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Starting, building, growing and sustaining a business is hard.

Because we have little funding in this process, starting, growing and sustaining a business is done with a view to secure revenue as fast as possible. But this develops habits that, if we don’t change them, builds a business that generates income for us, but that can’t be sold.

94,6% of businesses started, fail to sell and close.

A life lived successfully growing and sustaining a business to build an income generating business, is a life lived poorly when you cannot monetise your years of risk and investment because you cannot sell your business for a capital gain.

Rather, we should have our cake (an income generating business) and eat it (a capital growth business). Both are possible and realising this too late is a costly mistake.

Listen to Pavlo Phitidis discuss how to get this right on this podcast from The Money Show

https://omny.fm/shows/small-business-focus/small-business-focus-building-a-business-that-gene

Think of it objectively:

If you have R1000 and you want to invest in the stock exchange, with a view to hold on to it for 5 years.

You can ear dividends – let’s say R200 per year. At the end of 5 years you’ve enjoyed R1 000.

In your business the income dividends come from a salary, other perks of owning the business and dividends.

In 5 years you now want to realise its capital growth

Let’s say your share is now worth R2000 – you sell it and gain R1000 on your initial investment.

You had your cake and ate it as the R1000 you made in dividends covered the R1000 invested AND you made R1000.

The third element to this is that the share has to be interesting to someone, to buy.

In our businesses, this so often doesn’t happen because the business owner is central to the continuation of the business. Without you there, there is no business.

You need to think with both an operator and investor’s hat as you run and build your business. The sooner you start thinking like this, and behaving differently, in accordance with this, the better your chance of making it into the 5.4% who can sell their business, and secure their retirement, and legacy.

Productivity

How productive is your business and why you should lose sleep over it?

Increasing your productivity should be a key focus as a business owner. It means you leave nothing on the table, maximizing your value all the time.

Pavlo discussed the difference between productivity and efficiency, and how to calculate your business’s productivity in this podcast from The Money Show:

Increasing your productivity should be a key focus as a business owner. It means you leave nothing on the table, maximizing your value all the time.

I recently met a manufacturer in the cosmetics and homecare industry. They make creams, ointments, soaps, and the like.

Looking to exit, a valuation of $20m had been offered and they wanted a view.

Their stunning, clean factory glistened with shiny machinery and equipment and a professional team gleamed with pride. The business owner felt that they could do better than the offer. We got to work.

After a day, we discovered that the business was running at 46% of its productive capability. After another day, we learned that the business enjoyed an 87% efficiency indicator.

What does this all mean?

Efficiency is about doing the same with less, while productivity is about doing more with the same. They are miles apart. Closing the productivity gap would add another $15m to the current offer based on the same valuation multiple. What’s best, is that I could be done in just 2 short years. 

How to calculate it?

Productivity measures the gross value added per worker

Productivity = turnover – consumption costs [(raw materials used in the production process + energy and materials + water + rates and taxes + consumables and packaging) + (services including sub-contractors + plant and equipment hire + tech, marketing, HR, accounting services + rent)]

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Divided by workers [owners and employees all active in the business]

How to get it right?

  1. Mindset
  2. Awareness and attitude – a growth mindset is vital
  3. Respect time – invest it or spend it
  4. Leadership – less time doing and more time leading, mentoring, delegating

  1. Diagnosis
  2. Core, strategic vs everything and anything
  3. Outsource expertise
  4. Increase efficiency, and innovate activities

  1. Execution
  2. Team driven to institute
  3. Measured to manage

  1. Change
  2. Culture and ethos of who we are and how we do what we do
  3. Hire for it, fire for it, reward for it
competition

Understanding the competition

No business operates on an island and no business is original or unique.

If you think you are, you are in trouble or protected by a massive bank balance or government license.

For the rest of us, we swim in a sea of competitors and every time they eat, we don’t.

Also, if you are not growing, they are eating your lunch, be sure of it. They might be doing it through product, service, business model or smarts.

Listen to Pavlo Phitidis unpack why knowing who they are and how they are doing matters in this podcast from The Money Show.

Competitive analysis and competition for the big 4 or 5 anything is easy. There is a tonne of data, they are incestuous and have no ability to protect IP and mostly they are listed with public information freely available. Think of any big bank, mobile network or insurer for example!

In the small and mid-tier business segment, besides the tens of thousands of competitors that we face up to daily, there is scant data to do a proper analysis and there are simply too many. So where do most of us begin?

Most of us start our businesses based on an interest, skill and insight. For example, if you are a petrol-head, love cars and develop insight and knowledge on cars, you are likely to find yourself in the auto industry. Perhaps the tyre industry. As you begin your business, you attend trade shows, exhibitions, and events. You subscribe to the TyreWeekly trade magazine. You even take a few courses on rubber and rims.

This creates for each of us a frame of reference against which we see your businesses, the industry and, how we grow and compete. In many ways, we become trapped, much like a person walking the same path daily for years eventually creates a ditch preventing you from seeing left or right. We lose the wood for the trees.

So, out of necessity we do a competitive analysis. We may go to a trade show and see our competitors with their products. In many cases, that competition is evaluated on a feature-for-feature basis. This leads to a feature-for-feature investment to one-up your products or services against those of your competitors. A better tyre, a coloured tyre or a different tread and for a while, you have an advantage, until your competitor has to respond and the battle begins again. It’s expensive and futile and everyone loses. The same goes for price. Competing on price is a never-ending battle until someone runs out of money. When they do, the price has been dropped to such a degree that there is little profit in the industry, making your daily grind, a grind.

If instead of seeing your business as a product, with a price, you saw it differently in relation to a customer, your competitive evaluation works differently and will give you a very different outcome.

It’s hard to get right because everything that moves, needs a tyre, right? If you only have a hammer in hand, everything looks like a nail. But, using this example, the tyre industry is full of differentiation. You have cars, used and driven by many different people for different reasons. The same with vans, trucks and lorries. You have industrial yellow metal, airplanes of different sizes and hundreds of different trailers. The list goes on.

Stepping away from a tyre and looking at your business as a customer begins a very fruitful journey. Since nobody spends anything unless it solves a problem (consciously or unconsciously), picking out 2 or 3 different types of customers in the tyre industry and then deepening your understanding of them takes you out of the product-price cycle and brings you into the problem-experience cycle. For example, in the grain farming industry, you have a few weeks that determine whether you will live or die based on your irrigation capabilities. Understanding that means that the big circular, mobile irrigation equipment has to work. If your tyres have been sitting out in the sun for months, cracking and weakening, and you need to irrigate, is there a cost that you would not pay? Understanding your business like that means you can better identify your competitors, evaluate them more closely and then add the features of service that will get you ahead of them specifically and directly.

Why your team is everything

At an event this week, I was told: “If you want something done properly, do it yourself”. It’s the biggest lie if you want to build a business that can grow and one day be sold. You need people – it’s an absolute fact.

Listen to Pavlo discuss this on this podcast from The Money Show:

https://omny.fm/shows/small-business-focus/small-business-focus-11

Some truths to start:

  • You cannot grow a business without people.
  • You cannot grow a business with people who are not part of a team
  • You cannot grow a business with a team that has no responsibility.

If you are, beware, since you don’t have a business but rather, you have created a job in the shape of a business. It will never be able to grow beyond a certain level and will never be able to be sold for a significant capital gain.

Your team’s impact on growth

We ran a survey across 308 mid-tier businesses (none were Aurik clients) doing between $1m and $10million per year. On average about 88% of these businesses want to grow. Of those, 95.2% had staff that were completely unaware of the growth strategy.

If your people don’t understand your strategy, how can they be aligned to it, to you! A huge part of leadership is communication and getting your team on board and excited about the growth journey.

Your team’s impact on value

There are 5 levers of valuation in a business. The 3rd is all about team – if you can’t delegate and train your team on the system they need to operate, you get caught in the engine room of the business and it gets very hard to see the wood from the trees and to see where your growth opportunities are.

Just hiring more people doesn’t solve your team issues:

It’s not enough to just employ staff, you need to capacitate them, and you need to make them accountable by delegating clearly. If you don’t have their buy in and haven’t given them the training for them to succeed, you’ll still be stuck believing that if you want something done properly, you have to do it yourself!

Digital marketing

Is digital marketing dead?

Digital marketing is about promoting your brand to connect with potential customers using the internet and other forms of digital communication. This includes not only email, social media, and web-based advertising, but also text and multimedia messages as a marketing channel.

A bold statement, specifically for and from the context of Business to Business (B2B) growth businesses with annual revenues R1m-R150m

*Big brands, who can throw the most money at the platforms, tend to win in this space, and business to consumer (B2C) also has a different experience on digital.

Listen to Pavlo discuss his reasons on this podcast from The Money Show:

It’s a broken covenant or we’ve been duped by the giant conglomerates who run these platforms – Google, Facebook and Twitter

In the beginning we were told good content is king, so create good content and the platforms would support your growth by ranking you better and growing your audience and community. Your ads, if created well, would pop and generate response.

Then it all changed, after we’d invested deeply in creating content for our community These platforms listed, and turned from looking at us, the users, to looking at their shareholders, and delivering returns. And the algorithms changed to serve that audience. And for users, they keep changing. You can’t keep up.

Today, we create good content, we build our community, but discover that we’re only reaching a small percentage of our community – and to reach the rest we need to ‘boost’ our ad.

The context: A changing environment

In the old days TV really worked. In South Africa especially, there were only a few options – SABC, eTV and multichoice so you knew if you flighted an ad it would reach millions. But that ad costs millions of Rands so that was only an option for corporates.

Radio used to be an affordable and impactful option for SMEs but it has been hard hit by Covid as fewer people are in their cars, in traffic. Even before Covid,  it had taken a huge knock from audio on demand which has become accessible to almost everyone from Spotify to podcasts to youtube.

Print has been decimated by online, which allows us access to news from millions of sources.

So, who can help us?

It’s become so complex to understand the digital marketing reports and results and so we turn to agencies to interpret the stats, and act on them.

Digital marketing is a long and expensive game, and SMEs are impatient – they want to see results! So the agencies move up the ranks to serve corporates.

In addition, many of the agencies are affiliated to one or more of the digital marketing platforms, and are motivated to use those platforms for your spend.

Where to now?

There are 2 trends that Pavlo sees emerging to get results from digital:

  1. Performance pricing

If you are an agency that is confident digital works – then consider getting paid on the basis of delivering leads.

2. Relationship marketing

Migrating good old fashioned relationship marketing into a digital delivery.

perspective

How you think about your business is how it develops

Reflecting on many business discussions, there is a consistent pattern that correlates the present to the future. 

How you look at the world, shapes the world to that outlook. To use a current example, a combination of cognate dissonance and confirmation bias at work across social media on the issue of vaccines. 

How you understand your business is driven by how you choose to see it. It is a choice. Listen to this podcast from The Money Show as Pavlo Phitidis illustrates this using the example of 2 clients. 

https://omny.fm/shows/small-business-focus/small-business-focus-how-you-understand-your-busin

Both are in the same industry and have similar business metrics. The deal in home furniture design, manufacture, and distribution. Both employ around 80 people, both exist in very competitive markets, and each is having a very different outcome.

Company 1 – Jack

The business owner came out of the supply chain and procurement department of a corporate furniture manufacturer. He found himself there after several years on the manufacturing floor. At 38 he started his own business with a good understanding of the supply chain, relationships.

Company 2 – Jill

She had started this business at 27 out of her parents’ garage. She did so to pay for college and contribute to his family home. She designed the furniture, made it and distributed it mostly through smaller, independent furniture stores. Over the last 3 years, she found access into bigger stores and chain stores too.

When I asked both business owners what made them special, they gave me very different answers.

One said, the materials, fabrics and chassis upon which the furniture is built, the manufacturing process and the factory floor layout with its plant and equipment.

The other said, the sales representatives who had relationships with the customers who bought the furniture. They influenced the design and manufacturer of the furniture.

The one business enjoys steady, consistent sales and the other struggles, finding traction hard to sustain.

When I first met Jack, he took me around his factory and spoke to me about the various fabrics and imitation leather materials. He showed me a cnc lathe that could cut out the fabrics based on his CAD furniture design software.

Jill spent a short amount of time with me at her factory and then took me out visit 4 of her retailers. She had asked that we meet on a Saturday and then spent all the time talking about how the shoppers in the retailers behaved and how that informed all her decisions.

Can you guess who is growing and who is struggling?

Both are smart, experienced, and hard working. Both are determined and well connected.

When I ask Jack what challenges has he faced and how he overcame them, his answers all centred on product. Jill’s all centred on her customers, customer behaviour.

A business exists for only one purpose: To solve a problem for a customer by providing a great experience. When you see and value your product, before you see, understand and value your customer, their problem, and the experience they wish for, all your responses to business challenges will be wrongly orientated.

You can build a better mousetrap, but the world won’t beat a path to your door, if your customers own cats.

unit economics

Understanding your businesses unit economics

In any business, understanding your data and knowing which data is valuable, helps manage risk, performance and value.

Understanding your unit economics begins this process. Unit economics simply evaluates how much profit you make from selling one unit of service or product. It’s easier to calculate in a very early-stage business but much harder in a growing, established business.

Listen to this podcast from The Money Show where Pavlo Phitidis outlines how to calculate your business’s unit economics:

Continue reading

What is business experience and how can you value it?

Experience holds much promise. When you want to grow, experience can accelerate it. When you are facing challenges that overwhelm you, experience can solve it.

What does experience look like?

Grey hair, time in the game, a fancy car, connections and networks, a string of degrees, Harvard, titles and the list goes on. Is that the experience you want?

Onboarding experience into your business to grow or solve problems is valuable only if you get it right. It will otherwise be a costly mistake.

Listen to this podcast from The Money Show where Pavlo Phitidis breaks down what elements of experience you need to look for, to achieve clear outcomes.

How do you evaluate experience?

Time – Does someone who’s been in business for 20 years have more relevant experience than someone who has been in business for 5 years? Think of driving to understand the value of time.  When you first learn to drive, there’s a massive, steep learning curve and within a few months, you quickly get the hang of it! Since then, how much have you improved your driving? Sometimes we don’t even remember driving to the shop – it’s automatic. And would you like to be driven to the shops by your 95 year old grandpa? No, even though he has 80 years of driving experience, it doesn’t make him a better driver.

But think of Lewis Hamilton, who spends every single day working on his driving. He’s got far fewer years in the driving seat but his constant attention to it sees him improve every day.

Context – Does the experience come from government, corporate, university or the school of hard knocks and is that relevant to your business?

Position – Chairman, CEO, CMO and everything else, what does their experience actually look like, what do you need them to achieve.

Function – Strategy, sales, ops or admin – where is your biggest need?

Activity – Were they alone, in a team, led by the team or leading the team, saying or doing?

Outcome – How is success and failure communicated, evidenced and truthfully expressed

How do you value it?

Onboarding experience should be preceded by need.

A need to grow – remember if you are not growing you are dying.

A need to solve challenges – some come from complacency, others come from growth.

Define what the problem or opportunity is. This means give it context, description, shape, and form and ultimately a measured outcome. Hire the right experience to deliver on that, and value it at the resolution of opportunity or solution to the problem.

If you are not seeking the outcome of experience in your business, it might be time to question your ambitions or purpose. Nobody knows it all and wisdom, the sum of insight and foresight, will never leave a growth mindset comfortable or complacent on status quo. It can always be better. You can always be better. If that’s the case, why not be better. Experience, well placed, can constantly close that never closed gap at being the best you can be!

job vs asset

When the business you’ve built is just a job

Don’t look where you fell, look where you slipped is a favourite African Proverb.

Listen to this podcast from The Money Show where Pavlo Phitidis unpacks why this resonates with him in regard to many business owners he works with:


It came to life after 2 consultations with 2 different business owners today.

The first business owner, in his 50’s has built a remarkable business in a commoditised market. With a $30m annual revenue, he has generated a solid income for himself and the partners. They now want to monetise their 32 years of investment and risk through a sale. This would allow them to enjoy the capital gain that would be their greatest wealth generating instance. But the market does not see their value. After a due diligence from a prospective acquiror, it was evident that the partners hold and own relationships that are responsible for 56% of annual revenue. The uncertainty that these relationships would remain in play after they sold, led to the acquiror discounting their asking price by a hefty 60%.

The second business owner in the security sector is in his late 30’s. Over the last 5 years he has built a very smart, tech-based solution for the eventing industry. Specifically, it is suited to big entertainment, sports, and political events. Recently, his business took off. But his clients, on the back of big, medium-term contracts, insist on his presence at the events, even though he needn’t be there for the service to function and perform. He wants to work with Aurik to resolve this problem. We’ve agreed to help. It’s a problem we have solved many times before. Today was the third postponement of our first session. But the news, like last time, is all good. He is overwhelmed. Having just signed on 3 new stadia and bidding with a high likelihood of success for the Olympics, he urgently has to deal with client needs. Urgent, but how important? This path will lead to the same problem faced by the first business owner – is the business an asset or is it a job?

Starting and building a business needs you at its core. It’s you that needs to learn what works and what doesn’t and through that, find a path to establishment and growth. Transiting from your daily direct leadership to a team then becomes essential. This is where many fail and 5,10,20 years on, still remain front and centre of the businesses sustainability or growth. So how do you get it right? And when should you act to get it right?

How do you get it done?

  1. Simplify – narrow the scope of your business both in terms of who your customers and clients are as well as the extent of the services you provide to solve their problems. A simple business is scalable and a scalable business is a growth business.
  2. Systematise – translating and articulating the activities you perform in how you market, sell and service your clients into teachable activities, organised into a sequence with measured outcomes is next. Once done, linking and stitching them into a single system or experience from the view of your customer is vital.
  3. Delegate – with your business organised into a single system, made up of the many activities, you can now empower your team to perform the activities. Remember, the activities generate the experience, not your personality. If you cannot get it done, discard that element of the experience and make do with what you can get done.
  4. Grow – with a scalable platform for growth in place, growing beyond where you currently are needs to be led by you. Setting a framework for growth that maintains the scalable service platform you have now built is essential. Failing to do so unwinds all the effort and will see you again, front and centre of the business, or put differently, the job you have built.

When should you start?

Once you have traversed the first 3-5 years of start-up, the time to transfer relationships, processes and responsibilities becomes essential. Should you opt not to or fail to do so successfully, you are building a job, not an asset. You limit the scope of your business’s potential, limit the opportunities to attract driven team members and fail your own future wealth creating instance.

Urgent and important are different. Urgent mostly means that you are being led by other people’s agendas. A client must be responded to. But you have full control over which clients you have, the promises that are made and how you build your business to operate without you. That’s the important, strategic, structural stuff of turning a job into an asset. Put differently, building a business that can be successfully sold in the future to become your greatest wealth generating instance.

funding for growth

Growth funding – debt, equity, or both?

Not all business growth needs funding.

There are two types of growth: organic growth and next-level growth. Listen to this podcast from The Money Show where Pavlo Phitidis unpacks both, and what the funding options are for each. 

 

 

Organic growth sees your growth emerge along with the business’s ability to support it. Your organic growth rates will be governed by your working capital cycle, team, and equipment capacity and then outside influences like the country’s growth rates and economic cycles. See this as a marathon that requires a consistent, predictable pace to finish the race. 

Next-level growth relies on you going beyond your weekly, monthly activities and requires trailblazing and a very deliberate, focused effort. Think of entering a new market, acquiring new assets or teams, developing new products or innovations, or even acquiring a competitor or aligned business. See this as a sprint within the marathon to get ahead quicker and faster than the rest of your former best time. 

As you put more effort into growth, you need more oxygen or fuel to feed the increased activity. Accessing this funding is vital and failing to do so fails your effort of next-level growth. 

 

Where do I go first for funding? 

Depending on your life stage and stage of business. The further you are from retirement, the more risks you can take. A more mature and established business means your funding will be cheaper.  

A younger business and owner may start by looking to banks for debt and likely fail. Next will be an external funder called an angel funder, who will look to take equity against a loan provided, or a pure equity stake as an early-stage investor. This means they become a shareholder and earn a seat in your future and direction. It is a marriage of sorts.  

At a later stage, business owner and business can turn to banks for debt funding and likely succeed. A loan is granted and requires capital and interest payments to be made until it is settled and repaid in full. It will mostly be granted against the security of an asset. 

 

When is debt best and how do I get the deal done right? 

Debt is best and cheapest in all cases of organic growth. If you tick up the growth rates in your business, debt is still best. The reason is that you remain in full control of your business – this might be a good or bad thing! Nonetheless, it’s an easier source of funding to understand, evaluate and calculate, keeping things simpler for you.  

But, it is unlikely to be granted in any meaningful amount unless underpinned by an asset.  

Your business assets – plant, equipment, debtors, stock, investments – all act to cover the risk of the debt being provided by the funder. Earlier stage businesses will require higher risk cover than later stage businesses because they face a less predictable future. If you need funding to support your businesses growth and uptick using non-material assets like salaries, technology, marketing, and so on, you might get some through overdraft (costly), but it’s unlikely since there is no security against that spend. You can look elsewhere to get that funded, but it’s messy and complicated.  

When raising debt, be sure to understand the cash flow implications. The next month you’ll be required to pay back the debt! Payments include principal capital amounts as well as interest on the debt.  

Suppose your funding is an investment that will take time to yield an increase in revenue or profit to settle that debt. In that case, you need to negotiate a moratorium on capital or interest or both. This acts as a holiday on the payments you owe for a specified period but increases the debt’s accumulated value, which still accrues interest. 

 

When is equity best, and how do I get the deal done right? 

If you are ready to sprint, you need growth funding. Again, your first option should be from your coffers, followed on by debt if the amount is not too big, and you can manage the payments you’d need to make to the debt provider.  

Alternatively, and most likely, if it’s a big sprint, you’d need to raise equity. The process begins with finding the right funder. More than money to invest, they should bring skills, relationships, understanding, and other benefits to help you attain your next-level growth ambitions. This would make them a strategic funder. If all they offer is money, they are simply a funding provider. This matters because the pricing of the equity will differ between the two options.  

A strategic funder can get you where you want to be faster, safer, more reliably, and more efficiently. They can probably also get you there bigger. They will price it all into the cost of the equity. In addition, equity funders will also want a clear, obvious exit strategy.  

Their business is about investing an amount of money with the intention to get out of your business in the future with more than they invested. How they extricate themselves from your business will be a key concern for them and you need to be able to convince them accordingly.  

Equity is good to fund your business once you have exhausted your debt options and it stretches across all your growth assets, tangible, or intangible. It’s hard to raise, takes a massive amount of time and tests your intention behind why you do what you do. Seldom do we have time to think ahead into the future – equity. 

The way we build businesses, and the way companies must be built to secure the right funding at the right time differs. Often, we bemoan the funders, blame others, and claim there is no funding in the market when we fail at securing it.  

There is more money to fund business growth than there are businesses worthy of funding. Knowing that and adopting an Asset of Value™ growth approach will locate you in the heart of a deep oxygen pool to fuel your greatest ambitions.  

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