By Barry Goodman CPA CEPA CMAA CVGA
Managing Director, Birkdale Transition Partners
Copyright: Cannot be Reused without Author’s Permission
This is the fifth in a series of nine articles that follow a business owner, John. He is taking action to increase the value of his company before transitioning or selling it and moving into retirement. In the first article, he learned that Tom—who owns a similar business—had sold it for a much higher price than John was told his company was worth. In the next few articles, John discovered the importance of having a business plan, what it should include, and how strong leadership and his people drive the value of a business.
Business Value Enhancement 101
Value drivers affect either the earnings or the worth of an operation. Being in business is about making a profit and creating sustainable value.
Value isn’t always about the numbers. Environmental and qualitative value drivers have a dramatic effect on a company and its ability to grow. Knowing what creates—and destroys—value helps owners and managers make better day-to-day decisions. That also allows them to build increasing a company’s value into its culture.
The place to begin is a detailed discussion about the quality of the organization. This should include the owner, management team and advisor. At Birkdale, we use the results in our Deep Discovery and an Enterprise Value Assessment and the Value Enhancement Process. An initial conversation broadly examines the eight main value drivers:
Planning Sales Leadership Operations
People Finance Marketing Legal
In taking an in-depth look at each area, John and his business advisor moved to the fourth category: marketing.
Marketing is the strategy that drives sales. When it’s designed right—and supported by the sales and finance value drivers—marketing adds significant value to a company.
Marketing versus Sales: The Ongoing Debate
Almost every company experiences a conflict between marketing and sales. John learned a useful distinction:
A company generally can’t be successful—and create value—without both, or when they don’t work well together. However, if the efforts are unbalanced or departments don’t communicate, growth can’t occur.
John recognized it’s the message that prepares the prospect for the sale. His marketing efforts should include strategies designed to persuade prospects that his company is the right one for them. He has many choices for marketing strategies. These include advertising, public relations, social media, relationship marketing, brand marketing, email and direct mail, among others. It’s also important that he put a process in place to measure their effectiveness.
Sales is a process of interpersonal interactions. These usually involve cold calls, networking, one-on-one meetings, and proposals/estimates. In other words, sales is anything that engages the prospect or customer on a personal level rather than at a distance. This focuses on the customer: the needs that will make these people buy or continue buying. Sales is tactical; marketing is strategic.
Good marketing adds value to the sales process. A good sales process adds information to marketing: through customer feedback and a better understanding of the marketplace. When both work hand in hand, growth happens.
A well written and developed marketing plan, a marketing mix that supports a competitive and profit-driven enterprise and drives income, and a mentality of customer profitability can create value.
What a Marketing Plan Does
A marketing plan is a road map of how to share information on a business, its products, and/or services. It must reflect the overall business plan (discussed in an earlier article) sales, financial, operational, legal and other business value drivers.
The plan also should include everything from information about a target market, to the step-by-step processes for coordinating and building marketing strategies and tactics. Developing the marketing plan requires a clear vision of how the company will attract customers that can create and build value and match what the company does best with the customers’ needs.
John’s company didn’t have a formal marketing plan. Working with his advisor, he realized that his business was doing what many others do. It was good at attracting an audience, but many of these were unprofitable customers—so his marketing efforts weren’t creating value.
Now John understood how a properly written and developed marketing plan would change this:
As with any other plan, this one would be worthless without a clear vision of how to execute the strategies and tactics. It’s imperative that all stakeholders be involved in creating and using the plan, so their efforts are in sync.
The Elements of Marketing Mix
Marketing mix is used to make major decisions that lead executing and seeing the measurable results of a marketing plan.
These are the major ingredients:
Product is an item that will satisfy customer demands by providing a tangible product or service.
Price is the amount the customer pays for the product or service, which provides profits to the company. Pricing is a strategic decision, since it affects demand, the amount of sales, gross and ultimately net profits, and a host of other aspects of the business.
Promotion is all activities that present information about the company’s products and services.
Place is the ability to provide the customer with the goods and services at a place or in a way that’s convenient for them and profitable for the company.
The Value of a Customer
A customer’s value is often overlooked when making decisions about a particular client or product line. The effect of customer profitability can be dramatic, considering the role of marketing investments a company will make.
John had never analyzed the lifetime value of a customer, determined its present value, and compared that with the cost to get and keep a new one.
Knowing this allows the management team to allocate resources based on how profitable it is to obtain and retain a particular customer. Another benefit is seeing the link between customer profitability and the company’s enterprise value. The value of the customer base is an intangible asset. This usually doesn’t appear on the balance sheet (unless the company is acquired). The concept sounds easy, but it can get very complicated when all the components and variations are considered.
Customer satisfaction may also affect the value of a customer. Companies commit capital and resources-based feedback from customers. The American Customer Satisfaction Index has a standardized system to measure this, which seeks to link it to financial performance. John’s advisor warned him to be careful. Businesses get into trouble when they spent too much time and money on customer satisfaction at the expense of the business’ profitability.
Tracking the value of a customer may seem like a daunting task—and often it is. However, it’s important to realize that, when managing a company, each action requires strategic thinking, financial measurement, and an understanding of how this creates value.
With a solid understanding of the role of marketing, John was ready to move to the next value driver: taking a strategic approach to sales.
Birkdale Transition Partners LLC is the objective source for those seeking business sustainability, growth or considering a business transition. Our goal is to ensure business sustainability and to maximize the value of an enterprise before any transition or transaction. Business owners without a transition plan often are unable to sell or transfer their company at its highest value. We help them to balance a company transition with the owner’s personal goals. Then we work with them to avoid problems caused by the lack of planning and/or not recognizing what needs to be added, corrected or modified before then.
Birkdale is unique because it only offers an unbiased assessment and solutions for the company owner. We do not sell any other products or services, so are a fee-only firm. We work in partnership with the company’s current professional advisors and staff. Because we help companies increase their monetary value, owners view our assistance as an investment—with payback and payout occurring during and at the conclusion of an engagement.
For a no-obligation, confidential discussion of your situation, please contact Barry Goodman at 312-626-1820 or contact us.
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