Growth vs. Value: Not all Revenue is Created Equally

When you look ahead to next year, will your growth come from increasing your average dollar sale and average number of transactions per customer, (selling more to your existing customers at a higher rate) or finding new customers for your existing products and services through lead generation?

The answer may have a profound impact on the value of your business.

Take a look at the research coming from a recent analysis of owners who completed their Sellability Score questionnaire. We looked at 5,364 businesses and found that the average company that had received an offer from an acquirer was offered 3.5 times their pre-tax profit.  When we isolated just the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.

However, the real bump in multiple came when we isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.

Nurture your Niche

Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.

A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.

Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.  

At ActionCOACH our definition of a successful business is a commercial profitable enterprise that can work without the business owner.  Our 6 Steps process helps business owners by coaching them to define their niche and at the same time focus on the 5 drivers of profitability to increase cash flow.  We then help you to leverage your business by creating systems and helping you to find and keep motivated team members to "work in" your business.  This will give you the time and cash flow to plan and "work on" your future growth and eventual exit from the business.

You can get your own Sellability Score, and see how you compare on the eight key drivers of valuability and thus sellability, by taking our 13-minute survey here at www.actioncooachsellabilityscore.com

Are you afraid to raise your prices?

A few years back I was working with a client that was having some cash flow issues.  One of the first strategies I suggested was that she needed to raise her prices.

She thought I was nuts.  I recommended that she raise her prices 10%.  I can’t raise my prices, I’ll lose all my clients she told me.  

All your clients, I asked? 

Once she calmed down, she agreed to give it a try.  At the beginning of the year she sent a letter out to all her clients thanking them for their business and notifying them of the price increase.

To her amazement, she didn’t get much push back. Then she got that dreaded call from her #1 client (that accounted for 35% of her business) saying they couldn’t live with a 10% increase.  

She was frantic when she called me to tell me the bad news.  So I just simply asked her, how much of an increase would they find acceptable?  “I don’t know, I didn’t ask.  I was too worried about losing their business.”

To make a long story short, they did finally agree to a 4% increase.  That increase amounted to over 50% of the increased revenue she generated from all of her other clients combined.  Her client was willing to accept the price increase because of relationship and value they received from her.

Don’t be afraid to raise your prices.  That fear could kill your business.  What is fear anyways?  False Expectations Appearing Real.

Most of us are afraid to increase our price because we see our competitors keep dropping their prices just to get the sale.  That's because all they know how to do is sell on price and not value.  With that said, the business advice that I give my clients is to raise their prices.

I'm serious, even in this tough economy you can raise your prices if you know how and when.  Raising your prices in your slowest season might be tough but it's a must during your busiest season.

Here are 3 easy steps to raise your prices with no complaints.

1. Get a list of all your products and services that you sell and rank them on the amount sold for the same time last year.
2. Take out the most price sensitive items.
3. Now raise your price on the top 10% of items that are left

It's really that simple.  Another one of my clients that implemented this simple strategy has reported one of his best months ever because he was able to increase his average dollar sale with no resistance from his customers.

Please let me know your thoughts in the comments section below...