8 Ways to Ensure that a Second Paycheck is Growing for You as a Business Owner
What? A second paycheck?
Every business owner wants a profitable, successful business. The metrics of success may shift slightly per business owner, based on personal values, but the ultimate goal is to build a business and make a profit by serving customers well, right?
But is there anything after that? The answer is a loud and resounding “yes!”
Each week you’re taking home a profit from your business. That’s your first paycheck. You may be selling a product or service and making a good living. You may be earning a paycheck every pay period, paying your bills and saving for your retirement. But what about the second paycheck every business owner is quietly earning? How much is that?
Your second paycheck is something that you may or may not be building. This paycheck is the one that you are earning by building value in your business now and it’s the paycheck, or cash, you’ll receive when you exit the business and sell to a buyer. It will be the biggest paycheck of your life, but you’re working on it right now (or maybe you’re not working on it right now, but should be).
The only way to receive that big second paycheck is if you can sell your business.
Did you catch that?
IF you can sell your business in the future, that’s the second paycheck you’ll receive and it’s by far the largest paycheck of your business. Most businesses are not transferable and, therefore, are not sellable.
We’re heard it before at PoleStar from previous clients…”but I have a profitable business so someone will want to buy it, right?”
We’ve had to answer that question with a hard answer: “not necessarily.”
But that’s where tools, resources, and knowledge come in so business owners all around the world, aren’t in the dark about their options.
Here’s what potential buyers are really looking for:
- More than just the current profit the business is making
- Future, transferable cash-flow that the business will generate
- Built value inside of the business that’s obvious at a glance
How do you ensure that last bullet point?
There’s 8 main drivers to building value in your business that will make your business look like a mirage in a desert full of unpurchasable-businesses when a buyer is looking for a business to purchase.
You may be the mirage, but ultimately that buyer will need to find water, food, and shelter in the desert, right? That’s the stuff that you’re working on in your business every day that is serving your company right now, and will serve the buyer in the future.
It doesn’t matter what you are selling there will be a buyer for every business if the company is built to sell.
The best part about focusing on these eight main drivers to make sure your business is sellable? These drivers also make your company more stable, more profitable and more enjoyable to own!
8 Ways to Ensure Your Business is Sellable
A buyer is buying the future cash-flow of the business. This translates into you, as the business owner, must prove the cash-flow that you have earned by having good accounting records and following accounting policies and tax strategies set in place.
A quick tip for you to avoid in this area: do not use your business as a personal piggy bank!
Focusing on products and services that stimulate growth is very attractive to a buyer. Identify the products and services that are teachable to employees, and valuable to customers.
A quick tip for you to avoid in this area: avoid focusing on value to such an extent that the products and services become less teachable, inhibiting the ability scale.
The Switzerland Structure:
Do your best as the business owner to not rely on a specific employee, customer or vendor. You should be able to switch vendors with little impact to the business. One specific customer should not be bringing in more than 15% of revenue to your business. Imagine if that customer stopped using your services…how quickly could you make up that 15% of revenue your business has been relying on?
A quick tip for you to avoid in this area: keeping employees loyal and engaged can minimize risk of dependence. Consider creative strategies such as a phantom stock program to minimize turnover of key employees.
The Valuation Teeter Totter:
The more cash your business needs to operate, the less valuable it is to a buyer. This is all about timing of cash-flow. The more you pay upfront to produce goods and services before you collect the revenue, the more working capital the business needs to operate.
A quick tip for you to avoid in this area: you can close the gap by collecting from customers sooner while simultaneously slowing down the speed you pay vendors.
The Monopoly Control:
This is how well differentiated your company is from your competition. An attribute or benefit of your product or service that makes it unique will give you more control over pricing and make it less of a commodity.
A quick tip for you to utilize in this area: The more you can control pricing of a product or service the higher margins you can generate, which in turn can be used for enhanced marketing to further differentiate your product or service from the competition – it becomes a virtuous cycle!
You need customers that aren’t just satisfied, but are willing to re-purchase and refer you to others. Document the testimonials from previous customers, seek to over-deliver to a customer every time!
A quick tip for you to avoid in this area: avoid lengthy surveys that will take a customer more than 1-2 minutes to respond to. Opt for a quicker method of a survey by creating a survey that has the thumbs-up/thumbs-down approach. Thumbs-up respondents get sent to a google review site and thumbs down respondents get connected with a manager who in turn can correct the customer experience.
Hub and Spoke:
This is the extent that your business relies on you personally. This is the most important of all as when you are ready to exit the business because YOU won’t be staying in the business to run it! This is where you may have grown a very profitable business by doing all the selling yourself instead of hiring out, but Hub & Spoke businesses are stressful to run because you can never take a break and all decisions – even the most mundane — are brought to you.
A quick tip for you to utilize in this area: hire salespeople to build a management team that can handle this aspect of your business so you can enjoy the best part about being a business owner (freedom)!
Recurring revenue is more valuable as it is less risky. There are six forms of recurring revenue.
- Consumables: items that must be replaced regularly (gas for a car, coffee for a coffee pot)
- Sunk Money Consumable: where the customer has made an investment to do business with you (like a Nespresso Coffee Maker because you must buy the capsules that work with the machine)
- Subscription: charging a monthly fee usually for a contracted period (a magazine)
- Sunk Money Subscription: you invest in the hardware and then need a subscription for the service (DirecTV)
- Auto-Renewal Subscription: there is no start and stop to the subscription, a roll-over effect takes place (storage units)
- Multi-year Contract: a customer is legally committed to buy over a period (cell phone service contract)
Where do I start?
Take this quick and simple 13-minute free assessment that will measure each of the eight key-drivers of salability.
- This assessment will help you figure out what the low hanging fruit is in your business-situation.
- Start with a few ideas for each key driver.
- If you need outside help, contact a Value Builder Certified Consultant, or even a local business coach in your area to keep you on track.
It is important to set aside time to work on your business just as much as in it! We’ll call this the true CEO time inside of your business — you’re the chief executive officer…do those executive tasks that will push your business to the next level!
At first, this will be very lopsided where you won’t have the time to work on your business as much as you need to work in it (especially if you have a Hub & Spoke business), but as you work through the eight drivers, you will find yourself with more time to work on your business.
As this happens, know that you are growing that second paycheck and creating a more pleasurable business to own – one that provides you with both personal and financial freedom!