell the family a third, inexpensive car.

Once you become successful, it can be tempting to sit back and enjoy your success. But in order to drive up the value of your business, you need to be able to demonstrate how you can grow, and the least risky strategy will be to figure out what else you could sell to your existing customers.

If you are curious to see how your growth stacks up and if you’re building a business you could sell one day, take the 13 minute Sellability Score questionnaire to find out…it’s well worth having an independent and objective answer.

 

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9 Warning Signs You’re a Hub-and-Spoke Owner

If you were to draw a picture that visually represents your role in your business, what would it look like? Are you at the top of a traditional pyramid-like organizational chart, or stuck in the middle of your business, like a hub in a bicycle wheel? As anyone who has tried to fly out of O’Hare Airport when it’s been hit by a snowstorm knows, a hub-and-spoke model is only as strong as the hub. The moment the hub is overwhelmed, the entire system fails. Acquirers generally avoid hub-and-spoke or pyramid style managed businesses because they understand the dangers of buying a company too dependent on the owner. Here’s a list of nine warning signs you’re a hub-and-spoke or pyramid style owner and some suggestions for flattening the organization allowing the organization to run, even if when you’re on vacation:

1. You sign all of the checks: Most business owners sign the checks, but what happens if you’re away for a couple of days and an important supplier needs to be paid? Consider giving an employee signing authority for checks up to an amount you‚re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home (not the office). That way, you can review all signed checks and make sure the privilege isn’t being abused.

2. Your mobile phone bill is over $200 a month; If your employees are out of their depth a lot, it will show up in your mobile phone bill because staff will be calling you to coach them through problems. Ask yourself if you’re hiring too many junior employees. Sometimes people with a couple of years of industry experience will be a lot more self-sufficient and only slightly more expensive than the greenhorns. Also consider getting a virtual assistant (VA), who can act as a first line of defense in protecting your time. You can find a VA by filling out the request for proposal at http://www.ivaa.org/.

3. Your revenue is flat when compared to last year’s: Flat revenue from one year to the next can be a sign you are a hub in a hub-and-spoke or pyramid model. Like forcing water through a hose, you have only so much capacity. No matter how efficient you are, every business dependent on its owner reaches capacity at some point. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people.

4. Your vacations stink: If you spend your vacations dispatching orders from your mobile, it’s time to cut the tether. Start by taking one day off and seeing how your company does without you. Build systems for failure points. Work up to a point where you can take a few weeks off without affecting your business.

5. You spend more time negotiating than a union boss: If you find yourself constantly having to get involved in approving discount requests from your customers, you are a hub. Consider giving front-line, customer-facing employees a band within which they have your approval to negotiate. You may also want to tie salespeople‚s bonuses to gross margin for sales they generate so you‚re rewarding their contribution to profit, not just chasing skinny margin deals.

6. You close up every night: If you’re the only one who knows the close-up routine in your business (count the cash, lock the doors, set the alarm), then you are very much a hub. Write an employee manual of basic procedures (close-up routine, e-mail footer to use, voice mail protocol) for your business and give it to new employees on their first day on the job.

7. You know all of your customers by first name: It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together. Consider replacing yourself as a rain maker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else.

8. You get the tickets: Suppliers‚ wooing you by sending you free tickets to sports events can be a sign that they see you as the key decision maker in your business for their offering. If you are the key contact for any of your suppliers, you will find yourself in the hub of your business when it comes time to negotiate terms. Consider appointing one of your trusted employees as the key contact for a major supplier and give that employee spending authority up to a limit you‚re comfortable with.

9. You get cc’d on more than five e-mails a day: Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work. Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the To: line if you really must be made aware of something, and only if they need a specific action from you.

Curious to see if you’re a Hub & Spoke manager and if you have a business you could sell one day?…Take the 13 minute Sellability Score questionnaire to find out…it only takes minutes and well worth having an independent and objective answer.

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Dire Warning for Capital Gains

The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extends Bush tax cuts until the end of 2012. As of January 1, 2013 the capital gains rate will increase to 20%.  Unless there’s intervention and a further extension of the “Bush” tax rate cuts, 2013 could bring a significant increase in the rates for single individuals with income in excess of $200,000 ($250,000 for married filing jointly). Although Congress might take action to minimize the tax increase, business owners at these income levels should start planning for proposed changes urgently.

Despite all these dire warnings to business owners of privately held businesses contemplating the sale of their business, very few have taken heed of the impact to their future net worth and dramatic effect on the proceeds of a business sale in 2013. To mitigate the effect of the potential capital gains tax increases business owner need to significantly grow their sales just to maintain equity. However, if a business owner is emotionally and financially ready to sell, then now is the time to start talking with advisors on how to maximize the business value before a potential capital gains tax increase.

There are a multitude of tax avoidance tactics which can be applied, however time is running out and the sooner a small business owner starts the process the better. To sort out this maze of taxes and how applicable they are to you, retaining a very competent tax attorney or CPA is the first task. In fact, this may not be a bad time to review your exit or transition plan, if you have one, if not, this is something that should be at the top of your agenda. There is no doubt, that selling a business requires expert tax advice, so the earlier you start the better.

 

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