This Week@Work Pavlo’s meetings with long-established business owners left him concerned about their runway to an exit. They have spent their careers focused on operational issues to generate income to sustain the business. Only now are they realising they should have been focused on growth and capital value to secure a profitable exit. What are you spending your time on?
Running a business based on project revenue models can be a roller coaster ride. Money comes in only when a project lands, and business owners are sucked into high-risk projects that make it difficult to budget, plan, hold onto skills, stabilize suppliers, and scale. Every project feels like a game of roulette due to factors beyond your control, such as weather and the availability of resources.
To build an Asset of Value™ and escape the tyranny of project revenue models, some businesses have changed their approach. Let’s take a look at a few examples:
Construction Firm: This 2nd generation family construction business was hit hard by COVID-19 as big developments stalled. They responded by creating a designer-shack that was quick to erect, multi-functional, and aesthetically pleasing. It could be used for versatile spaces including a home gym, an office, a bar, a DIY workroom, garden shed or a kids’ playroom.
They found opportunities in multiple channels to market, such as website sales, retailers in hardware and building supplies, gym equipment distributors, realtors and estate agents, office furniture stores, architects, furniture stores selling bar-related furniture, liquor stores, and overseas markets for flat-pack, easy-to-erect versions of the product.
Software Developers: Two partners in a software development firm solved problems for big-brand corporate clients that the big-brand tech companies could not. They analysed all of their past projects and identified localsation trends, orienting their business around software solutions to manage complex SME value chains. .
Advertising Agency: Two partners in an advertising agency prided themselves on bespoke, thinking-outside-of-the-box solutions, but they struggled with a project-driven business model.
After positioning their service to zone in and focus on developing and producing brochures for vehicle manufacturers, their understanding as to how the brochures were used to promote, educate buyers and support the sales and marketing efforts of dealers allowed them to secure a consistent and reliable stream of projects. This flattened out their event based revenues into a steady stream of revenue, allowing them to hold onto talent, increase their return on marketing spend, build distinction and competence, and secure a capital buyout.
To get it right when changing your approach to building an Asset of Value™, you need to understand your purpose and intent, make a commitment to achieve that, create a path to exit, focus on a single goal, dedicate the first 90 minutes of every day and the last two hours of every Sunday to this goal. you may need to split responsibilities and fund one from the other, set milestones that shift time, attention, and resources, hire with the end in mind, and chase the transaction in the old business while building relationships in the new one.
Unfortunately, not every business gets it right. The construction firm sold two of their designer units and got sucked back into a new project, and nothing has changed. But for those who succeed, the rewards can be significant. The software firm has built a product that aligns with current trends and now generates approximately 85 million in annuity revenues across 350 clients. The advertising firm specialized in motor vehicle brochures and POS, created a repeatable, teachable process, built brand and reputation, and sold out in 2017 to a big agency for R23m.
In conclusion, by changing their approach and building an Asset of Value™, businesses can escape the tyranny of project revenue models.
However, it takes commitment, focus, and a willingness to take risks to make it happen.
This week at work, Pavlo met with a group of brilliant engineers who undoubtedly offer a highly specialized solution. It’s something no one else can do at this stage and they believe that is enough to drive their growth. It made me ask whether these engineers are building a business, or if they are just creating a job for themselves. The difference is profound.
Watch as he address what’s missing if all you have is a brilliant product or service.
We spend years building a business to generate economy for ourselves. Mostly, we are undercapitalized and learn to do things ourselves. It becomes a habit. Then, of a day, we decide we want out. Or circumstances change and we want out. This is brand new to us despite the 10-20-30-40 years of investment work in our businesses. All your experience is in generating an income through your business, you have no experience selling it.
Understanding your exit roadmap early will serve you well. Listen to this podcast of Pavlo Phitidis’ discussion about business exit planning with Bruce Whitfield on The Money Show on 702 and CapeTalk:
94.6% of all businesses started, fail to sell. Even the well-established ones. Think of it like a share you would buy on the stock exchange – what would you want from it?
You want to earn dividends each year hope, and when you are ready to sell it, you want to be able to sell it – for a capital gain. Your business is the same, it needs to demonstrate to a potential buyer the following:
Think of your potential buyer as a customer: That buyer needs to have a problem solved and different buyers have different problems, different skills and competencies.
Identify who the most likely kind of buyer would be for your business, and think about what they would want, and how you should build your business to suit their wants and needs.
It is very rare to get an outright cash offer for your business. Pavlo shared the story of an American business owner he worked with, who got this right. He did medical assessments for insurers and over a period of time he realized it wasn’t scalable as he had to do each patient visit. So he harnessed technology through Amazon, Instagram, Facebook, Google and used all of that data to create a risk profile for individuals, which he provided to the big insurers. When he was ready to sell he got a once-in-a-lifetime offer of $180million. But that was extremely rare. Most of us will not secure such a simple payment.
So who is buying what?
This leaves a no-mans land between around R25 million and R50 million where there is no-one who wants to or can buy your business. And it’s important to know that, as you grow your business towards an exit
Smart and successful businessmen have faith in their vision for their companies, but they need to be aware of their limitations and see themselves and their situations in the proper light.
A failure to do this leads to the business blind spot, a place where we can’t see what is going on around us. It’s also a place where we see things not for what they are, but what we perceive them to be. It grows from a history of how things have always been done in the business and a narrow view of what the business needs going forward. On The Money Show with Bruce Whitfield this week, we discussed business blind spots, how they develop, what they cost your business and how to prevent them.
Recently, I met two business owners in their late 60s. Both started their businesses from the ground up, work hard and earn their success. But what perplexed me was that even with their wealth of experience, both were plagued by glaring blind spots preventing them from putting succession plans in place.
In fact, the global status of successful succession is bleak – 28% of businesses survive it and only 3.4% make it there.
Keeping it in the family
However, blind spots are extreme in the family context. Founders in their late 60s and early 70s don’t admit to their fallibility easily. They can’t tolerate change, but argue that they don’t want the next generation to change the way they’re running the family business because it’s too risky. The successors can’t see that the founders are fearful of risk simply because time is running out and change means risk. This cycle places both in a deep, dark circle of despair – and both generations know it, but feel helpless to change it.
We all suffer from them
Many successful businessmen overestimate their capabilities and have an infallible view of themselves. They surround themselves with a team that seldom disagrees and mostly offers opinions that support the boss’s views. They listen to reply, not to hear and they talk to an outcome but don’t back it up with a plan to act. They seem convinced that what and how they are doing things is the best course of action to grow their businesses even though the numbers don’t agree.
Luckily, there are some blind spot antidotes that we can embrace such as:
As a business builds over time and as growth comes in, the complexity of the operation increases and your ability to change your way of working is crucial. Don’t allow your business to be sabotaged by blind spots. They can lead to a misplaced commitment to a selected course of action that can cloud your vision and stunt the growth of your business. If the destination is clear and there is a clear vision, you can get past the problem and deliver on the promise.
Aurik Business Accelerator will work with you to build, implement and manage a family business succession plan.