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Creating Equity Value For Your Business
This book review originally appeared in Baltimore and Washington SmartCEO Magazine October 2010 issue.
It’s the dream of every entrepreneur. Start a business, build the business, grow a great team of people, have a lot of fun doing it and then sell it for millions of dollars, creating financial independence on one hand and a great feeling of accomplishment on the other.
The reality for the vast majority of entrepreneurs, however, is quite the opposite. Often saddled by meeting expenses, managing the complexities of growth and people and, today, saddled with a difficult economy most entrepreneurs ended “owning a job,” and if they are even able to sell the business are able to extract the equivalent of an income for a few years; and even that is becoming increasingly difficult.
There comes a point in time when business owner must make the critical and philosophical decision:
Is my goal to build a business that will create equity value (and, hence, can be sold) or is my goal to build a cash flow stream that can support me and my family for the future?
This question has perplexed business owners and entrepreneurs since the beginning of capital markets; and there are few, if any, questions that can get the blood boiling between entrepreneurs than this one.
This is a critical question that every business owner (and I mean every one) needs to answer as early in their business career as possible (that means that if you haven’t answered the question yet – do it now!) The steps you take, and the rules to follow for building a business that is designed to create cash flow are very different from the ones for building a business designed to create equity value.
The unfortunate mistake that most business owners make is that they take the middle ground, focusing on cash flow today, while hoping to create equity value in the future. Please don’t misunderstand, building a business for equity value does not mean that you don’t focus on creating cash flow – the key question is how is that cash flow created and managed.
If you are building a business for maximize cash flow, you should:
Exploit the capabilities of key employees – typically the founder
Focus your hiring strategies on leverage the capabilities of those key employees (this typically results in a few highly capable people and lots of support people)
Broaden your scope of services to take advantage of the unique talents of those people and to gain an advantage in the marketplace
Customize, customize, customize
Looking at this list if services oriented businesses like law firms, consultancies, engineering firms, accounting firms, etc., don’t be surprised. The vast majority of services businesses fall into the category businesses that build cash flow.
If you are building a business to create equity value, you should:
Narrow the scope of your offerings so that they can be sold, delivered and serviced through the development and maintenance of process.
Build a team of people that make any one (or few) employees unnecessary. This results in building a highly capable senior team where the founder is often not even the senior officer.
Rather than customization, focus on replication and consistency.
This list, on it’s surface, is often not considered to be conducive to services firms, and it is, most often, services firms that find their founders stuck in the trap of “owning a job” rather than “owning a business.”
There is good news for those professional services business that desire to create equity value, rather than solely creating cash flow, in John Warrillow’s new book: Built to Sell: Turn Your Business Into One You Can Sell. Built to Sell tells the story of fictional advertising agency owner Alex Stapleton.
Anyone who has ever started a business will be able to identify with Stapleton. Whether it’s dealing with the under-performing employees, good performers who are primma donnas, or dealing with un-appreciative clients who don’t listen to you, but produce so much revenue that you feel like your stuck with the client – Stapleton represents the hopes, dreams, and frustrations of every person who has started a business.
Stapleton’s agency is stuck. Alex had hoped to build a great agency, do great advertising campaigns, and work with a group of highly talented people doing super creative work. Unfortunately, Alex spent more time dealing trying to figure out how he could get his next project to keep the team billable and continue to make ends meet.
He meets up with Ted Goran, an old family friend, who had inspired Alex to become an entrepreneur. Ted is a successful serial entrepreneur who has built and sold several businesses in his career. Through the book , Ted teaches Alex the keys to building a business that create equity value and we get to experience the journey of what it really takes to sell a business.
While the story itself is a bit hackneyed, the lessons taught are excellent – and valuable – to entrepreneurs who want to focus on creating a business that creates income for them or building a business that can be sold.
Know Your Sales Process Vital Signs
Recently, I was presenting to a large group of CEOs, discussing how the commoditization trap was devastating company profits. As I was sharing the key indicators of a company in the cross-hairs of commoditization, I was asked how could you tell if you were effectively avoiding/fighting the commoditization trap.
Here’s my answer:
I call these key indicators your Sales Process Vital Signs. There are three primary indicators that will tell you if you are in the cross-hairs or if you are avoiding commoditization:
- Cost of sales. If it costs you less and less to acquire new revenue (as a percentage of revenue), it’s a very good indication that you are avoiding commoditization. If it costs you more to acquire new revenue, you’re being commoditized.
- Sales cycle times. If sales cycle times are going down, you are most likely avoiding commoditization; if they’re getting longer (or if you don’t know what they are), you’re probably getting commoditized.
- Margin growth. If you’re margins are growing, it’s a good bet you’re avoiding the impacts of commoditization; if there’s pressure on margins, commoditization is most likely the cause.
If all three indicators are working in your favor, keep up the good work. If one or more indicators are working against you, make sure you have a strategy to combat commoditization, or prepare for the consequences.
Would You Be Missed?
I’ve got a question for you: Would you customers/clients truly notice if you were gone?
Don’t get me wrong, I’m sure they like you, appreciate the work you do for them, and enjoy the times you take them out to lunch or provide other entertainment for them. But, if you or your company were no longer around, would it make really make a difference?
In my experience (and I’ve worked first hand with more than 1,000 small and mid-market businesses), the answer is “no” about 95% of the time. If you weren’t there, your customers would just move on the next vendor with no substantive impact.
The companies that aren’t creating substantive impact are most at risk today. As budgets are being cut, they are being taken, disproportionately, from the “non-indispensible.”
What’s most unfortunate for these at-risk organizations is that there is nothing that is preventing them from becoming indispensable – other than themselves.
Becoming indispensable is hard work. It takes focus, discipline, and a growth mindset. Virtually every company has the ability to become indispensable, and the only reason they don’t is that it’s easier not to. When demand was jumping and the proverbial fish were jumping out of the water, you could afford to take the easier route. In today’s drought – you can’t!
So, what are you going to do about it? What can you do to ensure that your best customers will, in fact, notice you if you were gone?
Understanding Your Customer’s Time Scope
Most organizational charts are broken down, and viewed, from the perspective of position and authority. While this can be very helpful in developing sales strategy, an even better way to break it down is by what I refer to as their “time scope.”
For some people, one week is a long-term, while others spend little time thinking about anything happening in less than two years. Here is an example (albeit oversimplified) of how typical levels break down to time scope:
| Level | Time Scope |
| Senior Executives | Beyond a year |
| Upper Management | 6 mos – 1 year |
| Middle Management | 3 – 6 mos. |
| Front Line Management | 1 month |
| Front Line | 1 Day – 1 Week |
When you have a clear picture of your customer’s time scope, you’ll be able to gain insight into what it is they really worry about, where the value you can create lies, and whether the issues you are dealing with are big enough to get them to change their approach.
Looking at your customer from this perspective also aids you when you are selling to smaller companies where individuals (especially owners, CEOs, and other executives) play more than one role. Knowing their natural scope can be a great advantage.
The longer your buyer’s time scope is, the more opportunity there is for you to create value and radically differentiate the results you can provide. Shorter time scopes significantly limit, or even eliminate, any opportunity to differentiate yourself in a meaningful way.
Unless you are selling a pure commodity, your first “sale” is to ensure that you are talking with the person with the proper time scope.
Are Your Customers Asking The Right Questions
There is nothing more important for you to know than the questions the customers and prospects in your market are asking themselves. I’ve said it before, the company that provokes the right questions owns the market.
If you want to know what types of decisions someone will make and/or how they will allocate their limited budget dollars, knowing the questions they’re asking is critical.
| Are they asking: | Or: |
| How can they get additional price concessions from vendors? | How can they gain improved performance from vendors that can enable them to lower their total costs? |
| How can they centralize their decision making to their purchasing department? | How can they utilize the intelligence that lies outside their organization to gain and exploit competitive advantages? |
| How can we build our capabilities internally? | How can we transform fixed costs into variable costs by better utilizing the capabilities of others? |
| How can we utilize the past to drive improvements? | What do we need to know to ensure that we can compete effectively in the future? |
If your market is the questions on the left side, you are clearly in a “What’s it Cost Conversation.” If they’re asking the questions on the right side, you’ve got an opportunity to discuss what it’s worth.
What questions do you want your market to ask themselves?
Growth Mindset
If there is one characteristic that I’ve always noticed in top performers that I rarely see if average or below performers, it’s a growth mindset.
Simply put, top performers are always willing to struggle to learn new things. What I love about top performers is that they don’t really look at the struggle of learning as a struggle – they couldn’t imagine not learning and mastering new things. They say things like, “On the day they lay me to rest, it is my hope that I will have learned something.”
Adults struggle with learning. When most of us were kids, we loved working with puzzles. We loved the struggle, the mind exercise of figuring things out. We took apart things and put them back together, just to see how things work. The confusion of learning new things was half the fun.
Then, suddenly we become adults and, god forbid, we get defined as successful. We begin thinking, “Well, since I’m supposed to be successful, I guess that means that I’m supposed to know everything.” The feeling begins that struggling with things must mean that you’re not good enough begins to dominate our thinking.
When we let those feelings dominate our thoughts, we stop growing; and when we stop growing, we start shrinking – especially in these market conditions.
As Zig Ziglar once said, “Anything worth doing, is worth doing poorly as you learn how to do it well.” In a world of constant change, and rising challenges, the critical success skill will be the ability to gain comfort with the struggle of learning.
So, what can you do to ensure that you are constantly learning and growing?
When The Sale Is Won
In my post on Monday, I asked you what game do you want to win. That night, I saw an interview with Washington Redskins quarterback Donovan McNabb talking about the Redskins win over the Cowboys. I was particularly struck by one of his comments.
McNabb then said, “Sunday (game day) is when we have fun. The game is won during the week – that’s when we work.” He was referring to Head Coach Mike Shannahan’s belief that practice and preparation are where the games are won.
I thought to myself how different that attitude is from most people – especially in sales. They think the sale is won when they’re in front of the customer performing. Great salespeople know that the sale is won long, long before they get in front of the customer. Being in front of the customer is the time for you to have fun.
The sale is won as you:
- Develop your business acumen.
- Practice your conversations.
- Develop your active listening skills.
- Develop an inventory of powerful questions that provoke and deepen the awareness of the problems and consequences your customers face.
- Study how customers in your market do business and consider ways that you could help them do it better.
As my coach used to tell me, if you’re not doing it off the field, you won’t do it on the field. So, what are you doing to win the game?
What Game Do You Want To Win?
I had a great conversation with one of my favorite clients last week that I wanted to share with all of you. I had just completed our Demand Creation Selling Bootcamp and as we were debriefing, the CEO asked me: “Doug, how precise do we have to be to be successful?”
My response was, “Well, it depends on what game you want to play and how you define winning.
“If you want to win the member-guest tournament, that requires one level of precision. Want to win on the Nationwide Tour, well that requires another level. Want to win a PGA Tour event, a major, several majors?”
He got the point. When we shared this conversation with his sales team, I asked them, “At what level do you want to play? At what level do you want to win? Are you working that hard at mastering your craft?”
So, I ask you:
- At what level do you want to play?
- At what level do you wan to win?
- Do you believe you can play and win at that level?
- How hard are you working at it?
Selling Before The Buying Process Starts
The definition of a great salesperson – or a Demand Creator – is someone who can sell when there is nothing to buy.
I don’t mean that you can sell ice to Eskimos, but that you can get conversations started before the customer/prospect has identified their need and begun the buying process. When you can do this, you gain two critical advantages:
- You are able to provoke awareness and create demand.
- Because there is nothing to buy, none of your competition will be there.
To be able to create demand like this, you must stop thinking of yourself (or acting) as a salesperson. Instead, you must truly become a businessperson who sells.
To begin the process of creating demand, and selling when there is nothing to buy, follow these four steps:
Step 1: Identify the problem you intend to solve. This should be a high probability/high value problem that impacts the types of customers you best serve.
Step 2: Answer the question – “Who gets fired if this problem isn’t solved?” The reality is, in today’s sales drought if the problem you want to provoke isn’t big enough for someone to potentially lose his or her job over, it’s not a big enough problem to create budget for.
Step 3: Determine if the person you have targeted has the authority to do something about it. There are two types of authority worth pursuing:
- The best is the authority to launch an initiative and allocate budgets to fix the problem.
- The second type is the authority to get you the attention of someone who can launch an initiative or allocate budget.
Step 4: If the answer to Step 3 is “no,” then you must go back to Step 1 and identify a bigger problem you can impact.
It’s Still The Wrong Question
I’m excited to hear the story of growth everyday in the CEO and salesperson lexicon. I’m beginning to see more and more companies looking to invigorate the marketing and sales initiatives that grow their markets. The danger is that people are still asking the wrong question regarding these initiatives.
I originally wrote this post four years ago and it’s still on point. I thought I’d share it with you again:
I recently had a conversation about some marketing initiatives. As we were outlining our objectives, I was asked the question, “How much are you comfortable spending on this initiative?” While this is a very common question – it is the wrong one. This is the kind of question that leads to poor execution. It is also one of the reasons people who are not sales and marketing people look at marketing with disdain.
The right question is actually a series of four or five questions. As you are planning your 2007 marketing program, I encourage you to ask them.
- Question 1: What do we want to accomplish? Or, what is the result we want?
- Question 2: What will it take and/or what we will have to do to accomplish our intention?
- Question 3: What resources (time, money, and energy) will be required to complete the actions that you determined by answering question 2?
- Question 4: Are we comfortable and/or capable of expending these resources (time, money, and energy)?
If the answer to this question is ‘no’, then you must go through the following additional decision tree:
- Sub-question: Are we comfortable accepting a result below our initial desires?
- If the answer is yes, then repeat questions 1 – 4.
- If the answer is no, then you must consider whether the effort should be taken at all.
While this approach requires both marketers and executives to think more, it is the only process that has any chance of working over the long term.
As I’ve discussed previously (here and here), one of the underlying requirements is to allocate your limited resources (time, money, and energy) effectively against those activities that have the best chance of advancing the organization towards its critical objectives.
I’ve seen too many organizations work extraordinarily hard without achieving their desired fast-growth results. One of the major causes is that they under-invest in too many initiatives. Under-investing is the result of focusing on a desired budget instead of focusing on the desired result. Don’t make that mistake.
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Resources
Doug's Washington Business Journal Columns- Intelligent Growth Articles
Third Wave Selling Blog
Products to Grow
