Now is The Time to Focus on Growth9 Sep, 2010 By: Tom Callinan, Strategy Development imageSource
Now is The Time to Focus on Growth
Yes, equipment placements are still falling in our industry so therefore, you do have a legitimate reason to point to that if you are experiencing equipment revenue declines. Yet, there are dealerships that are actually growing their equipment revenue - isn’t it a lot more fun to be included in this group?
How do companies grow in a market that is declining? It is a lot harder than growing in a market that is increasing, but the short answer is, as some other company is declining faster than the market, it does provide an opportunity for the company that plans and executes to grow. If you don’t have a plan or if you don’t execute well against your plan, there is a very slim chance of you growing your equipment business, given today’s environment.
A Good Approach
One approach to growth is to acquire another company or companies. This sounds really easy yet 1 + 1 doesn’t always equal 2. Back to the planning aspect, without planning you will do a poor job of integrating the company you just acquired and the revenue you acquired will decrease by 20%-50% as you struggle to integrate. There are other challenges with this approach, not the least of which is over paying. Two areas to pay particular attention to when buying a company are the payback period and “add backs.”
Payback & Add Backs
In an acquisition, “add backs” tie into the payback period. There are certain expenses that have the possibility of disappearing post acquisition, and after any contractual period expires. One example is real-estate; you may already have adequate facilities in the area and don’t need to maintain the acquired company’s real-estate at the conclusion of the current lease. I am sure the selling company would like to consider that expense an “add back,” but I would caution the buyer to consider that expense as a synergy of the acquisition and not pay for a benefit you, as the buyer, are bringing to the table.
Add backs should be limited to expenses that could easily be argued; didn’t need to be incurred to run the business. If the selling owner is running five company cars for himself /herself through the business, I believe it is reasonable to add back the expense on four of those vehicles.
The second area to consider is the payback period. It wasn’t that long ago that five or six times adjusted EBITDA (adjusted for add backs) was a common acquisition multiple. Assuming sound due diligence and consistent business performance, you would have your investment back in five years (or six) and begin to make a profit on that investment in the sixth year (or seventh). In reality, there would be synergies of the acquisition (the aforementioned real-estate or the ability to handle the volume with your pre-acquisition administrative staff as another example) and your payback would be 3.5 years and not the calculated 5, leading to lower risk. Clearly, the shorter the payback period the lower the risk since there is less time for a major environmental issue to affect the business.
Today, you should be targeting a three-year payback on acquisition price and then through synergies reduce that payback to under two years. I have seen many acquisitions lately with one year paybacks taking acquisition synergies into consideration. Add backs and payback period are only two of the many areas to consider when making an acquisition; since this article is on growing your equipment revenue we won’t be covering the other areas here.
Regardless of whether you make an acquisition or not, you need sound sales operations and strong marketing to grow your business. At one point in time, it was extremely easy to grow revenue in our industry: Add “feet on the street” and monitor activity as revenue grew. These two areas—feet on the street and activity—became the de facto sales operations approach for the industry. But the industry has changed. Unfortunately, we are creatures of habit, and for many, these two areas still define their sales operational approach. Think for a moment about the growth drivers we enjoyed for so many years. Let’s list them:
Product extensions as OEMs added higher segment products to our line-up
Technological improvements as more functionality was added to the products
Introduction of fax machines
Opportunity created by the failed roll-up of many of the competitive dealerships in our area
Opportunity created for our product line when a roll-up company bought a competitor and switched products
Bundling aftermarket into the lease and eventually CPP leasing, building in significant switching costs to our customer relationships
Introduction of color
Change from analog to digital
A rising tide lifts all ships and it is not hard to grow when you are in a fast growing industry, as we enjoyed for many years. Today however, product extensions are basically non-existent and, other than professional services offerings, technological improvements are incremental at best. The roll-up has experienced a traumatic death, color is mainstream, and many in the industry don’t know what you are talking about when you mention analog (roll fed or liquid copiers anybody?). The growth of the copier industry is a relic of the past.
To cope with the new environment you need a more thoughtful sales operations approach (in addition to new growth streams). “Throwing bodies at the problem” and monitoring activity will no longer work as the foundation for your sales operations. Here are some areas you’ll want to address:
Have a plan—this theme is repeated throughout this article because it’s so important yet overlooked by so many dealers.Have a strong front line manager that can develop your employees. People aren’t born to be managers so get them training. Long-term, develop your management team internally.
Deploy a sales coverage model. Strong sales organizations don’t pick quota out of thin air—there is a methodology—and don’t allow their sales professional to choose what accounts they cover. Management makes those critical choices.
Make sure you know the value of your machines in field (MIF). If all you did was upgrade your MIF what would your annual equipment revenue equal? Do the same at the sales professional level.
Monitor pipeline (funnel) growth. If you want to grow your revenue, grow the quantity of prospects; measure through pipeline.
Implement individual development plans for each of your sales professionals so that they experience growth.
Measure your results through equipment growth and sales rep productivity. Your average revenue per sales professional should exceed $500 thousand per year.
Many of your competitors will never learn how to put together a solid business plan, or will not take the time to formalize a sales operations approach, nor will not invest in training their managers—despite the fact that they are turning over their sales force every year—and will ignore all measurements of success. They’ll simply continue to “throw bodies at the problem” until they can no longer afford to do so, having drained their cash with this dated approach that worked for a period of time in yesteryear. When those competitors realize that they have indeed come to the end of the road, buy them at a bargain and increase your market share. To be prepared for that point in time, focus on improving your own sales operations now.
Tom Callinan is the founding principal of Strategy Development, a management consulting firm for the technology and outsourcing space and the leading MPS consultancy specializing in business planning, sales effectiveness, advanced sales training, and operational and service improvement. At www.strategydevelopment.org / email@example.com or 610.527.3317