In The Digital Wrap Book, Chapter 14 was titled the Digital Wrap Formula for Maximizing the Value of Your Business. The chapter covered the technical, financial calculus that can be used to determine the amount a financial buyer might pay for a service contracting business (read the related blog post). It also offered a good deal of advice regarding how an owner might maximize that value by lowering sales costs for new customers, demonstrating consistent revenue growth, expanding margins, and retaining customers. While all of the math and advice in the chapter is accurate, I have come up with a simplified slogan for focusing company value building efforts. How Many, How Much, How Long.
How Many refers to the number of customers your company has. A customer is not a location where you do work, but instead it is an entity that pays an invoice. How many unique invoice payers does your business have? How easy is it to add new ones? If the answer to these questions is “a few” (whether big or small) or “difficult,” then the value of your business is marginal. Having only a few customers, even big ones, is risky. More is better. Having an undefined sales process is also risky. If you do not know how to add new customers systematically, growth is a crap shoot. If you have a lot of customers and you can demonstrate how you reliably add more every year, your business will command a premium from a potential buyer.
How Much refers to the amount you can reasonably expect to be paid every year by each of your customers. If you can do more for them and if they pay you a premium relative to the market because you provide a unique experience, better outcomes, or great customer service, your business will command a premium from a buyer. If there is a great deal of uncertainty regarding how much each customer pays annually, a buyer is going to demand a risk premium from you and the value of your business will be marginal.
How Long refers to the number of years the typical customer stays with your company. Churn in the customer base is a bad thing, and your business value will be marginal if you have a lot of churn. Do you know how long the typical customer stays with you? Do you measure churn every quarter to see how well your customer service activities are being received? Ideally, your business has less than ten-percent gross churn (the number of clients that you serviced last year during the current quarter compared to the number serviced this year) and zero or negative net churn (the amount of revenue achieved from customers that you serviced last year in the current quarter that also received service this year). If your net churn is zero or negative, it means that you are becoming more valuable to your customers as a whole each year even as you lose some of them. It means you are raising prices and expanding your portfolio of services consumed by your customers.
How is your business doing on the How Many, How Much, How Long scale? Are you tracking these metrics every quarter? Are you putting programs in place that make it easier to sell your services, allow you to charge a premium, and make it hard for the customer to let you go? If not, why not? These programs will make your business more valuable when the time comes to move it along to the next owner and spend more time on the boat.
