Who doesn’t have fond memories of trick or treating? Wandering a shadowy neighborhood, climbing
mysterious porch steps, giggling with delight when the scary old lady around
the corner hands out a full size Hershey bar.
What fun.
But when are you too old to trick or treat? Why would you stop? Perhaps it was when you:
- Could balance the plastic candy collecting pumpkin in the palm of one hand
- Looked plain silly wandering up to a neighbor’s house surrounded by munchkins half your height
- Found the Budweiser the chaperoning dads sported was more appealing than the candy in your silly plastic pumpkin
But the biggest challenge:
how would you celebrate Halloween differently.
That’s takes some thought, planning and a seismic
shift. Several years ago, my 7th
grade son and his garage band buddies decided it was time to abandon the
plastic pumpkins. Instead they hosted their first driveway concert on Halloween
Eve.
This shift toward aligning their activity (a gig) with their
goals (an applauding audience) paid off big:
not only did they attract a crowd of goo- goo eyed middle school girls,
this event launched the professional music careers of several band members. Although the band is not rich and famous yet, they are
now collecting CD, performance and merchandise income instead of candy this
Halloween.
What shift do you need to make this Halloween?
May I suggest a shift from being sales-centric to value-centric?
Recently a client shared with me the significance this shift
had on his business. As a driven and
talented founder, Ray was myopically focused on sales growth. He was forever dreaming up new products, new
markets, new anything to build his top line.
His business grew, and he felt great. The he discussed his valuation
with an investment banker who pointed out the shortcomings of his enterprise, and
his less than acceptable market value.
Like a middle school trick or treater, he knew he needed to
make a shift. We had a chat, and I suggested
he direct his efforts toward building value.
Rather than spend all his time and energy generating another sale, he
needed to pay attention to what the market values: what lies inside and behind the revenue
line.
Fast forward to this Halloween. Ray implemented the shift over the past few
years and now has a company with 12% more revenue but worth over 20% more.
How did that happen? Ray’s shift
involved reengineering numerous facets of his business.
But he started simply- at the top.
Revenue growth, as the primary yardstick for performance is
fine as a business matures. Increasing
sales often means more customers, more opportunities, more employees, more
market visibility, etc. All of this confirms an owner’s belief in their business,
especially if increasing profits are the result.
But as an owner begins to consider a transition out of a business, the
revenue yardstick must be replaced by the value yardstick.
That’s because the market measures success on several
fronts, not just on the top line. In
fact, the revenue line itself has numerous value dimensions:
- # of customers and sales per customer
- # of industries served, and profile of those industries
- # of product offerings and sales per product
- Repeatability of sales, annuity or licensing streams
These details can tell a wide ranging story about a business. And represent a range of risks. Consider two companies, of comparable size in
the same industry:
Company A: Increasing revenue is due to an increasing
number of customers but sales per customer is flat.
Company B: Increasing revenue is due to sales per
customer increasing significantly yet the number of customers is declining.
Both companies show growth, but Company A is demonstrating
market penetration while Company B‘s customer base is becoming more
concentrated. The factors associated
with this trend will impact how the market views each company’s risk, and
therefore value. And the market could be
a third party acquirer, or for an insider transfer (i.e. manager or family
member buyout) the market could be the bank who will finance a portion of the
transition.
Acquirers and financing sources love revenue growth but hate risk,
perhaps even more. Not considering this
reality is a significant factor in unmet seller expectations.
The lessons for Ray, and any owner who dreams of maximizing
their life’s work at the point of transition:
- Revenue is only one dimension of company performance
- As an owner draws closer to transition, value becomes the metric to monitor
- It is critical to shift focus to how to grow business value, not just how to grow
If you believe you need to begin making the shift, I am
happy to provide two resources for you:
- Take the Matrix Value Advisors' Value Drivers Self-Assessment
- Email me to request a copy of our Value Drivers Whitepaper
Every business owner deserves to reap the rewards as Ray
will. But to do so, every owner must do
what Ray did: make the shift to being
value-centric, not just sales-centric.
It is a trick to do
it, but in the long run changing your approach will lead to some major treats!
