Radio Free Enterprise

One of the biggest problems facing every business owner is capitalization.

Where can I find start-up capital? How can I be sure to always have enough working capital?

Bank loans are much more difficult to secure than most new business owners realize. Without a decent track record of growth and profitability, no bank is going to give you a loan without requiring you to post collateral such as your house.

Securing venture capital is also very difficult. In fact it’s pretty much impossible if you have no experience in the process and/or your business model doesn’t fit with what VCs look for in terms of growth and the probability of a significant future liquidity event.

So, what’s Johnny Entrepreneur to do when he needs to get his hands on some cash to grow his business? For many people, the answer may be Prosper.com.

Prosper.com bills itself as “The online marketplace for people-to-people lending.” In effect, it’s kind of like an eBay for personal loans. If you need money, you anonymously post your story, how much money you need and the maximum percentage interest rate you’re willing to pay. The site checks your credit score and assigns you a Credit Grade and a Debt To Income percentage. Lenders then post bids of fractions of the total you’re looking to borrow at varying percentage rates not to exceed the maximum threshold you’ve set.

There are too many details and case histories to cover in a blog posting so I recommend you visit the Prosper.com yourself. While you’re at it, you should also visit one of the many piggyback sites which have popped up like EricsCC.com, which chronicles the lending and borrowing statistics of Prosper.com members. Truly fascinating stuff.

Today’s podcast includes another Enterpreneurial Success Story Interview, this time with Paul Ingenito, founder of Flavors Catering in Springfield, Virginia.

Paul and I discuss how he found his passion for preparing fine food very early in life, and pursued it for over twenty years working in restaurants and private clubs before founding his own catering business five years ago. Paul’s personality and success speak for themselves. I think you’re really going to enjoy meeting him and hearing his story.

I’ve also included a short interview with Virtual Assistant Rosanna Tussey, where we discuss what VAs do, how much their services cost, and how they can help business owners get more done in their own busy lives.

Did that headline get your attention? Are you thinking I must be nuts?

Here’s the catch: there’s a difference between “simple” and “easy.”

Successful Sales Management is certainly not easy, but I would argue that keeping it simple will maximize the production of your team.

Here’s what I mean:

1) Keep the compensation plan as straightforward as possible. The easier it is for a salesperson to figure out how and how much they will be paid on a given transaction, the harder they’ll fight to close it.

2) If you simply cannot resist creating added incentives, keep them to a minimum. Commissions paid weekly or monthly, contests run quarterly and bonuses paid annually.

3) Everybody gets the same deal. Ideally, sales is a meritocracy. Just one rep with a sweetheart deal can spoil the whole bunch.

4) Don’t change the deal. If your commission structure is a moving target, your team will come to the conclusion that they have little control over the own earning power. This is directly antithetical to what motivates good salespeople.

5) Keep everyone’s objectives in alignment. In other words, create a compensation structure that rewards the production of what is important to you as the business owner, not just top-line revenue.

6) Everybody knows how everybody’s doing. Before I learned better, I thought a “Leader Board” that published every sales rep’s production was Old School. Wrong! Good salespeople are competitive. The Leader Board is a great motivator - and scorekeeper.

The confused mind turns away. Keep it simple and keep ‘em selling.

There are three sources of sales for any business: 1) New Business; 2) Repeat Business; 3) Referral Business.

Most owners of small and mid-size businesses (SMBs) focus their marketing efforts on #1 and pretty much leave numbers 2 and 3 to their own devices - possibly ignoring the opportunity to triple their sales.

The two factors driving this situation are ignorance and fear: Very few SMBs know how to drive repeat and referral business and most are afraid to ask for a follow-on purchase or referral.

I know of one owner of a multimillion-dollar direct-response marketing company, who was afraid to communicate with his customers after the first sale because he was sure that they would never do business with him again after their initial purchase experience.

As a result, his company, with a database of hundreds of thousands of customers - including their email and shipping addresses - did no follow-up offers of complimentary products or services, undoubtedly leaving millions of dollars of annual sales on the table.

His concern was that, by opening a new communication with the customer, he was giving them an opportunity to complain, and he didn’t want the customer service hassles. My response was that most people were almost certainly happy with what they had purchased, and, even if they weren’t, they wouldn’t admit to themselves (most people use rationalization to reinforce their decision-making process).

Even the small number who might take the opportunity to complain would give him a chance to improve his offering and delivery process, thereby eliminating the need to worry.

Oftentimes, SMB owners find it difficult to ask for referrals. Many feel like they’re begging and that they are putting their customers on the spot, potentially making them feel sufficiently uncomfortable to not buy again themselves.

Just like any successful new business development program, a systematic approach is required when focusing on repeat and referral business. Here are a three pointers:

1) Capture customer information at the point of sale. Make sure you know everything about who is buying from you, what they are buying, how much they are buying and how often. You also want to gather as much of their contact information as possible including shipping address, email address and telephone number. I first started doing this with a point-of-sale system in the late 1980s, so I know you can do it today.

2) Actively market to your customers. There is no stronger indicator of a person’s future buying behavior than their past buying behavior. Don’t send your customers the same marketing communications you are sending to your prospects. Offer them special deals, send them different mailers, produce customer appreciation events, create frequent buyer discounts and premiums. Most of all, communicate with them frequently to let them know how much you appreciate their business and how you’re showing your appreciation.

3) Actively ask for referrals - but not face-to-face. Because so few of us are able to personally ask for a referral without making everyone in the conversation feel like they just stepped into as Southwest Airlines commercial (Want To Get Away?), do yourself and your customers a favor by asking for referrals passively: on your business card; in your email signature block; on packaging, invoices and stationery; and through a systematic series of cards like the ones demonstrated in The Referral Movie (use access code 6752). These methods are inexpensive, yet pervasive and powerful.

One more great source of referral business is BNI: Business Network International. As a member of BNI, the group you meet with becomes a powerful sales force in your community, always looking for opportunities to refer business your way. Commitment is a big success factor for anyone considering joining BNI, but the amount of referral business you can generate through the organization can be flat-out amazing.

For more information on BNI and another referral resource I use, listen to this podcast.

Every business owner considers this question at some point in their company’s life-cycle.

Some start thinking about it before they ever open their doors, seeking to build a business right from the start which will maximize the size of their future “liquidity event.” Others don’t think about it until it may too late - after they’ve already created a company which won’t sell for as much as they need to retire, or to start their next business. Most think about it on a very regular basis.

Valuation is a verb which means determining the worth of a company, and it is equal parts art and science. The most simplistic “rules of thumb” I have seen over the years are 3X last-year’s earnings and 1X last-year’s revenue. But a variety of factors often shoot the heck out of these two approaches and even the definitions of earnings and revenue come into question.

A formula which is often used to determine valuation is called Net Present Value of Projected Future Income Streams. That’s a mouthful, so let me break it down for you.

Income Streams means cash or other items of value flowing to the owner of the company. These include salary, bonuses, perks, travel, insurance premiums, retirement plan contributions and the million other ways that a successful business owner can extract value from their firm.

Projected means that nobody can be sure that the same level of income being generated today will occur in the future - but we may be willing to project that it will. In any event, without a strong and consistent growth rate, we (the buyers) will not project that future income streams are going to be higher than they are today. If you’re so sure that a huge increase in revenue is right around the corner, then you stay and enjoy it. Old Chinese Proverb: “potential” belongs to the buyer.

Net Present Value means that making $100,000 in the third year out is not nearly the same as making $100,000 right this minute. The time value of money “discounts” future income streams - making them less valuable than present income streams. If you expect your company to throw off $100,000 in profit in each of the next three years, I may not be willing to pay even $200,000 for the rights to those streams today. That’s the value “net” of any discounts due to delay in receiving payments.

So, the Net Present Value of Projected Future Income Streams means that the seller must do a great deal to document of the consistent ability of her company to throw off profit, and be willing to take less for it today than she would if she stuck around to pocket those earnings herself.

Factors That Increase The Value Of Your Business

1. Profitability: The more money you’re making from your business right now, the more somebody else will be willing to pay to buy it. I’m talking about real money, usually the kind taxes are paid against, not the kind that you’re somehow taking under the table or “expect to make” next year.

2. Sales Growth: Businesses which have stagnant or declining sales sell for less than those with strong, consistent growth.

3. Turn-Key Operation: The extent to which your processes - from marketing to production to bookkeeping - are codified (written down in an operations manual that anyone can follow) the more valuable your firm will be to a new owner. See The E-Myth Revisited by Michael Gerber.

4. Long-Term Lease or Included Real Estate: New buyers want to continue on as before, not pick up and move the whole operation in the next 24 months. Most buyers want to see an existing long-term lease (or owned building) in place so they’ll know where they’ll be doing business and how much the overhead will cost them going forward.

5. Seller Willing To Take Less Now and More Over Time: There are 3 ways you’ll get paid: 1) Cash today; 2) Note payments over time; 3) An Earn-Out where you earn a salary during a transitionary period and are paid for your time and the continued success of the company. The less you insist on taking as cash up-fornt, the higher the total price you can charge - and vice versa.

Factors That Decrease The Value of Your Business

1. Not a Proven Money Maker: People who buy businesses are making an investment in something that is already paying dividends. If they want to invest in something unproven they can go start their own business from scratch.

2. Company Is Tied To The Owner: The more dependent your company is on your continued presence, the lower its value to any potential buyer.

3. Declining Industry: Over the past 20 years or so, the printing industry has been a tough place to sell a business.

4. Only One Buyer Interested: If you can get a pool of prospective buyers in the hunt - even bidding for your firm - you will have much more leverage in negotiating the transaction. This is where a great business broker (in essence a real estate agent representing businesses instead of properties) can be worth much more than the fees they charge.

As this post has gotten pretty long already, I think I’m going to halt the discussion right here but am considering turning it into a longer-form audio program. If this is something you want to know more about please say so in the comments below.

I’m a big believer in targeted marketing: figuring out who you can bring the most value to and then making sure they know it.

This process explicitly involves excluding certain people from the process: those people to whom your offering or your message does not resonate or bring value.

And that’s the rub.

Many business owners cannot tolerate the thought of “leaving money on the table” by explicitly excluding anyone from becoming a customer. They try to please everyone and often end up pleasing no one.

One company that never had that problem is the Hooters restaurant chain. Their sexually suggestive name and scantily-clad waitresses polarize much of the public into lovers and haters.

But that’s just fine with Hooters. The haters have had limited impact on their image and the lovers have allowed them to grow to over $1 billion in projected 2007 sales. Not bad for a company that started with just a single location in Clearwater, Florida in 1983.

While you don’t have to adopt a brand as controversial as Hooters, the same lesson applies. As Internet marketing guru Alex Mandossian says, every business should boldly ask the people they are targeting to “either turn up the volume or change the channel.” Your brand should speak boldly and your business act decisively. Those who agree will want more and those who don’t will turn away. And that’s okay. It’s a big country.

Food for thought.

In this podcast I interview John Gorman, founder and president of Benchmark Training in Alexandria, Virginia.

This is the first of my Entrepreneurial Success Story Interviews, in which I ask successful business owners how they handle each of my Six Disciplines of Entrepreneurial Mastery.

John’s business is particularly interesting in that he is able to provide executive-level training to federal agencies across the country from a home office with no overhead, no inventory and no employees.

Additionally, John’s business plan includes the ability for him and his wife to travel several weeks a year - rather than allowing the company to run their lives as happens with so many entrepreneurs.

If you’ve been wondering what I’m talking about when I keep pounding on the idea of the “Successful Entrepreneurial Lifestyle,” you need to listen to this interview.

Many entrepreneurs dream of attracting millions of dollars in venture capital (VC) funding to bring their innovative business concept to the world.

It’s not until they’ve gone through the meat-grinder process of pitching VCs, negotiating with VCs, working with VCs, giving up huge chunks of equity to VCs and taking orders from VCs that they realize that their dream was at least one part nightmare.

Venture Capitalists are not interested in seeing you fulfill your dreams. They’re interested in making money. If you’re able to fulfill your dreams and make some money for yourself along the way, all the better. But those two criteria are not necessary for them to judge one of their investments to have been a success.

This short rant is my way of saying Be Careful What You Wish For when it comes to landing VC funding.

With that off my chest, pray allow me to relate an intersting article I came across on the Money magazine web site. Reporters from Money asked a group of successful venture capitalists to share their ideas on what types of companies they would fund if they could just find the right people and business plans. The result of the survey was a list of 20 concepts which can be reviewed by clicking on the headline of this posting.

Two things I found particularly interesting:

1) Most of the numbers and timelines (as in how much money they would invest over what period of time) the VCs cited were unrealistic. For example: $5 million to fund a 20-person team over the course of 3 years to develop a heads-up display to retrofit on automobiles. Payroll and overhead for a 20-person team in any high-cost metropolitan area is going to bust that budget long before we even talk about doing any research and development.

2) The idea of VCs pitching their own ideas and recruiting entrepreneurs to come in and make them happen turns the usual approach on its head. Entrepreneurs are generally willing to put up with all the hell and dilution of ownership that accompanies VC participation in order to make their own dreams or business ideas manifest - not those of someone else. Now, if an entrepreneur sees an item on this list that is in direct alignment with what he is currently working on - great! Otherwise, I just don’t get it.

You see, more likely than not, after spending 3 years and $5 million, that heads-up display venture will be no more. Without a dream providing at least the mirage of light at the end of the tunnel, the people on the team are going to have a hard time coming into work every day.

Business owners spend a lot of time figuring out how to get new customers in the door - and rightfully so. An ever-growing roster of customers is critical to long-term success.

Unfortunately, this foucs on new business development can sometimes mean that existing customers receive less attention than potential ones. If this situation is allowed to persist, it can actually cost a firm two-thirds of its prospective revenue: repeat and referral business.

The most important thing that any company can do to actively promote repeat and referral business is focus on the customer’s “buying experience”: what it’s really like to be in the buyer’s shoes when doing business with you.

Part of this has to do with your pricing and delivery - how well the actual experience matches up with the promises made in your advertising. Another big facet is how helpful and knowledgeable your front-line sales and customer service reps are in identifying needs and solving problems.

But perhaps the most important element of the customer experience appears when something goes wrong - the product is defective, the wrong amount was charged on a credit card, the delivery never arrived. While many business owners see dealing with these problems as a nuisance, smart ones see it as an enormous opportunity to build customer loyalty.

Here’s an example. Last week I ordered a piece of professional recording gear called a Microphone Pre-Amp Limiter from a company called Zzounds (you can click on the headline of this posting to visit their web site). Last night, when I plugged it in to use it for the first time, it started to make a loud buzzing sound like the transformer from an old electric toy train set.

This morning I called Zzounds to ask what could be done. Their respsonse surprised me. Not only would they exchange the defective machine with no questions asked, but they would send out the new one this morning via 2nd-day air and not require the old one back until I had received the free shipping label from them next week.

I didn’t have to find my invoice or know my account number. I didn’t have to figure out how to package my old device for return shipping because I can use the packaging from the replacement. I didn’t have provide my credit card number or pay another penny. In short, other than dealing with the inconvenience of having a defective machine, I will have to do very little to rectify the situation other than box it up and ship it back.

My conversation with the customer service rep was short and pleasant. He knew right away what I was describing and agreed that the symptoms indicated the device was defective. He confirmed my email and shipping addresses to ensure rapid delivery and told me when to expect my new box. He thanked me for my business and asked if there was anything else he could do to help me. When I said no, he promptly said goodbye and allowed us both to go on with our days.

Needless to say, I was impressed. And - I’m going to do all of my shopping for musical instruments and recording equipment at Zzounds.com from now on - and I recommend you do the same.

That’s the difference that great customer service can make in growing your firm through repeat and referral business.

The final step in The Customer Factory marketing model is pulling the trigger - and continuing to pull it for as long as you own your business.

While some Customer Factories begin driving sales right away, most take a little time to begin generating measurable results. You have to keep pouring the coal to your plan until you start seeing them.

Just as importantly, you can’t stop working your plan just because your plan begins to work. Many business owners make the mistake of pulling back their marketing energies and resources because sales are doing very well. You can’t predict when the next downturn will arrive and by the time it does it may be too late to get the wheels of your Customer Factory turning again in time to avoid a significant slump.

Successful businesses not only create effective marketing plans, they also implement them, continuously.

Why do you think you continue to see television ads and infomercials for Video Professor? Because the Professor’s indirect-response marketing assembly line continues to persuade thousands of people every month to order a free computer training disk “for just the cost of shipping.” His Customer Factory works and he’s working it for the long haul.

A big success factor in Step 4 is tracking your results. You must set a baseline of what your sales and sales sources were before you flipped the switch on your Customer Factory and how they change over time. Your front-line salespeople and order forms must explicitly ask customers how they came to you. Coupons, mail-back cards, toll-free numbers and web sites must all be coded to track lead sources.

If this all sounds like a lot of work - well, it can be, especially when you’re first setting up your system. But this investment of time and energy up front also allows many successful business owners to travel the world while tracking their daily results remotely through the Internet.

How’s that for a successful outcome?