|
|
Business Ideas: Hey Ed, show me the money
1 Jun, 2004 By: Ed Laflamme Landscape ManagementThese 3 R's aren't what your teacher had in mind, but they' ll make you money.
Two of the most common questions I get each month are: 1. How in the world do I make money in this business? 2. How do I get out of this business? Both questions speak to the essential command, "Ed, show me the money."
The key to understanding begins by asking: What makes a landscaping company valuable and, eventually, something that somebody would pay a premium to buy from you?
Three "R's" unlock the essential issue of worth, says Don Delaney, my partner in business brokerage through Grassroots - Top Dollar. The 3 R's are revenue, relationships and reputation.
Revenue
With revenue, we're talking three things: profitable revenue, right revenue margins and recurring or onetime revenue. The nutrient value of revenue, like a growth agent, is all in the mix. A nurturing revenue mix begins with real net profit, meaning owner's perks are added back in, before tax and debt service. A growth-promoting target for profit is in the 10% to 20% range.
Next is having generous gross margins, which is revenue minus direct costs. The wider the margins, the wider the margin of error you can absorb. High margins lower risk and raise value. Healthy gross margins create a cushy cash flow.
Lastly, seasoned buyers or sellers zero in on the ratio of recurring maintenance to design/build revenue. Recurring revenue has a service contract. It's repeat business month after month. Service contracts add value and improve salability. The percentage ratio I like is 70:30 service contract revenue to onetime jobs.
Relationships
There are also three types of relationships - customer, employee and vendor. How tied are your customers to you? Customer dependence adds value to your company. Build this dependence by delivering indispensable expertise, quality, responsiveness, trust and a service contract. Low price isn't on the list.
Don't overlook the asset value in your employees. Their loyalty, ability, dependability and customer service skills build value in your company. Then there's mutually beneficial vendor and referral sources. These relationships can drive down marketing costs and drive up revenue. Include them in your asset list.
Reputation
Regarding reputation, what unique service or expertise do you bring to the marketplace? When you're recognized as a leader in a particular field of expertise, you can charge more; generalists are a commodity, with a lower value. By leveraging your reputation, you can open cross - and up-selling opportunities.
Your third grade teacher told you the 3 R's would take you far. She knew what she was talking about. Follow the principles presented here. You'll be able to show me the money now and when you sell your firm.
Please send any technical comments or questions to our webmaster.