A successful exit is the dream of every entrepreneur. However, it is not for everyone. Two success factors appear to be decisive for a dream exit. How predictable is your business income? Does the counter start again at 0 every month or have you built up a stream of recurring turnover? And how complex is your business? Is your company scalable and can you quickly take (international) steps? Or are people or resources actually a limitation? These questions are crucial in the valuation of your company. This blog discusses the two most important success factors in the sale of your company or business growth and provides tips on how to respond to them in a smart way.
Repetitive turnover is worth gold
Investors or potential buyers like to put companies in boxes. They use four quadrants, based on repetitive turnover and complexity. Companies that talk in Annual or Monthly Recurring Revenue have developed a revenue model where revenues grow daily. They work with subscriptions or licenses. The degree of recurring turnover is HIGH at these companies. If the complexity of those companies is also LOW, then they have a golden combination. They do not have complex logistics processes, countless overhead functions or hardware-related limitations.
Low complexity, high repetitive turnover
Software companies such as AFAS, Slack and SalesForce fit perfectly into this picture. To start with, they offer standard software that is directly available from the cloud (SaaS). In addition, these companies do not have logistical processes, months-long implementation processes and employees in overhead positions. They often even outsource one-off revenue, such as implementing the software, to third parties. This reduces the pressure on personnel costs and ensures a focus on selling and further developing the software. Software companies that deliver customization have more difficulty scaling quickly and are in the high complexity quadrant. It is not for nothing that SalesForce beat SAP in terms of growth figures, a company that switched too late to cloud solutions and standard software. Yet it is not only software companies that hold golden tickets. Adyen (Fintech), TransIP (Web hosting) and Goodhabitz (Education Center) are also in this ideal quadrant.
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Also popular with investors: highly complex and highly repetitive
Is your company perhaps not part of the group with a golden ticket? And do you want you sell tech company? No worries. Because companies with a high level of complexity and a high degree of repetitive turnover sometimes also do well with investors. Take the Eindhoven technology company ASML, for example. It has had a leading role in the world of transistors for many years. A highly complex business! ASML needs extremely highly trained personnel, which are scarce. Also from a logistical point of view, it is quite an operation to serve customers. In 2018, the Eindhovens Dagblad headlined: 'One ASML chip machine fills two and a half Boeing 747s'. However, this does not hinder growth. With a net profit of 2.6 billion euros in 2018, the company grew 20 percent.
The secret behind the success is revealed, among other things Moore's law, says CMO Frits van Hout. According to this law, the number of transistors worldwide doubles every two years thanks to rapid technological progress. At the same time, this reduces the costs for each chip that is produced. Take the developments around AI, self-driving cars, the future 5G data network or the growing possibilities of the Internet Of Things. All these developments require transistors. A doubling in chips means more demand for machines to produce them. Let that be precisely where ASML responds very successfully. Now you may think: but these are not repetitive turnovers, are they? Correct. ASML has come up with something for that. Maintenance and expansion! Maintenance contracts and upgrading of existing machines are expected to account for 50% of sales over the next five to seven years.
Stickiness – make customers stick
But there are more companies with a high complexity that know how to come up with repetitive revenue streams. Such as KPN, which has been very profitable for years despite the costs of the network and its thousands of employees. Nevertheless, KPN must be careful. For a few years now, the telecom company has been losing recurring revenue streams to price fighters. They make smart use of the network of other telecom providers and can therefore charge lower rates. It is very important to stickiness to keep an eye on your business. In other words, get customers to stick around.
Tip: this is how you keep the performance and potential of your team members easy at.
The quadrant where you don't want to sit
Are you in the quadrant of high complexity and low repetitive revenue? Then take another look at your business model. You also have to scratch your head in the field of low complexity and low repetitive turnover. It is not for nothing that many traditional retailers have disappeared, such as clothing stores and toy stores. In the current (internet) economy, the retail business model has simply become too complex to simply keep it profitable. Take Bart Smit, for example, with its large stores at prime locations in towns and villages. High rents, high personnel costs and logistical challenges played tricks on the company, especially in competition with online retailers. Because in addition to the complexity, the repetitive nature of the turnover was low. Do the sparrows fall from the roof? Then no one can be found in your store. Does it freeze that it cracks? Then sales plummet immediately. Every day it is hoped that someone will visit your store to buy something. Yet there are plenty of examples where retail does work.
Perfect solution from the florist
Of course I can now start talking about Ahold, Jumbo or its new competitor Picnic. I prefer to put my local florist in the spotlight. The biggest advantage of a florist is that his product is often dead within a week. So customers come back faster. The disadvantage is that weather conditions or holiday periods can have a major impact on the number of visitors. Yet my florist, like a number of his colleagues, has found a solution: a flower subscription. For individuals and especially for companies. Every week you get a bunch of flowers for a fixed amount. This is how my florist has created a smart undercurrent of recurring sales. The more subscriptions, the better. In addition, the logistics costs are significantly reduced at high volumes. All the more reason to bet on this.
Three important tips
Do you want to sell your company? Then prepare well. Take advantage of these three tips:
- Come up with a business model where the recurring turnover is high.
- Think about ways to complexity of your business model as low as possible. If that doesn't work, make sure you grab a leadership position that your competitors can hardly match, as ASML has done.
- Care for stickiness in your business model. Customers who stick, increase repeat sales even further.
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