What are the Benefits of a Diversified Revenue Stream?

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by Michael Iverson, Principal of Trillium Financial

When you think about the way America’s small businesses get started, it should come as no surprise that a relative few have revenue streams that could be considered diversified. A great many startups are the result of the entrepreneurial recognition of a market need.  In many instances, the market need is that of a single, sizeable customer.

For instance, I once made the acquaintance of a woman who helped manage the investments of a state pension fund.  One of the challenges of her position was keeping abreast of corporate governance matters for a universe of nearly 2,000 stocks owned by the pension fund.  Her team had a fiduciary duty to vote the shares in the best interests of the pensioners.  Yet, keeping tabs on executive compensation plans, auditor changes and corporate acquisition proposals for 2,000 different stocks was nearly impossible, given the small staff of the pension fund.  Why wasn’t there a service that could provide advisories on the stocks owned by her fund and other pension funds?

To make a long story short, she left the pension fund to become an entrepreneur and start the business that would address the very need she had identified.  She started a fiduciary advisory service to track corporate governance issues of stocks held by pension funds.  Her former employer became her first customer.

Starting Out

In the early years of a startup, it’s not uncommon for a business to be strongly dependent on its first customer. For some startups, it is 100 percent of first-year revenues and more than 50 percent of second-year revenues.

No matter how solid that first customer may be, it is prudent to become less dependent on the customer by diversifying the revenue stream.  Keep the original customer happy by providing outstanding service, but develop new customers as quickly as you can.

Diversification of revenues provides financial stability for your company, reduces business risk and makes your business infinitely more marketable when it comes time to sell.   Diversification can be number of customers, geography of customers, and product offering.  One of the metaphors that I have heard over the years is a three-legged stool offers more stability then a two-legged stool.

Shoot for 15%

As a goal, try to diversify your business to the point that no single customer is responsible for more than 15 percent of revenues.  Until you achieve that goal, the possible loss of your largest customer (due to reasons as varied as a change of ownership or a sudden downturn in the customer’s industry) carries significant financial risk to your business.

I have met any number of business owners who have lost a customer responsible for 30 percent or more of their revenues.  The results can be devastating.  Imagine having taken on debt to expand the business, only to lose a customer of that size.  Some businesses can’t survive that kind of a hit; others survive, but with great difficulty and sacrifice in the way of layoffs and contract renegotiations.

As many of my clients know, it’s not easy to achieve the 15 percent target. It’s not uncommon for talented service providers to be approached by a large customer who wants more of their time, not less. I advise clients to be disciplined and politely dismiss opportunities that would make them more reliant on a large customer.

Even though the initial financial rewards may be tempting, there is an important trade-off in terms of autonomy.  A business owner who hitches his wagon to a single customer often feels more like an employee than a business owner.

Is your business in need of a more diverse base of revenues?  We have ideas about acquiring new revenue streams. Give Trillium a call at (404) 353-2148 or send us an email.

Numbers Coach Advises & Establishes Financial Infrastructure for Pain Management Company Spun-Off from Parent Company

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SITUATION

Pain Consultants of Atlanta, LLC (“PCA”) is one of the leading pain management medical services firms in Georgia. In 2004 a decision was made by the owners to spin off PCA from its parent company.  PCA’s management team recognized the need for financial leadership during this time to help them navigate through the spin off and become a successful stand-alone company.

SOLUTION: Numbers Coach Financial Leadership Services

PCA engaged the Numbers Coach (“NC”) to provide recurring financial leadership services that would assist in the transition to an independent company.  NC developed a detailed plan with specific deliverables to meet the transition deadlines.

RESULTS

PCA has successfully established several key self-sustaining business components:

  • Established a billing department and acquired financing for the billing system and computer hardware necessary for successful in-house financial operations.  An internal billing and collections department allows for greater control and is designed for increased reimbursements.
  • Outsourced accounting functions to a bookkeeping firm, allowing the company to remain focused on their core business, instead of adding fixed operational overhead.  Outsourcing also provided a scalable accounting system that PCA can use during its growth phases.
  • Created and implemented a detailed transition plan to migrate PCA’s employee benefit plans from the parent company in a manner that protected the employee’s current level of benefits.

Knowing and Focusing on Your Market

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by Anne Moore Odell

In economic boom times, companies often put their marketing efforts on autopilot. In the current recession, business owners can’t afford to spend money on ad space reflexively. For savvy companies, the downturn is an opportunity to re-examine their marketing strategies, think through what works and why, and make more meaningful connections with new and loyal customers while supporting sales efforts.

“Focus on customers and markets that absolutely need your product and service to survive and your marketing message should be in that context, “says Chris Lambrecht, Lead Consultant, Intelligent Marketing Solutions, based in Atlanta. “One should be focused on building long-term relationships and the objective should not necessarily be to sell.”

Retaining your current clients is important—they may be buying less or even taking a break from buying, but that doesn’t mean they are no longer loyal. Keep them in the loop so that when the economy turns up again, you are still the first business they call. Statistics show that it still costs five to ten times less to retain a customer than to acquire a new one.

“Just like in many markets, it’s easier and less expensive to gain market share today that it will be after the economy turns,” concludes Lambrecht.

“Look at different ways to expand the relationship with your existing customers,” says Mike Iverson, CEO of Trillium Financial. “That’s true in all economies. Today I hear people saying their customers are looking at ways to cut their cuts, but they can’t really cut costs. What extra value can they add such as bundling products or offerring two for one?”

You also need to study what is happening across markets so you can keep your existing clients and acquire new ones.

Bernadette Peters, CEO, Natural Marketing Services in Atlanta, GA says “Re-evaluate your target market. Many Nordstrom customers are shopping at Target. Target shoppers are going to Wal-Mart. Wal-Mart’s customers may be buying less. This downgrading makes all businesses have a new target market with different demographics, buying behaviors and characteristics.”

Marketing needs to reflect that the economy and spending habits have changed. Peters says that many successful marketing strategies tap into the “return to core values” that a recessions tend to cause. These include family, peace of mind, more leisure time, connecting with friends, philanthropy, and life’s little pleasures and rewards.

Your marketing message should reflect this change, telling clients about their short-term or long-term cost savings.

Another strategic plan that Peters suggests is to provide a taste or smaller portion of your products or services in order to build trust on a low-risk level with new customers.

“Don’t throw the baby out with the bathwater, but hold your marketing staff accountable to do their due diligence on their new target market, and leverage existing relationships first,” says Peters.

In this economic environment, Iverson recommends making sure “that you include everyone in the thought process regarding what can help improve the bottom line of a business.”

Suggestion boxes, monthly contests, and rewards can get everyone in the business involved with finding for the best marketing or cost saving ideas, and at the same time, help build company morale. Ideas flow up from the bottom as well down from the top.

“Make sure that everyone in the organization has a clear understanding of what your business does and then they can each be a walking billboard among their circle of influence,” suggests Iverson.

Peters adds, “Don’t hold back on investing in marketing and advertising just to save money. Media costs are lower than ever. There are fewer competitors out there marketing for the same reason. Again, hold your team accountable to evaluate the marketing channel, include the right messaging for this new economy, and test on a small scale to reduce risk and track results.”

Phased Approach Makes Marketing Planning Easy AND Effective

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by Bernadette Peters, Natural Marketing Services, LLC

It’s the new year again.  We’ve all been working on budgets, evaluating our financial strength and setting goals for the new year.  One of the biggest challenges for any business owner or manager is creating a marketing plan.  There’s a misnomer out there that the plan requires several months of work and the final result is a large tabbed notebook of strategies and initiatives.  But that’s not necessary to create a plan that you can implement in 2010.

As a marketing services provider and consulting firm, we have worked with a lot of small businesses.  They all need a marketing plan, but didn’t necessarily have the budget or time to go through the full marketing planning process.  So we developed a phased approach that any business can use to produce positive results in the short-term and over the long term.

It looks like this:

  1. Evaluation/Discovery
  2. Strategy Document
  3. Implementation Plan

Evaluation/Discovery:  When a business is small, the owner or manager has a pretty good sense of where his or her customers are coming from, which marketing strategies are working or not working and the general areas that the business needs to focus on to grow.  But as a business expands, owners and managers “wear fewer hats” and are more disconnected from the reality of their marketing effectiveness.  The evaluation and discovery process provides real data to get the owner or manager back in the driver’s seat.  Actionable data is the result of this process.  During our client marketing strategy session, we go through a discovery process which looks like this . . .

  1. Financial – this discussion centers around revenues, profit margins (per product/service or customer group), average number of transactions, average transaction amount, growth goals for the following year.
  2. Target Market – we look at existing customer demographics, psychographics, buying behaviors, then combin the financial data with this information to determine adjustments to the desired target market, and products/services that go with that market.
  3. Database – since data is everything, we look at the types of data that the business maintains on their current customers, inactives, prospects and strategic/referral partners.  We evaluate trends through reporting that will help shape our strategy phase of the plan.  We also look at the marketing tracking – activites that lead to new sales, retention, or cross-sales to existing customers.
  4. Marketing activities and infrastructure – this is probably the most time-consuming part.  We look at all marketing, communication and sales initiatives for the year, evaluate their effectiveness and prepare for the decisions we will make in the strategy phase of our plan.

And guess what?  If you never get past the first phase, you’ll still have created something valuable to make a difference in your marketing.  But if you want to go from “good” to “better,” move to the Strategy phase.

Strategy: This is where we take all the data from Discover/Evaluation and create ideas to improve on what’s working, make decisions to remove what is not working, and then reallocate funds or effort toward new marketing initiatives that we will test and track in the coming year.  The result of this process can be a one-page marketing plan listing specific goals and high-level initiatives or a multi-page document with enough detail to get the process started.

At this point if you don’t have the time or resources to move into the implementation phase, you can use this document to move forward.  We suggest going back through it to rank the initiatives in order of potential effectiveness (A, B, C), then list target dates for each initiative.

Implementation Plan: If you have a team to help you implement the marketing strategies, we highly suggest moving to this phase which will take your plan from “better” to “best.”  This is where you put specific information to your plan.  Each initiative will have associated tasks, resources needed to implement them, and time required for each step.

Although Microsoft Project may be more software than you need for this process, you may want to consider using it or something similar.  One of the key features we use is the “predecessor” fields so if one step gets delayed or an initiative re-prioritized, you can easily change the target dates of all associated tasks for that particular project.  You may want to use something as simple as an excel spreadsheet.  Remember, for each marketing initiative, you will want to test and track its effectiveness, and possibly adjust the marketing channel or message in order to find the most effective approach.

Here are some metrics we recommend tracking.  This works for direct response initiatives (promotional programs, events, mailing, advertising), but is not as effective for branding strategies.

Response rate – you will need to define what a response is for you.  It could be a sale, an inquiry, the prospect giving you an email address, etc.  Response Rate = # of responses/number of impressions (mailings sent out, number of ad copies, etc.).  The goal is to increase responses.

Cost per Acquisition – what it costs the business to acquire a new customer.  This can be tracked on a business level, customer group level or even a campaign level.  The goal is to reduce it over time. On a business level, you can divide what you spent on marketing or sales and marketing by the number of new customers acquired for that year.  That will be your baseline.  We’ve had clients track it on their business customers separate from their consumer customers, or even by affinity group.  On the campaign level, you can track what you spend on the campaign and divide by the number of new customers you acquire directly from that campaign.

Just remember that in everything, even marketing, there’s a good, better and best approach.  Going through the evaluation and discovery process will provide you with a good sense of what needs to be done in the new year.  The strategy phase will provide a better approach with identified initiatives, and the implementation phase offers the best approach toward achieving your growth goals in the new year.

Business Planning: Having a Business Plan Helps Ensure Sweet Success

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by Tim Fulton

Quick. Name a product or service that you or your business will gain more satisfaction from while it’s being developed or produced than when it’s finished.

Your answer?

“My tax return?” (Wrong answer)

“Chocolate chip cookies?”  (You’re getting much closer)

‘OK, I give up.”

Your strategic business plan!  (“I never would have said that.”)

Well, don’t feel embarrassed. Most business owners and managers do not consider developing a Strategic Business Plan for their organization. In fact, less than 20% of all small businesses have any type of plan in place including operating plans, marketing plans, succession plans, etc.

They deny themselves such pleasure for a number of reasons:

  • “It’s far too difficult to do.”
  • It’s far too costly to do.”
  • “I don’t have the time.”

Imagine that you have hired a builder to construct your dream home. You have this rather vague picture of this house in your mind and you communicate this image to the builder.

Now imagine that your builder plunges into the construction of your home without any architectural plans. No drawings.

In a panic, you stop construction and ask the builder why he isn’t using any plans or drawings?

He responds, “It’s far too difficult to do.” Or “It’s far too costly to have done”.  Or “I don’t have the time.”

It would be crazy to build a home without plans. How long would that “dream house” of yours last if it was not built to any type of specifications? How long do you think your business will last without any direction or strategy?

Now back to my original question.

What is fascinating about developing a business plan is that the greatest satisfaction is derived from the development of the plan itself. Just like baking chocolate chip cookies. I get more enjoyment from eating the delicious cookie dough while I’m baking than I do from the baked goods upon completion. Sometimes I get halfway done baking and stop completely. On rare occasion, the dough never makes it to the oven.

The business plan development process includes the following three steps:

  • Analyze the business as it exists at this moment in time
  • Determine your 3-5 year vision for the business
  • Decide what you need to do to move towards that vision

As you go through this process you will be forced to examine your business, as you have probably never done before. You will uncover your strengths and weaknesses. You will identify market opportunities and threats. You will set goals and objectives and then establish an action plan geared to achieving them.

You will take that image of your “dream house” out of your head and onto paper where it belongs.

When you finish, you will feel exhilarated and motivated like never before. You will find new confidence in your business. If this is not the case, it’s time to bail out. Sell the farm.

Once your business plan is completed, it than becomes your road map for leading your business. You will use it to make sure that the “construction” of your business is just as you have planned for. You may even want to share it with others such as your employees, your banker, or even your family.

Just like chocolate chip cookies.

Does Your Business Have a Succession Plan in Place?

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by Michael Iverson

Have you met a business owner who is close to retirement age and wants to sell the business? His or her life’s work is tied up in it, and the owner is unsure whether a buyer can be found. Unfortunately, he or she never developed a plan to transfer ownership of the business.

According to a recent survey conducted by PNC Bank, only about one-third of small businesses in the U.S. have a succession plan in place. Without one, a business owner probably won’t attract what he or she considers to be a fair selling price. In all likelihood, the owner will sell the business at terms stacked in favor of the buyer. Should the business owner die without a succession plan in place, it might have disastrous consequences for his or her family, such as a forced sale of the business to pay estate taxes.

The business case for a succession plan is to make sure the owner can gradually withdraw from the business on his or her terms – at a fair price and on a preferred timetable. In this article we are going to focus on three key areas that need to be considered in your succession planning process: 

  1. Identifying a suitable buyer for the business.
  2. Allowing a long enough training period that assures a smooth transfer of ownership to the new owner.
  3. Preparing a financial plan for “cashing out” the owner without draining all of the business’s operating capital.

How to Identify the New Owner

Finding the right person to purchase your business need not be difficult, but it does require time and forethought. Trying to identify a buyer under time constraints is difficult, especially during an economic downturn. As part of your planning, write down periodically a list of possible buyers – even if you are not considering a sale just yet. The exercise is a good way to understand your options.

People familiar with your business are often the most likely buyers. Many business owners ultimately transfer ownership to existing business partners, a family member or a long-time employee. In any of these circumstances, there are benefits to the seller and the buyer(s), including:

  • The seller is likely to achieve a better price by selling to a party that knows the business.
  • The buyer(s) can negotiate a timetable that assures the seller will pass along valuable knowledge about running the business.
  • The resulting continuity of business will benefit employees and customers.

Do you know potential buyers of your business?  Go ahead and start making a list.

How to Plan a Smooth Transition

No matter who the prospective buyer may be, there are significant benefits to allowing a period of several years for a successful transfer of ownership, including:

  • The current owner can provide training to the prospective buyer.
  • The owner can also assess the strengths and weaknesses of the buyer, and spend the time necessary to address areas of weakness.
  • The prospective buyer can be introduced to customers and interact with them for an extended period – to minimize the risk of customer attrition.
  • A long transition period usually improves the financial stability of the business. And, the business’s tax accountants have a chance to plan for future tax liabilities.

A long time frame might not be warranted if the business is being sold to another company. In that case, a shorter period would be better to integrate. However, planning for the transition is still very important because the real work begins after the close of the sale.

How to Cash Out

As an owner transfers ownership of the business, he or she needs a plan for both a) funding retirement and b) leaving the business with the cash resources necessary to continue operations. In other words, writing him or herself a large check from the business’s bank account is not a solution.

Many partnerships put buy-sell agreements in place, which provide for the orderly exit of one partner. Deferred compensation plans can be established, which allow the owner to begin the transition to retirement while still collecting a salary. And, life insurance policies can be used to provide liquidity in case an owner dies before a transition is completed.

These are just a few of the considerations for any succession plan. The important thing to understand is this: not having a succession plan is a huge risk – not only to the business owner, but to his family and to the employees.

If your business doesn’t have a succession plan in place, get started today.  Let us know if we can help you by calling (404) 370-6147 or sending us an email.

Next time we will talk about what can create Transferrable Value. Without it, you don’t have a business to sell.

Are You Insuring Your Life and the Life of Your Business?

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by Duffy G. Elliott, CPA, CFP

As a business owner, you may not consider life insurance an integral part of your financial planning. However, life insurance is critical to an owner’s family, as well as the business, in the event of an unexpected death. In order to make sure both your family and your business are adequately protected, it’s important to purchase the
proper amount of life insurance coverage.

The amount of life insurance you need depends on your current net worth, the lifestyle you want to provide for your family, and ultimately, your personal desires. (see more detailed guidelines below).

For business owners, life insurance for the business is often referred to as “key man” or “key person” insurance. In this case the beneficiary of the policy is the business and not the owner’s family. The insurance is used to provide funds to help the business navigate through the change as a result of the loss of the owner. The funds may be used to buy out the owner’s family interest, find a replacement to lead the business, provide working capital to cushion any financial impact from the loss, or a combination of these options.

Key man life insurance is an important part of a business’ planning. Without it, all of the hard work by the owner and the sacrifices of the owner’s family could vanish.

A common rule of thumb is that you should purchase 5-7 times your annual income. Unfortunately, like most rules of thumb, this does not take into account individual circumstances and may leave you with an inadequate amount of insurance.

  1. First, you should consider how much your family will need every year, being sure to take into account the effects of inflation.
  2. Next, total your assets and other sources of family income. Be sure to include any benefits your family may be entitled to under any pension plans. If your spouse doesn’t work now, you need to consider if he/she would work if you died and how much he/she could earn. Don’t overlook social security survivors’ benefits available to your children under age 18 and to your spouse if he/she does not earn significant wages.
  3. Finally, determine how much life insurance you require. This will depend on how long your family will need this income, what rate of return can be earned on the insurance proceeds, and other factors.

Unfortunately, this is not a calculation that can be made only once. Since your needs will change over time, you should assess your insurance coverage periodically, especially if a major life event occurs.

To learn more about how life insurance plays an integral part of your business and personal financial planning, contact Duffy G. Elliott at Elliott & Associates Wealth Advisors at (770) 451-2446 or visit http://www.elliottandassoc.net/.

Will You Sell to a Strategic Buyer or a Financial Buyer?

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by Michael Iverson

 

In the recent article Identifying a Likely Buyer of Your Business, I suggested a number of parties that might be interested in purchasing your business. To review, possible buyers include:

  1. Your management team
  2. Employees of your business
  3. A Family Member
  4. A Competitor, Business Partner or Vendor
  5. An Unknown Investor or Investment Group

These potential buyers can be classified as either Strategic or Financial.

A strategic buyer has knowledge of both your industry and your company. This kind of buyer has a compelling business interest in a possible acquisition of your company. The business interest might be as simple as buying out a prime competitor to achieve dominance of a local market. Or, perhaps a buyout is pursued with the intention of significantly expanding the business.

Typically, strategic buyers are willing to pay more for your business than financial buyers. A strategic buyer is familiar with your business or industry and optimistic about the prospects of your business enhancing his or her existing business. A strategic buyer isn’t afraid to pay full value for your business, because he or she expects to experience significant benefits when the two businesses are combined.

In contrast, financial buyers often have little or no knowledge of your industry or your company. This type of buyer is interested in acquiring your business’ cash flow, and motivated to buy at a discount – as a sort of hedge against his or her lack of familiarity with your business. Some financial buyers aspire to cut expenses of your business to boost profitability and flip the business in a short period of time for a profit.

Given a choice between selling to a strategic or a financial buyer, most business owners would rather sell to a strategic buyer. The price is usually closer to what the owner perceives as full value. In addition, the impact on employees is usually less.
If you have an exit plan in place, you increase your likelihood of selling to a strategic buyer, including identification of likely buyers. If you don’t plan your exit, you might end up selling to a financial buyer for lack of better options.

How Price Is Determined

Businesses for sale are usually valued at some multiple of operating earnings. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a variation of operating earnings that many investors use to compare profitability between companies and across industries. It strips away the effects of financing and accounting choices to focus on true operating profits.

Depending on the buyer, an offer for your business may be based on current year’s EBITDA or average EBITDA for the past three years. Typically, some multiple of EBITDA is offered; the multiple varies by industry. For example, 1.5 times EBITDA could be the offer for a business in a steady but low-growth industry, while 6 times EBITDA might be offered for a business in a high-growth industry. Any offer’s value also depends on whether you’re selling to a strategic or a financial buyer.

To learn more about the type of multiple your business might command, or to talk about developing a plan for its sale, contact me at Trillium Financial.

Selling Your Business: What Can You Expect From a Due Diligence Review?

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by Michael Iverson

Selling a business can be an exhilarating experience. Meeting with potential buyers, presenting the business in the best light possible, fielding inquiries, receiving preliminary bids and conducting early-stage negotiations is all part of the process. It’s pretty exciting compared to a typical day at the office.

At a certain point in the process, however, the excitement of an impending sale gives way to something much more serious. The would-be buyer’s offer is usually contingent upon completion of a due diligence review. The buyer gets a chance to conduct a very thorough examination of the business. If the review uncovers unpleasant surprises, it may be possible for the buyer to walk away from the deal.

No Stone Unturned

The buyer may well be making the biggest financial commitment of his or her life, so he or she wants to be sure about the purchase. Confirmation usually comes from outside professionals who advise the buyer through the due diligence period. At the very least, expect visits to your business by an accountant and an attorney representing the buyer. These experts will advise the buyer about whether he or she is making a wise purchase decision. Make sure everyone handling your data has signed a Non-Disclosure Agreement, then provide them the information they request.

Information requests from the buyer’s accountant are likely to include, but not limited to:

  • Financial statements for recent years and related audit reports
  • Tax filings for recent years
  • Financial projections, capital budgets and strategic plans
  • The business’ general ledger and schedules of Accounts Payable and Accounts Receivable
  • Schedule of inventory
  • A schedule of capital equipment, its location(s) and copies of purchase contracts or leases
  • A schedule of depreciation/amortization calculations related to equipment
  • A list of real estate owned or leased, plus copies of mortgages, deeds or leases
  • Analysis of fixed and variable expenses
  • Details of debt covenants and credit lines

The buyer’s attorney will likely want to review the following documents:

  • The company’s Articles of Incorporation, Bylaws and Minutes of the Executive Board
  • The company’s organizational chart
  • The company’s list of shareholders
  • Certificate of Incorporation
  • A schedule of any intellectual property of the company, including trademarks, trade secrets, patents, licenses, agreements with personnel and consultants providing technical know-how.
  • A list of litigation settled or pending; regulatory proceedings against the company; environmental actions pending.
  • Insurance coverages protecting the company and Executive Board from general liability, personal liability, product liability, errors and omissions, workers’ compensation, etc.

In addition, the buyer will want to see information about your product or service lines, customers, key suppliers, major competitors, and marketing programs of the company.

As you can see, the process will test your record-keeping and organizational skills. I often stress the importance of developing a business infrastructure. This is the occasion when all of the time and effort pays off for having a well organized and documented financial, operational, sales, and administrative processes.

Managing the Process

The buyer and his or her advisers have every right to gather the information they need to evaluate the business. You have every right to make sure their work doesn’t become disruptive to your business, your employees’ work and your clients.
Manage the process by setting a few guidelines for retrieval of information. The buyer’s requests should be made directly to you, or your designee. If the provision of information cannot be immediate; encourage the buyer to request things in advance.

The due diligence process can be very intense and emotional. Have key advisors to surround yourself so that you can keep your eye on moving the business forward. Understanding what to expect can save you a lot of time and emotional energy.