Category: Business

Posted on

Cross Training to keep your business fit!

For me, cross training in a gym is a distant memory but I am sure some of my readers may still indulge. In a business sense, cross training is a great way to improve the business.

In a well-designed induction program a new team member may experience several different departments over a number of days or weeks. That allows them to start on the job with a wider understanding of how their work impacts upon the rest of the business.   It’s a really good way to bring someone into the team and make sure they have a decent understanding of how the business as a whole gets things done.

It’s not often that you see the same principles being applied to established team members, but it can be a great way of making sure that departments work together, rather than forming silos where information is retained within the department and competition with other departments rather than cooperation is the order of the day.

Tesco used to require the senior team (from directors down) to spend some time on the shop floor every year. I wonder if that no longer happens, and some of their problems can be related to the disconnection between the leaders of the business and its customers.

When you acquire a business you should have a plan to integrate the two businesses and a very powerful way to blend the cultures is to have an exchange of staff.

I’ve used cross training with the credit and collections teams, working with the sales team.  The credit team can be very dismissive of the sales team – I’m sure you have heard phrases like “Those lazy sales folk, they can’t even get the credit application form completed” but get the credit team into the meetings and they’ll realise (a) how much else is going on to secure the customer and (b) how clumsy the credit application form is.  In one case I remember the credit application form was reduced from 8 pages to 2.

Cross training really can keep (your business) fit

Posted on

New Markets

One challenge for any business is that a product has a life within a market and that life has a limitation. It may be that the time frame of that life is substantial but there will be a limit.

Addressing the decline of a product can be managed in many ways but one of the less frequently employed is the alternative market strategy.
Alternative markets take many guises, from geography through alternative uses, and examples are readily available once you start to consider them as such.
Relatively few businesses have a defined export strategy but that can allow you to deploy the same technical skills and knowledge. You will have significant marketing and possibly design work to enter such new markets – what works as a marketing campaign in the UK almost certainly won’t work in another country, even an English speaking one

Export markets can extend the life of a product to a really significant degree; many years after the decline of the western European market for the non-smart phone, those same phones were highly prized in emerging markets such as Africa.

Alternative uses for a product are sometimes harder to recognise; if you are not embedded in the history or knew the product before the use you now see you may not be aware of the transition. I watched a TV program about an early 20th century hospital where one of the surgeons adopted an early model vacuum cleaner for use as a suction device!

Listerine was developed as a surgical antiseptic, and an article from 1888 recommends Listerine “for sweaty feet, and soft corns, developing between the toes.” Over the course of the next century, it was marketed as a refreshing additive to cigarettes, a cure for the common cold, and as a dandruff treatment. But it was in the 1920s that the powerful, germ-killing liquid finally landed on its most lucrative use as a magical cure for bad breath.

Viagra was originally conceived as a treatment for hypertension, angina, and other symptoms of heart disease. But Phase I clinical trials revealed that while the drug wasn’t great at treating what it was supposed to treat, male test subjects were experiencing a rather unexpected side effect: erections. A few years later, in 1998, the drug took U.S. markets by storm as a treatment for penile dysfunction and became an overnight success. It now rakes in an estimated $1.9 billion dollars a year.

Brandy started off as a byproduct of transporting wine. About 900 years ago, merchants would essentially boil the water off of large quantities of wine in order to both transport it more easily, and save on customs taxes, which were levied by volume.

Coca-Cola was originally invented as an alternative to morphine addiction, and to treat headaches and relieve anxiety. Coke’s inventor, John Pemberton — a Confederate veteran of the Civil War who himself suffered from a morphine addiction — first invented a sweet, alcoholic drink infused with coca leaves for an extra kick. He called it Pemberton’s French Wine Coca. It would be another two decades before that recipe was honed, sweetened, carbonated and, eventually, marketed into what it is today: the most popular soda in the world.

Play-Doh, was first invented in the 1930s by a soap manufacturer named Cleo McVickers, who thought he’d hit upon a fantastic wallpaper cleaner. It wasn’t for another twenty years that McVicker’s son, Joseph, repurposed it as clay for pre-schoolers and called it Play-Doh, a product that remains wildly popular among the under-5 crowd today.

Posted on

Hiring a professional can be money well spent

Last week I was introduced to a team of three directors who have fallen out with the 4^th director, who is also the largest shareholder in the business.

This team of 3 merged their business with the larger business owned by the 4^th director some time ago, and things have not worked out as they would wish.

I’m helping them unravel the situation, but in establishing the true position it has become apparent that some of the advice they were given was not what I would have recommended, and seems to be unduly favourable to the larger shareholder.

I know the legal firm they used for this transaction – indeed they acted for me when I sold my house – but I would not recommend them for a corporate finance transaction. I am sure they do a few transactions a year but this is dangerous territory best left to the experts.

One item in particular jumped out at me. There is provision in the shareholders agreement for a “bad” leaver to have his/her shares bought out by the other shareholders. The valuation of the shareholding uses the same mechanism for a “good” leaver as for a “bad” leaver.

In this case, the largest shareholder appears to have breached employment law, the shareholders agreement and his statutory duties as a director!

It seems likely he will be a “bad” leaver.

I have not seen the valuations but I am sure the value of his shares will be quite substantial – even though he will be a bad leaver – so that my clients will have to find substantial resources to buy him out.

A provision for a bad leaver might well have saved my clients several hundred thousand pounds. I think the investment in the appropriate expert – a few thousand pounds – at the time of the merger might well have been worthwhile.

“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”
Red Adair

 

Posted on

What shape is your revenue?

When I ask a business leader

“What was your revenue last year?”

I’ll get a number as the answer. That tells me a little about the business, but from a business value perspective I want to know a lot more.

The next question is

“How many active customers do you have?”

This often leads to a debate about the definition of an active customer, but usually gets an answer fairly quickly. I think an active customer bought from you within the last 12 months.

There are two more elements that go to make up the revenue profile, how often does your customer buy (f) and what is the average order value (AOV)

The formula looks like this

rev shape

Where T is your turnover and n is your number of customers.

From the business buyers perspective, once n has reached a minimum level what matters next is the frequency with which the customer buys.

It is important not to become too reliant upon one customer and prospective acquirers will be worried if one customer exceeds more than 20% of your revenues.

A customer who buys from you once a year is typically worth less to an acquirer than one who buys 3 or 4 times a year.

There are exceptions. It might be that the once a year purchase is from a “Marquee” customer; someone you are proud to do business with and usually someone who commands instant name recognition.  If you are able to state “We supply John Lewis” that will count as a marquee customer, but other examples might be government business or the NHS.

The most valuable customers are those who are on long term contracts, where you are providing goods or more likely services.  These are very common as support services, for example in IT or building maintenance.

Within these contracts there are a few things to look out for to ensure you maximise the value.

A real “Red flag” for the buyer is if the contract contains a “change of control” clause, allowing your customer to break the contract if the ownership of your business changes.

It’s good to have contracts set up as “evergreen” where the contract automatically renews unless one party (or the other) gives notice, but within these there will need to be some form of pricing mechanism.  You don’t want to be trapped in a contract where your costs have dramatically increased, but you are unable to adjust your sale price.

If your business doesn’t lend itself to long term contracts, aim to move as far down that road as you can. Become an approved supplier or a preferred supplier or enter into some form of framework agreement – anything you can do to evidence a strong relationship with your customer.

If you want the best value for your business, you need to show that your revenues (and your profits) are growing, year on year.

That does not necessarily mean that you should keep adding new customers. If you can increase the frequency with which your customers buy, your revenues will grow. If you can increase the average order value, your revenues will grow.

 

 

Posted on

Peer to Peer lending in the news – do you have a hook?

There’s been quite a bit of news this week around Peer to Peer funding and the most recent success stories. In case you missed it, a property developer has raised something over £4m for a project in Croydon – you can read more here.

Peer to peer funding or crowd funding are a real change from the traditional financing models, but they may not be appropriate for your business financing needs.

The fundamental change is that in P2P or Crowd funding, it is a many to one relationship and your project is competing with many others to be visible and to attract investors.

If your project is something that is easily understood, or has name recognition, or is quirky enough, then you may be able to get funding through the peer to peer route.

If that’s not the case, getting funding through the traditional routes may be more appropriate.

Think how you could market your project or business to investors; is there a “hook” you could use?

 

Posted on

So you want to buy the business you work for?

Many people dream of running their own business and sometimes you’ll be in a position to think about buying the business you work in.

There’s a whole raft of things to think about along the way but here are a few to consider.

If you are successful in buying the business, that’s just the start. What are you going to do with it, and do you have the skills, knowledge and experience to successfully run the business? One way to think about that is to write down all the functions, then assign names to them from your team. You might want to get the existing owner to do the same thing; there may be some surprises for you!

Do a SWOT analysis on your team; be prepared to hire the skills you don’t have in-house

As an employee, working for the owner, you have an established relationship.  If you are going to make an approach to buy the business, you will change that relationship. There’s a risk that if you make an approach, and it does not work out (for whatever reason) you will not be able to continue in your role.

To minimise this risk, make the approach very carefully and be as subtle as you can. Be prepared to take your time and give the owner time to adapt to your suggestion.

Money matters. The chances are that you cannot pay as much for the business as a third party, with deeper pockets, can afford. Be open with the owner about your finances, and be prepared to go “all-in”. That may mean putting your house on the line, risking your pension…is your partner or family prepared to take the risk?

For the existing owner, there are a number of benefits to selling to the team and you’ll need to emphasise them. You probably cannot compete on price, so compete on the emotional appeal of looking after the business and the team. There’s also the avoidance of a protracted sale process involved in the sale to a trade buyer.

Get help early on to advise you; there may be more sources of funds available than you realise, and the conversations with the owner may be more fruitful if both sides can express opinions untainted by the (probably many years) experience of working together.

Posted on

Is it Christmas yet?

Every year all the children get excited because Christmas is coming, but all the retailers get stressed because Christmas is their busiest time of the year.

In the US their busy period is from Black Friday (the day after Thanksgiving) through to Christmas.

Wikipedia tells me the name comes from the appearance of the crowds that thronged the streets of Philadelphia but the popular myth is that it is when the retail chains move into the black (into profit) for the first time since January. Don’t tell anyone, but the smart retailers make money all year round, not just in the last few weeks of the year. The dumber ones go broke in January & February when the rent bill falls due.

Is your business seasonal? Is there a distinct pattern to your sales, so that you know that some part of the year will be quieter than another? Do you look for the pattern?

Seasonality is common in many business sectors, with summer holidays and the Christmas break affecting many, but if your business is seasonal you have three choices:

A.      Match your resources and investment to the pattern of your sales. Some businesses do this through the use of temporary staff (Retailers at Christmas is a classic example of this)

B.      Use the quiet period to do jobs that have been put off from the busy period (common in the agricultural sector, and in some parts of the building trade)

C.      Find something else to fill in the gaps

One of my clients is a florist, and their seasonality is weekly, or rather at the weekends. Everyone wants to get married at the weekend!
We’ve made a deliberate decision to target other markets, moving away from weekend work to jobs that can be done between Monday and Friday, balancing out the workload across the week. It will never be perfect, but where doubling the size of the wedding floristry would require a doubling of the team, we can double the size of the business during the week just by utilising the existing team & giving them a few more hours.

Big swings in sales lead to big swings in cash flow, big swings in cash flow stress the business (and the owner) sometimes to breaking point. If your business is very seasonal, that’s not a good place to be. Remember that more businesses fail from cash flow problems than anything else.

Find another market, or another product to sell to smooth out that seasonality.

A colleague helped a client whose business was entirely winter seasonal; they bought a business that equally seasonal, but in the summer.

The same is true of orders and projects. If all you do is very large projects, sooner or later one will go wrong or be delayed & deferred. Lots of little project to fill in the gaps are a really good idea.

The best sales graph is one that has a smooth upward curve – how can you smooth out your sales?

Posted on

Keeping a customer is easier than finding a new one

I was reminded of this yesterday by discussions in an all-day meeting planning the future of the organisation.

We’re taking a new direction, investing some additional funds and resources to increase and re-shape our marketing so that we can win new business. The meeting yesterday focused on the strategy in the morning, then the tactics in the afternoon – a very productive day.

Towards the end of the day we turned to the subject of customer retention, and realised there was a possibility that some of our new activities, unless carefully communicated, could disappoint and disillusion our existing customers.

We chose to forego some of the whizzy new stuff to keep the existing customers happy. It does not mean we will not do it – just not yet – and the cost to us is minimal. There’s an opportunity cost, to be sure, but it is pretty small.

If you lose 10% of your customers in a year, you’ll need to add 11% just to stand still.

If you break down your revenues by customer, and then by order size you get a formula that looks like this:

Total Sales = Customers x Sales per Customer

Sales per Customer = No of Orders x average order value

So to grow your total sales, you can either increase your number of customers or you can increase the sales per customer.  One of those is much harder than the other!

To increase your sales per customer, you can either increase the number of orders (the frequency with which the customer shops with you) or you can increase the average order value.

So, how much of your marketing effort is devoted to your existing customers?

Posted on

Strategy or Tactics?

Many business advisors bandy around the words “strategic” and “tactical” but for me, the only real difference is the timeframe.

There will be times when you have to take a decision to solve today’s problem, but it comes back to haunt you at a later date.

It’s a bit like buying something you can’t really afford on a credit card. If you are not careful, you end up paying for it twice over (or more) by the time you’ve paid the interest.

A client of mine has been approached to sell his business, and I am helping him through the process and we are providing information to the buyer.

One piece of (quite important) information is the share structure and ownership of the business.  The MD and his wife are the majority owners, but two key employees (Nick & Bob) were given a small shareholding many years ago.

When the MD declared the shareholding, he included Nick & Bob as owning 5% of the business each, but when I looked at the accounts there were far more shares that he had declared.

Several years ago, when bidding for a large contract, a director’s loan was converted into share capital so that the business could obtain finance. 

The MD had forgotten all about that transaction. It had to be done at the time, his money was already committed to the business, and it didn’t matter to him.

But Nick & Bob don’t own 5% of the company each, they own 0.05%.

This business will sell for about 5 million pounds; Nick & Bob will receive a few thousand pounds instead of the £250k they would be entitled if they still owned the 5%.

If my client wants to do the honourable thing and give Nick & Bob the difference (I am sure he will) then taking into account the various tax implications he will be about 500k worse off.*

If, after taking the undoubtedly short term decision to convert that loan to share capital, the MD had thought through the implications for Bob & Nick in the longer term, there would have been a way to make sure they still had the 5% he had promised them.

So when the answer to the short term problem is obvious, and you just get on and do it, try to take a step back every so often & ask yourself the question

 “How will that affect me / us / the business in 3 years’ time?

*(Now I think I have a solution for this problem – I just need the corporate lawyer to check)

Posted on

Business Valuation

Valuing a business is much more of an art form than a science, simply because value, like beauty is in the eye of the beholder.

A business that has immense value to one potential buyer may have very little value, or attraction, to another.

Your business manufactures and sells blue widgets. Your competition only has yellow widgets.

If the prospective buyer doesn’t care what colour the widget is, the two businesses can be directly compared, but if the buyer only wants blue widgets, your business is worth far more than the manufacturer of yellow widgets!

The over-riding principle is that in 90% of cases a business is bought for the future profits it will make, and the valuation calculation is an attempt to place a value on those future profits.

The other 10% of business purchases are for bought for lifestyle choices, a passion or an interest (think football clubs) or for egotistical purposes.

There are many different technical tools and calculations used to try and estimate value, but the real challenge is to identify the right strategic buyer and see the business from their perspective.