Business owners are always looking for ways to maximize profits and increase the value of their business. There’s lots of advice out there, but it’s usually just some variation of “increase your sales and reduce your expenses” – duh – as if you hadn’t thought of that. Here are three ideas that you may not have thought of:
Grow Your Recurring Revenue Base
Any business broker or mergers and acquisitions advisor will tell you that business buyers love recurring revenues. And there’s a reason. Recurring revenues are like magic. You make the initial sale and then do nothing (or next to nothing) and a check just shows up every month. It’s the best. And recurring revenues have additional advantages. First, because the customer is tied to you in some way, recurring revenues are usually quite stable. Second, because no additional sales effort is needed, they tend to be high-margin. And third, recurring revenues keep you connected to your customer so when he’s ready to make a new, large purchase, you’ll likely get the sale. There are lots of ways to build a base of recurring revenues – license or lease your product or technology instead of selling it outright, sell products that need periodic supplies or maintenance, sell service or maintenance agreements, franchise, sell your product through a distributor, etc. It’s well worth concentrating your energies on growing your recurring revenue base – it will pay dividends both in the short-term by increasing your profits and in the long-term by increasing the value of your company.
Fire Your Customers
Most everyone has heard of the 80-20 rule – that 80% of a company’s profits typically come from the top 20% of the company’s customers. But not enough small business owners focus on the effect on their company of the bottom 20% of customers. How many of these customers are marginal or even unprofitable? You probably have no idea. But you should. Marginal or unprofitable customers are often high-maintenance and low volume. They consume more resources than they pay for, bleed you with slow pay, or simply are too small to cover your overhead allocation. They divert attention from your hi-margin customers and use up resources that are better deployed elsewhere. We’ve sold businesses where the seller, content with his profits, never took a hard look at each customer’s profitability. When a new owner took over, however, he found that the business was losing money on each transaction with many of the company’s clients. He “fired” his marginal and losing customers and profits increased dramatically. There’s no reason to wait to get rid of losing accounts – do it now, increase your bottom line and increase the value of your company.
Have a Business Plan
Studies show that most small business owners do not have a business plan. You may not feel like you need one. You know your business, you know your market and you know competition. And you run your business more on gut feel than hard analysis. And it works – for now. But did you know that businesses with defined, current business plans do better than those without? It makes sense. If you have a plan for growth, you tend to grow. If you don’t, you can stagnate or even lose ground. Most business owners are reactive rather than proactive - they react to changes in their market instead of analyzing changes and trends, identifying their strengths and weaknesses and then devising a plan to best position their company to move forward. It’s easy to get caught up in day-to-day operational issues and crises and to lose sight of the big picture. A business plan helps keep you focused on growth.
For more information about issues that may affect the value of your business, please visit us at www.primeinvestments.us. There are lots of white papers to download and blog topics of interest to business owners. Click here or on the link below if you are thinking about selling your business or call us at 888 468-1660. We’ll be happy to schedule a free initial consultation and complimentary business appraisal.
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