He began offering a membership model where, instead of contracting him when a circuit board broke, he asked his customers to subscribe to a plan enabling them to have their circuit boards serviced at any time in return for a fixed monthly fee. Bergeron’s customers paid monthly for access to his technicians when they had a problem.
The switch to a subscription billing model transformed the business, and Bergeron quickly grew the company to $7 million in annual sales, at which point he sold it for $10 million — a significant premium over a standard service company.
As the example of Walter Bergeron illustrates, most small businesses begin life using the “break/fix” business model where a customer has a problem, and you swoop in to provide a solution. This business model may make you feel valued as a problem solver, but it comes at the expense of the value of your company. In the break/fix model, you must create demand, sell your product or service, deliver it, and start all over again, which is why acquirers place a lower value on these transactional businesses when compared to subscription-based companies.
By contrast, with a service contract, you create an ongoing stream of income that has the potential to grow the lifetime value of a customer dramatically. When you can accurately predict how much money you will get from a subscriber, you can invest more in wooing them.
The most compelling reason to adopt a recurring revenue model is the impact it can have on your company’s valuation. Dollar for dollar, recurring revenue can be worth more than twice that of transactional revenue, depending on your industry.
Service contracts are a simple and effective way to transform a transactional business into a recurring revenue goldmine.
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Recurring revenue makes your company more predictable, extends the lifetime value of a customer and ultimately makes your business more valuable. If you’re unsure how to create these automatic sales, a simple service contract can be the place to start.
A service contract is an agreement to provide an ongoing level of service in return for a regular payment. It can be a way to transform an ordinary service company into a predictable subscription business.
For example, Walter Bergeron started a small company servicing circuit boards for large food processing plants. It was a classic service business where Bergeron offered his time to fix customer’s circuit boards when they broke.
The business model worked fine, but cashflow was lumpy. Bergeron had reached a point where he could no longer sell any more of his time, and his growth stalled. Knowing something had to change, Bergeron made a 90-degree turn.
As we enter a new decade, it’s fun to look back on the companies that have stood the test of time.Despite a few well–financed chicken–focused start–ups, mounting pressure to reduce our dependence on meat,and our growing addiction to fancy coffee, McDonald’s has managed to thrive.This year McDonald’s is celebrating its 80th anniversary with a market capitalization of around $150 billion—up roughly 10% over last year.McDonald’s started when Maurice and Richard (Mac and Dick) were invited by their father,Patrick McDonald,to help flip burgers at his diner,the Airdrome, which the brothers rebranded in 1940 as their namesake.The two spent almost ten years tinkering with their business before they introduced the “Speedee Service System”—techniques that were pulled from the factory assembly line to serve customers quickly.The McDonald clan ran their single–location hamburger stand for almost 20 years before Ray Kroc came along, asking to franchise the concept. Mac and Dick had the skills to create a successful one–location business, but it was Kroc who took their modest restaurant and made it world famous.
What Got You Here Won’t Get You There
Three skills are essential to survival as a start–up that you must eventually “unlearn”to grow a business. While these talents are prerequisites for getting a business off the ground, they become a liability as time goes on.
In the early days, when cash is scarce, you need to be flexible. Instead of hiring full–time employees, you may need to subcontract work to a partner. This arrangement works well as you pay subcontractors only when you have work, and they pay their expenses.You also stay flexible when dealing with customers. If you’re just starting up, you’re likely not in a position to dictate to your prospects, so you listen carefully and adjust as necessary to suit their needs.Instead of setting up a physical location, you may create a makeshift office by patching together a home office or working out of a coffee shop. All of this bootstrapping allows you to get your business off the ground on a shoestring budget. The problem is that being too flexible can start to become a liability. Your contract employees may have other clients and can’t be at your beck and call when you need them. Your customers may start to ask for so much customization that the only person in your company with the technical skills to fulfill their special requests is you. And, eventually, a customer will want to see where you work and may think less of you if your office is your car.Flexibility, a prerequisite in the beginning, actually becomes a liability as you grow.
If you’re self–financing your business, you have no choice but to make it profitable from day one. If it doesn’t make you money today, you don’t do it.This discipline of getting an instant return on cash invested allows us to get a business off the ground. Still, the problem with fixating on immediate profit is thatit can undermine your ability to grow.For example, redesigning your website won’t make you more profitable this month, but it could be a necessary investment to attract larger contracts from more significant customers in the future. It’s true that you should never overlook profitability entirely, but it is a good idea to place an equal emphasis on top–and bottom–line results—even if the investment doesn’t pay off right away.
With no money or people to delegate to, a new business owner gets things done on her own. Many of us grow to like the control of doing things our way and fear things might get messed up if we give them to someone else.Since we can do every job in our company, we often just keep doing some things long after we should. But once you start generating more profit, a few extra bodies are necessary to ensure you’re managing your calendar appropriately and not wasting time. If you’re not self–reliant in the early days, you won’t even get a business off the ground. But at some point, your inclination to roll up your sleeves and do it yourself can be what stops you from growing.Overall, flexibility, thrift,and self–reliance are the essential ingredients of any start–up, and for your company to become a world–beater, you somehow have to unlearn those tendencies for a new set of skills.
A vision board is a display of images that illustrate where you want to be in the future. Creating one by grabbing a stack of magazines and cut out pictures that appeal to you and communicate the life you want to lead.
A vision board is a compelling way to immunize yourself from the inertia that sets in once the startup years of your company are behind you. When you’re no longer struggling to find the next customer or wondering how you’ll make payroll, running a business may become less exciting. When you no longer need to draw on your creativity and problem-solving skills, one day may flow into the next, and you can become content, but perhaps not truly happy.
Think about a time when you were happiest. You were probably doing something new, perhaps in a new place with new people, learning, contributing and growing. Most owners are happiest when they are starting and growing a business, but when a company matures, it can become stifling.
The problem is, it can be challenging to leave a successful business. Your lifestyle needs are satisfied through your company, so why go? That’s where a vision board can be handy. It allows you to decipher the difference between being happy and merely content. When you find yourself feeling comfortable but not necessarily happy, that might be the perfect time to sell – regardless of what’s happening in the economy at the time.
The global economy has been expanding for several years, fueled by low-interest rates and optimistic consumers, which can be a dangerous time for founders. When the economy is hot, it’s tempting to expand outside of your original product and service category as customers seem to be willing to buy just about anything from you.
The problem with diversifying too broadly is that you can become less attractive to an acquirer over time. Acquirers buy what they could not quickly build on their own. When you diversify too broadly, a buyer may pass reasoning, that it would be relatively easy to compete with your similar products or services. They know you’ll want to get paid for all of your business, yet they may only want a small part of it.
Remember that acquirers only buy what they could not quickly build themselves, so they place a premium on buying a business with a definite competitive advantage — for example, a proven brand that consumers prefer or a protected technology innovation.
No matter what the economy has in store for the years ahead, do one thing better than anyone else, and you’ll always have a ready pool of potential acquirers for your business.
A new decade always comes with a slew of predictions that can be scary. Will a new superbug take hold? Will the stock market crash? Will the economy tank?
These are all excellent questions, but without a crystal ball, you can feel helpless. However, there are three practical steps you can take to inoculate yourself from whatever the coming years will bring:
Inoculation Strategy #1: Stop Trying To Time The Market
Many founders try and time the sale of their business to coincide with the peak of an economic cycle, reasoning they will get the best price for their business when the economy is booming.
While this is true in theory, when you sell your company, you need to do something with the money. Perhaps you’ll consider investing in real estate or buying stocks. Still, most investments are impacted by the same macro-economic environment your business enjoys, which means you’ll be buying into just as frothy a market.
The alternative to timing the market is to consider selling when your business meets two criteria:
First, if your company is on a winning streak, it will command a premium compared with average performers in your industry. Pick a time to sell when your revenue is growing, gross margin improving, employees are happy, and customers satisfied.
Second never sell before you have all of the information you’ll need to survive due diligence. After you agree to terms with an acquirer, they’ll need some time to verify your business is as advertised. A sophisticated buyer will look into every aspect of your operations, including your financials, customer contracts, employee agreements, the way you produce your product or service your sales and marketing approach and just about every other facet of your business.
You can’t wait until due diligence to prepare this package of information. The volume of questions will suck up too much of your time. React slowly to an acquirer’s request for information and “deal fatigue” will set in. This malaise happens when an acquirer loses interest in closing an acquisition because it is taking too long.
The way to immunize yourself against whatever the economy may be in the years ahead is to sell when you’re on a winning streak, and you have the data assembled to skate through due diligence with ease.
Have you ever wondered what determines the value of your business? When we take a look at the data provided by The Value Builder System™, we’ve found there are eight factors that drive the value of your business,and they are all potentially more important than the industry you’re in.
There are three factors that make your business much more valuable than industry peers, and they are the same things you can focus on to drive up the value of your company:
1.Cultivate Your Point Of Differentiation. Acquirers do not buy what they could easily build themselves. If your main competitive advantage is price, an acquirer will rightly conclude they can simply set up shop as a competitor and win most of your price sensitive customers away by offering a temporary discount.
2.Recurring Revenue. Acquirers want to know how your business will perform after they buy it. Nothing gives them more confidence that your business will continue to thrive post sale than recurring revenue from subscriptions or service contracts.
3.Customer Diversification. In addition to having customers pay on recurring contracts, the most valuable businesses have lots of little customers rather than one or two biggies. Most acquirers will balk if any one of your customers represents more than 15% of your revenue.
Using this strategy, you can build a valuable company regardless of size or industry.