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A Guide to Business Valuation

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Business valuation methods vary and are used to determine a value that represents the price that a business can be sold for at a particular time. No method is precise.

Your business is likely to be your largest asset, so it’s natural to want to know what it is worth. The problem is: business valuation is not an exact science. It has a purely financial component that can be calculated. It also has a subjective side where the value perceived by each potential buyer varies with each buyer’s circumstances.

Another successful business valuation led sale

The price that will be finally achieved is only what a buyer is willing to pay. This may be a lot less that the value the seller has calculated.

This article covers the most common business valuation methods. These methods are true for smaller business as opposed strategic sales, where a business’s value is based on what it would be worth in the acquirer’s hands.

Income based

Earnings Multiple: The most commonly used business valuation method is the Earnings Multiple or (Price/Earnings ratio) method. As the name suggests, the value of the business is quoted as a multiple of its future maintainable income. The earnings multiples vary for businesses of different size within the same industry and between industries for businesses of the same size. One arrives at a business valuation by looking at comparable business sale multiples and applying them to the business under consideration.

Discounted Cash Flow: The discounted cash flow method looks at the forecasted cash flows and then applies a discount rate to bring them back to a value in terms of today’s dollars. The discount rate used increases with the level of risk, possible forecast variances, and the length of time over which the cash flows occur.

Essentially the drivers of value when you use this method are
• how much profit your business is expected to make in the future
• how reliable those estimates are.

Assets-based

This method considers the value of a business’s hard assets minus its liabilities or debts owed. One uses the net asset value to value the business as if were to be closed down and no longer be able to generate any profits.
This business valuation method often produces the lowest value because it takes no account of ‘goodwill’. Goodwill is defined as the difference between a company’s market value (what someone is willing to pay for it) and the value of the net assets as described above. Goodwill should take into account all of the intangible value aspects of the business, such as: its earnings potential; reputation; and the ongoing relationships with customers and suppliers. Coming up with a valid sum for goodwill then becomes the issue.

Market based

The market based approach looks at businesses that operate in the same industries. If there are sufficient examples of sales available, then a common rule-of-thumb valuation method can be applied, such as an earnings multiple.
Other examples are:
• “x” times book value – of relevance for real estate management companies
• “y” times EBIT – Earnings before Interest and Tax – applies for most businesses
• “z” times EBITDA for businesses who have high capital costs, and so are assessed before depreciation or amortisation are taken into account.

Size of a business plays a big part in determining the relative value of businesses in similar or comparable industries. Typically, it is the larger, often publicly listed business whose sales price becomes public knowledge. Compared to those, most smaller business sales are concluded at much lower relative valuations. Anyone contemplating a sale should bare this in mind.

The difference between a vendor’s and a purchaser’s business valuation

Every time a business goes on the market, the owners either have the business formally valued or come up with a notional value of their own. This then becomes the asking price.

Purchasers on the other hand may use any one or more of the methods described above to arrive at what the value of the business is to them. Needless to say, these numbers are usually quite different. The difference is usually settled by negotiation. The seller invariably has to discount his asking price.

Strategic purchases

Sometimes a business is acquired for very strategic reasons, such as patent ownership, technical capability or market access. In these cases none of the business valuation methods described has any relevance.

Take for example Facebook’s $1bn acquisition of Instagram in 2012. Here there was certainly no consideration made for the earnings of Instagram – it had none. Five years later, Instagram’s 30 million user base had grown to 600 million. With what Facebook had in mind in terms of future monetisation from advertising, it was one of the shrewdest Silicon Valley acquisitions in history. A brilliant investment even at that eye-watering price.

Strategic acquisitions break all the rules and lead to business valuations that are much, much higher.

How to maximise the value of your business

Clearly, when it comes to selling your business, the more strategic sense your business makes to an acquirer the higher you will be able to pump the valuation.

The Value Builder System helps you to focus on those areas in your business that a buyer would consider to be of strategic value.

Get a free Value Builder value assessment of your business here

Avoid disappointment when it comes to selling a business

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By Evan Rubenstein

When it comes to selling a business after many years of hard work, will you walk away with a tidy fortune or suffer the gut-wrenching price disappointment that is so common? Many hard working business owners live for the day that they can sell their business and retire comfortably on the proceeds. Yet when that day comes they discover that there is no queue of buyers eager to make a purchase, and in reality the business is only worth a fraction of what they originally thought.

Avoid price disapointment when seling a business

A business is not a commodity that people are buying every day. Any person or business looking to acquire a business will usually have more than one option that they are looking at. When one is selling a business by contrast, you will generally only be dealing with one potential buyer, so the odds of making a sale are stacked against you.

When selling a business, a scarcity of interested parties has the effect of lowering the selling price

Prospective buyers, especially if they know they have no competition, have nothing to lose and everything to gain by submitting a low-ball offer. And they will.

But, you say, you've heard stories of other people selling their business and doing really well? And of course that may well be true. What you don’t know about is what they did to prepare and how they conducted the negotiations and the sale.

The common perception is that a solid profit history is the key determinant of value. It is very important no doubt, but by no means everything. A potential buyer sees a business differently to a seller. Sure, profitability is up there, but they will have a number of other criteria in mind that will play heavily in determining the business they decide to buy. The person selling the business is often quite oblivious to the importance and impact these criteria will have to the value and sellability of the business. After all, the business is doing fine, what more do you need, right?

Past profitability is not an accurate indicator of future value

This is at the heart of the matter. A business  buyer is not buying history, he or she or it (in the case of a corporate entity)  is buying the future! They are looking at a business’s ability to provide reliable, sustained profitability and cashflow in relation to comparable investments. Also in the mix is the amount of effort that will be needed to operate the business. So the details of how your business is set up and operates as a going concern, become very important in determining not only the value of the business to the prospective buyer but also its desirability.  And it may not measure up that well in the buyer's eyes..

So what are the 'Deal Damagers'?

Apart from the underlying financial performance, here are some other issues that will factor into the value of the business:

  • How involved is the current owner in the running of the business?
  • Does the business have too much dependence on any staff member, customer or supplier?
  • What are the customer satisfaction levels of the business?
  • How much working capital is required to operate the business?
  • What proportion of revenue is recurring?
  • How much market share/competition does the business have
  • As it stands, can the business expect to grow?
Selling a business checklist

This all seems like common sense, and it is. Yet time and time again, businesses for sale fall (expensively) short in one or more of these areas.  If they are not adequately addressed and if the owner is eager to sell within a short period of time the only yield point is price. The best strategy is to recognise these shortcomings in the business and address them in a timely manner. In this way, when the business goes on to the market, there will be no flaws for a potential buyer to fixate on and the business will be able to achieve its highest possible valuation.

How to ensure maximum value by the time you want to sell

  • Have a strategic plan with timelines for your exit well thought through and sufficiently generous to allow for all the work that needs to be done to take place well in advance
  • Don’t leave out the things that you don’t like doing or don’t understand.
  • Get professional advice and help. Unless you’ve done this a few times before, don’t go it alone. By doing so you put a considerable proportion of realizable value at risk.

A good way of assessing how your business measures up from a business valuation point of view is to use the free Value Builder System™ assessment. The Value Builder System™ assessment will give you a score out of 100 that gives a statistically valid relative measure of how well your business measures up. Once you have this score, you will have a pretty good idea of where your business stands in relation to achieving its maximum possible valuation.

Click here to do your free Value Builder System™ assessment.

8 Key Business Skills You Absolutely Need

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Success in business hinges on a range of key business skills. Without them your progress in the face of ever increasing competition will be held back and your frustration will increase. It is true to say that if you compared two businesses in the same market doing the same thing, the difference in performance will be down to the differences in the leadership, and the differences in the leadership will be primarily governed by the skills and knowledge of the leaders. So the sooner one gains these skills the quicker you will be successful.

Having worked with hundreds of business owners over the years, these are the most important skills someone in business should have.

What are Key Business Skills?

Business is a multi-faceted undertaking that combines a range of activities and concepts. The central product or service being delivered is obviously something that has to be done well but that is only a small factor in determining overall success. Wrapped around that central product or service is a range of ancillary activities that are vital to producing the desired business outcomes of profit growth and business value growth. It is not uncommon for people to start businesses where not only is there a lack of key business skills, but no awareness of the key business skills that are required.

Key Business Skills

1 Strategic Thinking

Business is not a short term play. Strategic Thinking is the thought process one engages in to devise long term competitive advantage for a business. The quality of this process is what will ultimately bring profound and lasting benefit to the business.

2 Planning

Arguably, nothing happens without a plan. Planning is the process used to develop the sequence of actions that will ultimately culminate in achieving a goal or objective. A plan will identify and quantify the resources and time required. It helps deal with challenges and problems at an intellectual level, less expensively and more quickly than if these were dealt with in a real world situation

3 Leverage

Leverage is probably the most fundamental business concept there is. In fact, business itself is nothing more than an exercise in Leverage. There are many definitions of Leverage but essentially it relates to being able to take small actions and to get comparatively big results. The most important form of leverage is knowledge. The more knowledge you have, the more power and influence you can wield and the less risk you take.

4 Business Finance

One engages in business in order to generate profit. The way we measure the value of a business is by the amount of profit it makes. Business finance is all the numerical logic behind the determination of profit. Without a grasp of Business Finance it is very difficult to measure progress or gauge performance.

5 Emotional Intelligence

Businesses employ people and have people as their customers. People’s behaviour and actions are significantly affected by their emotions. Emotional Intelligence is ones ability to recognise ones own and others emotions and to use this information to guide thinking and behaviour.

6 Business Software

Software is an important leverage tool. In this day and age, business needs to move quickly and be efficient. There are many categories of business software and a business leader should be aware of all of these; their uses and their benefit.

It almost goes without saying that proficiency with business productivity software is hugely advantageous. Any business owner who does not know how to set up a basic spreadsheet that contains formulae is at a distinct disadvantage.

7 Organisation

Businesses have a degree of complexity that is unavoidable. There are many details, activities and actions that need to harmonise to produce a good result. For this to be the case everything needs to be well organised.

8 Sales and Marketing

The most crucial skill of all is how to generate revenue in your business. This aspect should receive the most attention and be the centre point of most business that have a growth agenda. Once most of the other business actions and arrangements are in place, the issue of revenue generation continues to be an ongoing focus of any business forever and ever.

Is this the complete list of skills you need? Depends who you ask.

What skills do you think are critical?

Is your Business Networking Best Practice?

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Many people have a love-hate relationship with networking. We know we ought to do it, but its time consuming, a pain and wins seem rare. If that sounds like you, you’re probably a networking novice; unfamiliar with the finer points and techniques that can make networking a rewarding and profitable exercise.

Networking should be part of your lead generation repertoire, no matter what business you are in. A common mistake for people doing networking for the first time is that they are underprepared; not so much for the networking itself, but for what it takes to get to a point where business can be expected to be done. They tend to simply show up, try and make the most of the opportunity without understanding enough about what they are getting into and how best to deal with the follow-up activity required to make something of it. The result is that there is no result.  So lets examine how best to make networking a real success.

networking-group

Here are three common ‘no result’ networking scenarios:

  1. You introduce yourself to a number of people, grab their business cards and either never look at them again or quickly forget who the actual card owners were and their relevance to you, if any
  2. You meet someone you like or have things in common with and spend far too much time talking to them, with little or no prospect of an outcome
  3. You meet relevant people, get their details, attempt to follow up but somehow never manage to achieve anything beyond that.

These are just some of the things that can happen. Like any lead generation strategy, if you really want networking to work for you, you have to put some thought, focus and effort into it.

There are two levels networking operates at: primary and secondary. Primary networking refers to the activity of meeting people, with a view to doing business with them directly. Secondary networking refers to accessing the contacts of people you know or people you have met through your networking efforts.

There are basically two types of networking activities you can participate in:

  1. Join a structured networking organisation. This usually requires an ongoing commitment, but the structure and processes improve the odds of you achieving some level of success over a period of time. This sort of networking usually focuses on developing close relationships with people in the group. Whilst there is clearly a primary networking opportunity here, the much bigger opportunity is the secondary network. Whilst structured networking is certainly effective, it takes time to build trust before members will start to give you referrals.
  2. Attend ‘informal’ networking events. These events can vary tremendously in size and scope and the way they are organised. They usually have little or no structure and so it’s up to you to make it work. In this context, virtually any gathering of business people can be considered a networking opportunity. Unless you are a committed hermit, this is an opportunity too big to ignore. The rest of this article will focus on this type of networking.

But before we go any further, here are two basic networking realities that will shape the strategies you should use:

  • Most people that you meet at a networking event that you may be interested in talking to further, will not remember you the next day unless you are specifically relevant to their needs at that moment.
  • There is a high likelihood that your network target will receive a number of emails from other network participants the next day, so yours will not stand out. Even if this is not the case, with most people receiving a great deal of irrelevant email these days, your follow up email may not be read, or may not register with the reader

Group of young executives in modern space smiling and making introductions.

So what’s the best way to proceed? How can you make sure that the time you spend networking will yield results?

It’s best to prepare yourself well; have a plan. Make sure that each step of the plan is organised and in place beforehand, otherwise you will lose the initiative. Here are 7 points you need to have in your plan:

  1. Be clear about who would constitute a worthwhile networking “target”; industry, type of business, role within company etc. Choose events where your targets are likely to be found in concentration. Unless you have a good idea of who you are looking for and where to find them, you are likely to waste time and even confuse yourself as to the validity and value of some of the contacts you make
  2. Develop a ‘script’ that you are comfortable with and practise it. Include your elevator pitch and a few relevant questions to ask when you meet someone. This gets the conversation flowing and them talking, which relaxes them and makes them feel good. Without being rude, try and ascertain the degree of fit they represent to your target, i.e. qualify them. Qualify them for further follow up, that is
  3. Don’t spend too long with each person. The idea is to find as many qualified contacts as you can in the time that you have available, not to try and develop a relationship then and there, Relationship building comes later. Work the room, collecting business cards, where relevant,  as you go
  4. On the business cards you collect make simple notes immediately. Write down pertinent points that you can then use as part of your follow-up. Ideally you should have a quality rating system, say a scale of 1-5 that will help you prioritise your follow-up
  5. If a contact looks relevant to you, ask them if it would be okay for you to contact them after the meeting. In this way when you you contact them, you can say “You said it would be okay for me to contact you” – makes it harder for them to fob you off or turn you down
  6. Immediately after the event, send them a handwritten postcard, expressing your pleasure in meeting with them and informing them that you will be in touch with them shortly. This will make you stand out from most of the other networkers they may have met; they will mostly send emails
  7. Next is to make contact with them. Preferably by calling them or by email. It is good to have a promise of something of value for them; this is sure to trigger some reciprocity, which you can use to move the relationship forward, culminating in a meeting where you can explore the opportunity with them further.

Unless there is an immediate and obvious fit, most chance encounters such as those one has at networking events, are not memorable enough for people to remember who you are, or care. For this to happen there should be several follow up contacts done in such a way as not to make yourself a nuisance. Working this all out before you go-a-networking, is a good way of bring consistency and results to your efforts.

Your emotional Intelligence in the Workplace

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What is it that allows some managers to get productivity, loyalty and initiative out of people, while others are struggle, even when they seem just as intelligent? We usually say he or she has better “people skills”. And that’s about right. Most people in business would agree that to get results through or from other people is key to one’s success – unless you are a dedicated ‘soloist’.

You’ve seen or perhaps experienced the nightmare boss – the guy who is fussy, short tempered and demanding. Clearly, hard to work for. Why? Because he unbalances people emotionally, and does not care about how he makes them feel. Their emotional reaction drastically affects how they respond and what they will or will not do in return.

Angry Boss

So how much more effective would that boss be if he were patient, calm and understanding in his approach?

We’ve all had the experience of ‘losing it’ out of frustration or stress and saying things in the moment that we regret later. Things, that upon reflection, have further slowed or exacerbated the situation – hardly what we wanted in the first place.

One’s ability to perform work or function properly in a job can be broken into three areas:

  • Technical competency and skills
  • Intellectual capability – our cognitive ability commonly known as IQ (Intelligence Quotient)
  • Emotional capability – often referred to as Emotional Intelligence or Emotional Quotient

Emotional Intelligence (EI) is a measure of one’s ability to recognise, understand and manage emotions in ourselves and others. Getting results and performance from your team, demands that you master some basic skills in this area.

The concept of Emotional Intelligence (EI) became widely known through Daniel Goleman’s book of the same name back in the 1990’s. It’s a “must read” for anyone who works with people on any level (as are several of Goleman’s other books). Goleman argues that EI is a far, far greater predictor and ingredient of business success than cognitive intelligence.

Goleman developed the Emotional Intelligence Competencies Model which breaks this concept down into something that is easily understood.

Emotional Intellignce Competencies Model

Daniel Goleman’s Emotional Intelligence Competencies Model

  1. It all starts with Self Awareness. One has to be able to recognize one’s emotions and the effects your emotions have on others. You also need to have the correct measure of self-confidence.
  2. This leads to two things:
    • the ability to exert self-control and manage the characteristics that will lead greater achievement: Drive, conscientiousness, adaptability etc.
    • the ability to empathise and be aware of the people around you and your role within the organization and the community.
  1. With self-management and social awareness, one can successfully operate relationships where you can exert your influence, and drive results through others.

In business there is a range of relationships you need to be effective in:

  • Your employees
  • Your peers
  • Your manager
  • Your customers
  • Your suppliers
  • Your strategic partners

And don’t forget your social relationships, family and friends.

So what are the ingredients for being emotionally intelligent in a business setting?

  • Be direct and to the point. Be clear about the facts and tell it like it is. Don’t use sarcasm or emotive words for effect and never be personal.
  • Say what you mean and mean what you say. Be the model of consistency so that people learn to trust you. People will find it difficult to play games with you and the outcomes will be greater.
  • Be transparent. Tell people what they need know. Share. If you treat people like adults, they will respond positively. Don’t be paternalistic or patronising.
  • Be positive. Your team is scrutinizing you every moment of every day. They take their lead from you. You need to show confidence and control.
  • Be caring. Don’t forget how important your team is in helping you to achieve your goals. Get to know the people that work for you. To make your business more important to them, you need to show interest in what’s important in their lives.

happy team

Being emotionally intelligent in the workplace will yield dividends. Your team will enjoy their work more and they will naturally do more. Your business will gain a reputation as a great place to work and recruitment will become easier.

Not only should you take this on, but why not educate your team in Emotional Intelligence too?

Business Lessons You Should Not Learn The Hard Way

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Everyone who has done it, knows that success lies at the end of a series of business lessons and learnings; some easy some hard. If one were to analyse these lessons, you would likely find that most business owners will have made many of the same mistakes. Most could have had a much easier time had they instead, sought to learn from the mistakes of others first.

Every business owner will experience their own trials and tribulations. Here are some of the most common:

business lessons

  1. Learn how to delegate effectively early on. As a business develops and progresses, the owner has to keep moving his or her focus and activities up the food-chain of importance and presumably difficulty. One cannot do this effectively unless you are able to get rid of the lower order tasks, to free up your time and head-space. Remember that “success in business is a team sport” and delegation is at the heart of a good team effort.
  2. Focus. There is always a strong temptation to get involved in other things that you believe will make you more money. It’s very hard to be good at selling antique furniture and at the same time do justice to your social media software product. If you keep focussed you will become known as a specialist that people will value. You will be able to charge more. That said, if there is a service or add-on that will make your core product better, provide it.
  3. Get your business model right early. Running your own business is hard work no matter what it is. So make sure that you optimise your business model, otherwise you will be pouring a lot of effort into something that at best may only be mediocre.
  4. Beware of Discounting. In certain situations, discounting is an appropriate mechanism. But unless you fully understand the financial implications, avoid it like the plague. The common notion that one will make up for the lower price by increased volume is true; it’s just how much volume you need that will catch you out. Do the math. You will quickly concur that discounting will seriously affect your businesses profitability.
  5. Your product is probably not as good as you think it is. At the end of the day, it is only your customer’s opinion of your product that really counts. In-house use and testing will never be as tough as having indifferent customers using it in the field and beating it up. So seek customer feedback and act on it. There is nothing worse than product-complaint-deafness. Don’t be like the contestant on Australia’s Got Talent who’s family and friends think is great, but on a real stage, has obvious shortcomings.
  6. Keep a tight reign on receivables. This is especially important if you provide a service, you don’t have much bargaining power when you are only selling time. But it’s key for all businesses. Have a clear and enforceable credit policy that you stick to relentlessly. If you let things slide, not only will your business be cash-starved, but you will end up having to pay more to collect old receivables which will reduce your profits.
  7. Develop products against specific demand. If you think “Wow, I think xx industry could use XX” you could be very disappointed. Once you factor in development, marketing and distribution costs for commercialisation, you could be up for a big investement. On the other hand, if a customer comes to you with a specific request; you build a product for them and then discover that there are many more customers for that product you will be in the pound seats.
  8. Never enter into a partnership without a buy/sell agreement. Irrespective of how well you think you know someone, you just don’t know what is going to happen in their lives. Having such an agreement worked out before problems arise, makes for a clean (and inexpensive) separation when the time comes.
  9. It’s much more expensive to prove you are right than admitting you are wrong. When you have an unhappy customer, apologising, refunding them and moving on is much better than trying to prove you’re right and save the sale. They will burn too much of your time and badmouth you. They are not your ideal client; put them in the D for “Dead” category and move on.
  10. Thoroughly understand leverage. To grow and prosper means to be leveraged. Make sure that every aspect of your business is set up to get the biggest outcome for the least effort, over and over and over again.
  11. Get really good at hiring. All too often employees are hired too readily and without sufficient rigour. Chances are your candidates are better at handling interviews than you are. Before you start recruiting, develop a thorough process that will unequivocally eliminate under performers, and an equally thorough process for monitoring their progress through their probation.
  12. Leave your ego at the door. Neither your customers nor your team members will pander to your ego until you are a big player in the market. As a general rule, being humble and generous trumps egotistical and mean, convincingly. If this applies to you, learn how to manage yourself.
  13. Poor managers make poor employees. Don’t expect employees to do a good job all by themselves. A few will, most won’t. A good manager can make all the difference; turning mediocre employees into good ones. A good manager will have outstanding communication skills and be very clear about building a productive work environment that addresses the businesses vision and customer promise.
  14. Document, document, document. Most of a business’s success will be attributable to the knowledge of its people. When people inevitably leave, they take their knowledge with them, even though it belongs to the business. So make sure that everything you learn and develop in your business is properly documented for the use of those that follow; otherwise you will continually be paying to re-invent the wheel.
  15. People leave because of people, not companies. People’s actions are largely based on how they feel. Everyone, staff and customers alike, like to feel valued. Customers will stop using your product if they are dissatisfied or feel you don’t care; staff will leave. All this, a reflection of management’s understanding of Emotional Intelligence.
  16. Make customer acquisition and retention you key focus. You can have the greatest products, the best customer service, the most efficient operations. Without the requisite number of customers required to make your revenue targets, all of that serves very little purpose. When you have a sufficiency of customers, most other business challenges can be dealt-with with comparative ease. If your top-line is a continual struggle, no matter how good everything else is, your business will struggle and eventually succumb.
  17. Understand how to make the Internet really work for you. We live in a world where customers do their homework before they show up to buy. Your business needs to be part of that story. There are many options and opportunities online that you should be abreast of. Make it your business to understand them in relation to your business.
  18. Cash is more valuable than profits. You can run your business at a loss for a while, even a couple of years, but if you run out of cash it’s all over. Have a safety fund with two to three months operating costs in it, and for safety sake, a line of credit even if you don’t think you need it.
  19. There is no shame in getting help and advice. Many entrepreneurs are out to prove themselves and feel awkward asking for help. In business the stakes can be high, so better to be proved right with help and advice, than wrong without. And even if you are confident you don’t need help, it’s astonishing how much value an emotionally detached outsider can bring – which is why big companies have external directors. You will be amazed at how many of the world’s top business people stay at the top of their game by using coaches and mentors.
  20. Don’t overdo things. Always have the CFO pay for drinks.

Your business lessons are inevitable. You have to learn them to ultimately succeed. It’s just up to how you choose to learn them. Either through your own mistakes, or by studying the mistakes of others.

What’s Stopping You Getting Your Business to the Next Level?

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“I want to take my business to the next level” is a phrase one often hears from people in their own businesses. We talk about “levels” of business, but what do we actually mean?

What is the next level?Taking your business to the next level

From the business owners point of view, this is significant because the “level” implies the degree of personal involvement required, which is a function of the management structure of the business.  The more developed the management structure, the easier the business is to run. As such, the business’s level is somewhat independent of traditional measures such a turnover. Through the typical evolution of a business from micro to small to medium to large etc, the role of the owner changes dramatically. So in order for the business to get to the next level, the owner has to continually redefine and adapt their role to the requirements of the level they would like to get to; a perennial challenge for most.

Level 0: Micro

This level is a one man show with perhaps occasional helpers that require close supervision on a daily basis. Most of the business’s revenue is due to the efforts of the owner. At this level the majority of time is spent doing low order tasks and what the business really needs is for the owner to step up as quickly as possible to doing higher order, higher value tasks. The Level 0 business’s biggest challenge in moving to the next level is appointing capable staff to whom meaningful work can be delegated to. At this level, the owner usually has little money and has to use his time to compensate. As such the owner does not have a lot of control of how time is spent, hindering progress to Level 1.
The most difficult aspect of moving out of Level 0 is to know when and how to appoint the first employees.

Level 1: Small

At this level typically, there would typically be up to 6 or 7 employees working under the owners direct management. Some effort will have gone into structuring and organising the team and the owner’s time is a lot more discretionary. The biggest ongoing challenge is to avoid revenue fluctuations and to stabilise cash flow by working on the sales and marketing such that there is a steady flow of business. The owners skill at hiring staff and making them effective and productive, will be properly tested and be the biggest determining factor for transition into Level 2.

Level 2: Medium

Medium sized businesses are characterised by a management layer between the owner and the team, and the existence of proper systems to ensure the smooth running of the business. The owner’s focus is now on empowering the managers and he or she is now removed from the day to day operations and decisions of the business. This is a major shift for the owner as their personal significance in the business must be subordinated to that of the business itself. It is often a real struggle for the owner to let go of tasks, responsibilities and decision making that he or she has owned since the start of the business. For the business to run effectively at this level, there needs to be a proper management infrastructure in place. Businesses processes have to be well documented and systematised, and appropriate and robust metrics need to be in place. The owners vision for the business has to be well understood and the team needs to be committed to the business’s mission.
The owner spends most of their time doing strategic work such as planning, networking with important prospects, customers and suppliers. The owner now has full discretion on how he or she chooses to spend their time.

What it takes to get to  the next level

If one looks at the distribution of businesses as a function of stage, you will find that the further up the scale one goes, the smaller the number of businesses at that level. What is the reason for this? Well, taking a business from micro all the way to through to medium size (and beyond) takes considerable acumen, fortitude and time. There are many factors that can either aid or hinder this process. For example, recruiting an exceptional individual early-on can have a big impact on the speed of progress. Market conditions can have a big impact, either slowing things down or hopefully helping to speed them along.
During the Micro and Small stages, the business owner has to work hard and needs to have the moral and emotional strength to deal with the multitude of issues they have to face.  In addition, many business owners discover after some time in their own business that they require skills and knowledge they do not have to continue to grow the business. Some rise to this challenge, others don’t and their businesses therefore plateau.
As a function of the available knowledge, capital and capacity, a business will reach an equilibrium point with market forces and stop growing. To get to the next level, i.e. to continue to grow,  it is usually the knowledge and emotional strength components that will provide the impetus for further growth.

7 Key Tips For Business Networking Success

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There is no doubt about it, it’s getting harder and harder to prospect by phone and by email. That’s why networking has become such an important and effective way of generating business. For some businesses, this is all they need to do. For others it’s just one of several lead generation strategies that they may be using.

Networking

Networking is not an activity that should be trivialised. It is a serious lead generation strategy that takes thought and planning in order to achieve success. Getting a good business result from networking is not as simple as it may at first seem. One has to do much more than simply show up and be friendly. Even within structured networking organisations, it takes effort and skill to find the people who meet your needs who either go on to become star referrers or perhaps customers.  So it does not stop at meeting them. You will need strategies for developing partnerships so that you end up with a win-win relationship that endures and you will need to clearly understand the law of social reciprocity to be successful.

So here are the top 7 tips for successful business networking:

  1. Don’t go looking for people who can help you. Go looking to help others. Showing a genuine desire to help others, will make them be more open to trusting you, and being willing to do business with you. The very first thing you should do is provide something useful to the person you are looking to get referrals from. If you do, they will feel obligated to you and much more likely to give you referrals.
  2. Don’t just go and network. Have some goals and have a plan. An exercise that is goal directed will always be more productive than one that is not. Keep track of how you are progressing and adjust your efforts and technique accordingly.
  3. If you are planning to join or are a member of a networking group, make sure to choose your networking group carefully. You will be investing time and effort over a long period of time with your networking group. So check out different groups and make sure the one you choose has the right sort of contacts that you are looking to work with. Remember, the real objective in networking is to gain access to your network partner’s contacts and not necessarily the partner themselves. Make sure that the group’s members are a good fit before committing.
  4. Make use of the Law of Reciprocity. Good networkers understand that time has to be invested in getting to know one another before sufficient trust has been developed and a referral can be expected. So if you fail to invest time with them, don’t expect any referrals. From a different point of view, according to the law of reciprocity, you are far more likely to get a referral once you have given one, or at least made a sufficiently valuable gesture.
  5. Be super clear and concise in articulating the value you provide, and concentrate on making a good first impression. If you are not, you could find yourself being passed-by or not taken seriously.
  6. Make sure you practise proper referral etiquette, or you may risk losing out on future referrals. When you get a referral, act quickly and keep the referrer in the loop in relation to the progress you are making. After all, he is risking his reputation in referring you, and is looking for kudo’s if you do well.
  7. Build a network of trusted referral partners, so that when you meet someone new, you can be resourceful by introducing them to people you know and trust. This will make them trust you more and have more confidence in you, and help you greatly in gaining another new source of referrals.

Of all of these, I think point No 2 is the most important. Most of the people that I talk to that express frustration with the outcomes they get from networking, are guilty of just turning up.  If you are already putting in the networking time, doesn’t it makes sense to use that time as part of a bigger picture plan?

How to Become an Effective, Modern Sales Professional

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The Modern Sales Professional does not look much like he did 10 or even 5 years ago. The world of sales has changed forever. It had its first revolution in recent times when the Internet gave buyers access to precious information. Information that was previously in the custody of salespeople. The next revolution was the advent of Social Media. Buyers no longer need to even access the source of the information they are after. In most cases, the source of influential information is often a highly regarded 3rd party expert or influencer. As a sales professional, you may never get the opportunity to present your value proposition!

This development has been picked up by the world of marketing. They have integrated content and influencer marketing strategies to stay effective. At the same time, marketers have figured out that to best communicate their message, they have to measure and analyse. In the on-line world, marketers have become data scientists, counting and comparing clicks, links and rankings, to figure out what adjustments to make, to increase their target customer with the budget they have.

But what about you out in there the world of sales? This market transformation has had an enormous impact on the role of modern sales professionals. Information-rich buyers can be 60% -80% through the purchasing process before you get to speak to them. They come to you with the balance of power tipped in their favour and able to buy on their own terms.

As a modern sales professional, you know that it’s imperative to get a dialogue started. Apart from direct referrals, traditional outbound sales strategies, such as cold calling, are becoming less and less effective as sales targets make themselves less contactable.

 

The Modern Sales Professional

Just as successful marketing has made the transition to modern marketing, the successful sales professionals of tomorrow are making a similar transition. So what does the modern sales professionals look like? What do you have to do to become one?

1. Listen

The fact that buyers have access to lots of information means that the sales professional has access to it too. Conversations are happening across the social web about your product, brand and market. By following these conversations you can find out who’s on the market, what the key topics are, the trends and the players driving the conversation. The insights you can uncover will greatly help you in your conversations with would-be buyers. You may be able to find opportunities within those conversations to add value to the conversation.

2. Join in the Conversation

Old-style communication is largely over. People don’t answer calls from unfamiliar numbers and your emails and voicemails are unlikely to go unanswered. But conversations are happening on the social web. Join in, connect and engage. You will find opportunities to provide value, earning you the right to connect an develop relationships with qualified prospects.

3. Thought Leadership

The holy grail of interacting on the social web is to develop your persona as a thought leader. By following influencers and sharing their content, you will become known as a person of authority. From your vantage point you will have a unique perspective on how your products solve customer problems. By creating content that buyers find useful, not only will you attract more of them to you, but you will naturally become the target of their questions and the gateway to their knowledge. And before you know it, they will ask how you could help them directly.

Does all this sound a bit like marketing? You bet it does. Used to be that sales professionals followed the ABC; Always Be Closing. Perhaps that should now read Always Be Connected?

Why a “Sales System” is Essential

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The fast-paced, connected world of today makes a Sales System a success imperative. As customers gain more and more sales decision making independence, businesses need to seriously adjust their approach to cope. For the best outcomes, your system needs coherence and consistency to deal with the changing demands of the market. Only a systematic approach can produce this.

 

So Why a Sales System?

Your sale system is all the principles, processes and tools you set up to deliver revenue for your business. Every business, no matter how big or small has to give some consideration to this. The more attention and the more focus this component of your business receives, the better the sales function will be. Many businesses never develop this to the level of sophistication they need for it to run smoothly and productively, providing them the peace of mind they crave and the ability to fuel their business’s growth.

In a business where there is no formalised sales system, it is difficult to coordinate, harmonise and optimise the actions of the various people and processes involved in the various aspects of sales. In these situations, sales people operate in an uncoordinated fashion, sometimes independently and sometimes in isolation. This creates inconsistencies for customers, complications for management and erratic and unpredictable results. Above all, this approach does not scale. The management challenge will always be to improve the performance of the sales operation as a whole. Unless systematised, this is difficult, inefficient and time consuming.

The benefits of having a sales systgears_gray_smallem in place are:

  • A clearly understood (documented) process so that every person involved in it can know their responsibilities and be accountable for them
  • The ability to measure the performance of each element of the process, so that low performing elements can be identified and fixed
  • A scalable entity that can grow with the business
  • A structure that is well suited to a team environment and able to capitalise on the diverse abilities of its members
  • A manageable entity that can be effectively tuned to the environment it operates in
  • Lowers the organisation’s need for highly skilled sales people
  • Performance consistency over time. Team members coma and go. A system keeps running.

 

Let’s illustrate this by means of a case study:

Company X was selling a range of software products that addressed the needs of corporate human resources management. The products all addressed similar issues but there were different versions to suite the varying needs of different organisations. The sales cycle varied from product to product and was considerably longer and more complex for the more costly versions. These were subject to more stringent requirements and more detailed examination by prospective customers.

The business was owned by a software engineer who understood each product intimately. In order to achieve their sales objectives, a team of 4 was required. They all reported to the owner. The business had a basic web site and promoted their products principally at industry conferences. Website traffic was quite good but it was poor at generating leads.

Each sales person was responsible for their own prospecting which comprised following up leads collected at conferences and also cold calling companies off a list that had been compiled for this purpose.

Their sales process was basic: Find a lead – someone who expressed interest in a product. Prepare a proposal and submit to the prospect. Arrange a demonstration and keep following up until a sale was made or the sales person gave up in frustration.

The average cost of each customer acquisition was 9.4% of revenue.

The problems:

  • No standard proposal documents. Apart from pricing, each sales person tried their hand at writing a convincing piece about the product and the benefits to the customerOffice chaos
  • Sales people were expected to do prospecting by phone – which they all detested. As a result, there were too few prospects in the pipeline
  • Each salesperson followed up their own leads – irrespective of the product or customer
  • Salespeople crossed paths in the market often
  • Ineffective follow up saw many sales fall through, especially when they were busy
  • The overall conversion rate was too low
  • Other than revenue and conversion rate by sales person, no additional statistics were measured

The analysis

  • Too few sales opportunities being generated => too few opportunities at any given moment
  • Inadequate qualification => Opportunity quality too low, conversion rate too low
  • Inconsistent and erratic sales process => difficult to improve efficacy
  • Inefficient use of resources. 20% of sales people’s time spent selling, 80% spent prospecting. Should be the reverse
  • Too expensive. Acquisition cost should be much lower

The System solution

  • Focus on improving efficiency by standardising the process and all collateral, reduce time spent in non customer-facing activity
  • Employ dedicated telephone prospecting specialists; cheaper than sales people and more productive. Liberate 80% of sales people’s time
  • Introduce clear qualification criteria for prospects so that time is not wasted on poor quality opportunities
  • Organise the sales team by product/market and avoid crossover.
  • Redesign the website for better conversion and pace the manual sales process in line with customer’s time line.
  • Introduce multiple measuring points throughout the sales process to make it easy to identify inefficiencies and make it more manageable.

These steps made getting a better result much easier and far less costly. Over a 12 month period, the following results were recorded:Sales Growth

  • Conversion rate improved by 36%
  • Acquisition cost was reduced by 23%
  • Sales revenues improved by 32%
  • Month by month revenues were stabilised

A major benefit of introducing a proper sales system was the reduction in stress of all people engaged in sales. The morale improved and the business owner was considerably relieved.

If you are involved in the running of a sales operation, is this something you have given enough attention to?

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