Friday, March 27, 2015

How to Hurt Your Company Without Realizing It

The best companies never rely on the boss to do the selling.

Who does most of the selling in your business?

Many business owners would reply, "I do."

There is a good chance that when you're personally involved in the company's sales, your business sells more and is more profitable than months where you leave the selling to others.

This makes perfect sense. After all, you're probably the most passionate advocate for your product or service. You probably also have the most experience, industry knowledge, and the biggest network of connections.

If your goal is to maximize your company’s revenue in the short-run, you may have come to the conclusion that you should spend most of your time working on sales, and you leave the gritty work of operating the business to your staff.

But what if you want to think more strategically about building a valuable company for the long term -- one buyers are eager to acquire in the future ? 

Then you can’t be your company’s number one salesperson. 

We've talked to thousands of business owners over the years, and closed numerous deals in various industries. When you've been in the M&A business long enough, certain patterns start to emerge when it comes to the most valuable companies. 

One major factor we've discovered is that the less owner knows the customers personally, the more valuable the business.


Ask yourself how you'd describe your personal relationship with your company's customers.

  • Do you know each customer by their first name? Do they expect that you get personally involved in the sale when they buy from your company?
  • Do you you know some of your customers by first name, and a few of them prefer dealing with you rather than other salespeople or employees?
  • Do you know few customers personally? Or maybe you don't know any of them. Are you almost never involved with serving an individual client?

When we're working with clients, one of the categories we evaluate is the involvement of the owner in generating new sales. When we analyze all the data available to us, we find that owners who do not know their customers and rarely get involved in serving the individual customer tend to get offers worth 20% more than average.

On the other hand, companies where the owner knows each of his customers by first name and deals directly with them for sales get discounted by about 20%.

To get an intuition about why this is, imagine the situation from the buyer's perspective. If you buy a company, the owner might stay on for a couple of years, and then they're gone. Would you want to lose most of your sales when the owner leaves? Probably not. A buyer wants evidence of an effective sales process that persists regardless of the owner's lack of involvement.  

Since this easily adds up to millions of dollars in selling a company, it's something worth paying attention to.

This is one of the most important aspects of reducing owner dependency. No one wants to buy a company that will implode as soon as the original owner leaves. 
When you are building a company that is fit to sell, who does the selling is a critical area you need to look at.

Building a sales team that that relies on a strong methodology and a good brand to minimize the owner's role in the selling process substantially increases the value of the company.
Create a strong sales team. While it's tempting to dominate the sales process as the owner, especially when you're the #1 salesman, the long-run value of your company depends on its ability to generate business without you, whether it's just because you're going on a long vacation or you're selling the company entirely.

As you reduce your role in selling and focus on building an effective sales process that other people can execute, you might see weaker sales in the short-run. But long-term value is not the enemy of profit. You are effectively trading some money now for much more money later -- which is the same as any other good investment.

Friday, March 6, 2015

Five Arguments Against Diversification

Diversification is a sound financial planning strategy, but does it work for building a company?

My wife wanted to buy a new blender recently, because she burned out the motor in the old one.

I don't care too much about blenders, but the available options raised some interesting questions about being the most elite blender manufacturer.

Consider this: How does Vitamix get away with charging $700 for a blender when big reputable companies like Cuisinart and Breville make high-quality blenders for less than half the price?

I think it's because Vitamix does just one thing, and they do it better than anyone else.

Great companies stand out because they poured all their limited resources into one big bet. WhatsApp was "just" an efficient messaging platform. So what? But then Facebook acquired them for $19 billion.

GoPro makes the best helmet mounted video cameras in the world. That's what they do, and that's what they are known for. And many companies are drooling at the possibility of buying them.

In business school, the conventional view is that you should diversify and cross sell your way to a “safe” business with a balanced portfolio of products – so when one product category takes a hit on sales, another line of your business will hopefully boom and bring some overall stability.

But building a company is not the same as managing a big investment portfolio.

The problem with selling too many things – especially for a young company – is that you risk watering down everything you do to the point of mediocrity.

Here are five reasons to stop being a jack-of-all-trades and start specializing in doing one thing better than anyone else:

(1) It Will Increase the Value of Your Business

When you sell one thing, you can differentiate yourself by pouring all of your marketing dollars into setting your one product apart. This will boost your company's value.

We know this is true because analyzing 13,000 businesses using Sellability reports, we consistently find that companies with a monopoly on their product get acquisition offers that are about 42% higher than the average offer multiple.

(2) You Can Create a Brand

Big multinationals can pour millions of dollars into each of their brands, which enable them to sell more than one thing.

Kellogg can own the Corn Flakes brand and also sell Pringles because they have enough cash to support both brands independently. Even so, every new product comes with a dilution of your marketing dollars.

It's hard enough for a new company to build one well-recognized industry name and almost impossible to create two without massive amounts of outside money (which dilutes equity).

Remember, a strong company is more about the brand than about any individual within the company.

(3) You'll Be Easy to Find on Google

When you type "helmet camera" into Google, GoPro is featured in just about every listing. This is despite the fact that there are hundreds of video camera manufacturers.

It's easy for GoPro to optimize their website for the keywords that matter when they are focused on selling only one product. This makes it easy to people to find them, even if they didn't realize that's what they were looking for.

(4) Every Employee Will Be Able to Deliver

When you do one thing, you can train your staff to focus on service and execution.

When you offer dozens or hundreds of products and services, you reduce focus and specialization, and it can go beyond the competence level of junior staff.

Having employees that can refine their skills and knowledge in a specific area means they can deliver better results for your customers.

(5) Most Importantly: It Will Make You Irresistible to an Acquirer

The more you specialize in a single product, the more you will be attractive to an acquirer when the time comes to sell your business. Acquirers buy things they cannot easily replicate themselves.

GoPro is rumored to be a tasty takeover target for a consumer electronics manufacturer or a content company that wants a strong edifice in the action sports video market.

Even though there are various huge consumer electronics companies that could just manufacture their own helmet-mounted cameras, GoPro is so far ahead of their competitors (the #1 brand channel on YouTube!) that it would be easier to just buy the company rather than trying to fight for market share against a leader with such a dominant head start.


Diversification is a useful, even necessary, for your stock portfolio. And it often makes sense for a massive company with billions in sales too.

But when when it comes to building a business in the earlier stages, diversification is a pathway to mediocrity.

You should have a laserbeam focus on your product or service when your company is young. Focus leads to success.

(Want to see how your own business is doing on the major metrics of sellability? Get your sellability report here.)