In today’s rapidly evolving business world, a clear roadmap for success is essential. One pivotal tool in this journey is the meticulous crafting and implementation of standard operating procedures (SOPs). As we delve further into the role of SOPs, it becomes evident that to truly add HUGE value to a business, one must wholeheartedly embrace the guidance of standard operating procedures.

Standard Operating Procedures Demystified

SOPs aren’t mere documents; they’re the reflection of a company’s dedication to achieving consistent excellence. Standard operating procedures offer detailed guidelines on how to carry out specific tasks or operations. From the hospitality sector to the tech industry, the significance of SOPs in upholding quality, promoting consistency, and ensuring safety cannot be overstated.

For those aiming to sell a business, a solid set of SOPs can dramatically boost the business’s value. It demonstrates that the enterprise operates with streamlined processes, mitigates inefficiencies, and prioritizes the safety of its stakeholders.

Diving Deeper into the Value Proposition of SOPs

1. Consistency: A hallmark of successful businesses is the delivery of consistent outcomes, whether in product offerings or internal functions. For example, a bakery chain that ensures a consistent flavor and design of its cakes across various outlets likely relies on its SOPs. Such uniformity cultivates customer trust and reinforces brand credibility.

2. Efficiency: Imagine a tech firm releasing periodic software patches. By adhering to their standard operating procedures, the developers can sidestep redundant tasks, make faster decisions, and expedite the release process. This efficiency translates to a quicker response time and heightened user contentment.

3. Training: For an expanding retail conglomerate, SOPs play a pivotal role in ensuring that all employees, even in new regions, undergo consistent training. Instead of navigating through diverse training modules, the standardized procedures offer a unified training framework in line with the company’s core values.

4. Safety: In high-stakes sectors like nuclear energy, deviations, however minor, can have significant ramifications. SOPs, detailing precise steps for reactor maintenance, for instance, ensure each operation upholds the safety and efficiency standards.

5. Regulatory Compliance: Financial firms, which operate under tight regulatory scrutiny, can use their standard operating procedures to showcase adherence to mandated guidelines. From transactional accuracy to customer data handling, SOPs can serve as a benchmark during regulatory evaluations.

6. Accountability: If a food processing company faces quality issues, having SOPs enables them to swiftly trace the production batch, the ingredient sources, and even the personnel responsible, ensuring timely rectification.

7. Continuous Improvement: An e-commerce platform, based on customer feedback, can revisit its SOPs to include enhanced user interface designs or better security protocols, driving progressive enhancement and adaptation.

8. Scalability: For a global fashion brand, as it branches out into new territories, standard operating procedures ensure that customers in Paris experience the same shopping ambiance as those in Los Angeles. Such homogeneity, steered by SOPs, facilitates global expansion while retaining brand essence.

For businesses of all sizes, standard operating procedures aren’t just about documentation; they’re strategic keystones. Whether the objective is to augment operational prowess, guarantee safety, or sell a business at an optimum rate, SOPs bear witness to an organization’s unwavering commitment to progress, excellence, and long-term viability.

The Full Transcript of This Video is Below. Standard Operating Procedures Help Sell A Business.

Hey, entrepreneurs, do you want to increase the value when you want to sell a business? Today, we are talking about key value driver number three, to find out what it is, join us on this edition of the Inside BS Show. Hey, now I’m Nicki G. This is the Inside BS Show. I’m here with my partner, Dave Lorenzo. Dave, how are you?

Dave Lorenzo:
Hi, Nicki G I love doing these shows with you every day. There’s a surprise in the package, what’s going on today?

Today we’re talking about driving value when you want to sell a business. Now, this is the number three way to do it in our 10 key drivers series. Number three way to drive the value of your business is your standard operating procedures. So what are those? Those are a guide to every aspect of your business so that it operates the same way no matter who is there running it, especially if you as a business owner are out for a day. So your standard operating procedures are ranging from everything from the keys to unlock the front door to knowing the code, to turn off the alarm, to get all the lights on in the building down to the exact service you’re providing, the way that it’s provided, how it’s delivered, making sure that you ensuring that there is continuity, quality at every step of the business so that it’s always operating the same and it’s operating well. So Dave, why is it important to have standard operating procedures and really what’s the value of them when you want to sell a business?

Dave Lorenzo:
Yeah, that’s a great question and you really described it perfectly, and there’s two places where you really learn to value standard operating procedures, and in my case, it comes from having a career at Marriott in the hotel industry. Marriott is a company that was built on a foundation of standard operating procedures for everything from making coffee to taking out the trash, to cleaning the dumpster, to making a bed, you name it. Marriott had a standard operating procedure for everything, and I’ve worked with entrepreneurs who’ve had a career or been in the military, and they will tell you that the value of standard operating procedures in the military is incredible because you’ve got people from all walks of life, people with different levels of education, people with different types of innate intelligence, and in the military they need to perform a specific job to the exact specifications or people die, right?

In Marriott, if the bed isn’t made appropriately, somebody’s a little uncomfortable, but in the military, if you don’t load the weapon effectively, you will get shot before you shoot the enemy. So there has to be a standard operating procedure for loading the weapon in the military, and there’s a standard operating procedure for making the bed at Marriott. Now, why are these so important? They’re important because if your business has these for everything, particularly in the operations space, you can onboard new employees quickly because they can take a book of standard operating procedures and sit there and leaf through them and with some hands-on training and the standard operating procedures as a guide, they can learn to do everything from replacing the toner in the copier all the way through to sophisticated tasks if they’re broken down in step-by-step guides in the standard operating procedures. Think of it this way, Nicole, think of it as your standard operating procedures are like the checklist that the pilots use before they fly the plane.

The pilots have thousands of hours of experience in flying the planes that they’re in in commercial aircraft. A commercial aircraft pilot was a pilot in the military before they became a pilot in a commercial aircraft or they were a private pilot and they have hundreds and hundreds of hours before they join an airline. They join the airline, then they have hundreds of hours in the airline in flying the plane and taking off and landing, but they still, every single flight after thousands of hours refer to a checklist and go through the checklist for their pre-flight activities. When there’s a crisis and the buzzer is going off and the cockpit, they go to their checklist for that buzzer for that light, and they work through their checklist of standard operating procedures to diagnose the problem. Why do they have that so they don’t miss any steps, and so that there’s a consistent response and a consistent experience every single time.

This is such a huge value driver when it is time to sell a business. I can’t stress it enough, and when I teach entrepreneurs about this, I come in and I say, listen, you don’t have any standard operating procedures. We got to start in the operations of your business, and we got to create them. They go, oh my God, I don’t have time to sit down and write all this crap down. You don’t have to do that. Here’s the beauty of creating standard operating procedures today. You have the expert, the person who’s doing the task, create the standard operating procedure, and years ago when we would do this, we would have them take a pen and a pad and write down, okay, what did I do? I sat in my chair. Step one, sit down in the chair. Step number two, turn on the machines. Okay, step number two, turn on the machine.

These days, you don’t have to do it because what do we do? We take out the phone and we create a voice note and we say, step one, sit in the chair. Boom. They sit in the chair. Step two, turn on the machine. Boom. They turn on the machine. Step three, program the machine, push button a, button B, button C. All they need to do is record into their phone or a recording device that you give them the different steps that they’re following that’s transcribed. Somebody stands next to them the next day as they perform that task and they make sure they didn’t miss anything. Then you clean it all up and you got your standard operating procedure. You do this for every task, every single task, and it’ll take you six months to make sure you’ve captured everything in every segment of your company.

But these are so valuable because when you sell a business and the people transition into the roles in the business or the owner of the business says, what happens when there’s turnover in a key position? You can say, we’ve got the 30 standard operating procedures right there. We’ve also got, by the way, videos that show this, and we have certified trainers in each role who will compare the video and the text of the standard operating procedure to the actual person performing the job. That’s why these things add so much value when you want to sell a business because it serves as a turnkey model for somebody to come in and pick up right where the business left off. So it’s a seamless transition when you sell a business. Does that make sense, Nicola?

It does. So I don’t like hearing that the process of putting standard operating procedures in place takes too much of your time. It doesn’t. It’s actually a small amount of time that you will put into that, and frankly, you can use a point person to help you do that. It’ll be a small amount of time for the value that it’s going to bring to your organization. I mean, a great example of a company I can think of that we all are familiar with that has excellent standard operating procedures in place is Chick-fil-A. Think about it, I think I’ve read that they can get a new location up and running in something like four months. The only way you can do that and allow your customers to come in and have the exact same experience they have at that new location that they have at any location across the country, and there are thousands of them, is by having excellent standard operating procedures in place.

There is a step-by-step guide to every aspect of that business, and that business, as we’ve all seen, runs like a well-oiled machine from that drive-through line that is out onto the street, they have to make sure that everything is operating exactly on time, that is being executed flawlessly, that you are providing the same level of service at every single business. So that’s a great example as to why you need to have these and look at how successful that company is. Way up there absolutely exploded, doing really great job with their business. That’s why it’s so important because taking that little bit of time to put those procedures in place is going to exponentially increase the value when you sell a business, and that is going to put you on track for an excellent exit strategy.

Dave Lorenzo:
Yeah. In our business, we just did this recently. We had, so the producer of this show, MJ Villanueva, is in the Philippines. She also is my assistant. I work with her. I interface with her every day, but because her work schedule is opposite mine, she works when I’m sleeping and I work when she’s sleeping. We tend to exchange email and voice notes and sometimes videos as a way to make sure we get things done. We just put a new process in place at the time of this recording, and we’re two weeks into it where MJ is managing the Inside BS show page on LinkedIn, and she’s posting older episodes on the Inside BS Show page with the thumbnails and links to the shows, and in order to make sure she could do that, I set up the page here and I gave her the step-by-step guide for how you and I wanted the shows posted, who we wanted tagged, and how we wanted them tagged, and how the summaries needed to be done.

So what did I do to create that standard operating procedure? I did a loom video. I did a video on Loom, which is a really cool screen capture software that showed me doing the step-by-step process for posting the video, creating the summary and tagging people, and then putting the link down below, and I wrote it out, but I also sent her the video, and you know what happened? She did it flawlessly from day one, and we never have to do it again, and I want MJ to work with us for the rest of her career. But if she were to leave or if she gets promoted, when she gets promoted and somebody else needs to take over that task, she can send them the video, send them the step-by-step guide I created for her, and then teach them one time how to do it and they can run with it.

That’s just a micro example of the value of standard operating procedures. It took me 15 minutes to record that video. It took me maybe 10 minutes before that to work through the process and make notes. Then it took me another 15 minutes to write down the step-by-step guide. So in arguably 40 minutes, I created that entire standard operating procedure, gave it to her. I will never have to do that again. It’s done. It’s in the bank. As long as we have that practice in our business, it’s all set and ready to go. That’s a great example of a standard operating procedure that we use. You should be able to do this for everything in your business. It will increase the value exponentially when you sell a business because when people take over your business, they will be able to hit the ground running.

Absolutely. So my final thoughts on this topic are make sure that you take the time to put standard operating procedures in place. You are not only going to benefit your operations at this point in time, but at every stage of your company’s business and leading up to the time with you sell a business.

This is the third video and article in the Key Drivers of Business Value series. If you’d like to review the other key drivers of business value, you can find them all on this page: Key Drivers of Business Value

You can find the audio podcast of this episode of the show here: Standard Operating Procedures Help Sell a Business

The post Standard Operating Procedures Help Sell A Business | Business Strategy Series first appeared on Exit Success Lab.

In today’s ever-evolving business landscape, long-term stability and growth are crucial for a company’s success. One of the most critical aspects of ensuring this continuity is through “management succession planning.” By preparing for changes in leadership and critical positions, companies can significantly increase business value. This article delves into the importance of management succession planning and how it plays a pivotal role in enhancing the overall worth of a business.

Here is the video on Management Succession Planning:

1. Ensuring Leadership Continuity

Management succession planning is crucial for ensuring that when key leaders depart—whether due to retirement, new opportunities, or unforeseen circumstances—a well-prepared individual or team is ready to step up. The absence of this planning can cause disruptions, poor decision-making, or loss of valuable time in finding a suitable replacement. All these factors can impact operations and, consequently, decrease business value.

2. Protecting Company Reputation

A company’s reputation often hinges on its leadership. A seamless transition in leadership roles reassures stakeholders, employees, and customers that the organization is stable and forward-thinking. A robust management succession planning system can significantly enhance a company’s perceived value in the market, leading to a tangible increase in business value.

3. Retention of Institutional Knowledge

When leaders depart without appropriate succession planning, they take with them valuable institutional knowledge. Management succession planning ensures that there’s an effective knowledge transfer process. As a result, businesses can retain their competitive edge, further helping to increase business value.

4. Attracting and Retaining Talent

Top talent is always looking for companies that promise growth and stability. The presence of a management succession planning system showcases an organization’s commitment to its employees’ development and its long-term vision. This, in turn, attracts and retains high-quality talent, which is a pivotal factor in driving and increasing business value.

5. Encouraging Strategic Growth

Management succession planning isn’t just about filling a soon-to-be vacant position. It’s also about aligning the company’s long-term vision with the right talent. This proactive approach means companies can adapt to market changes more efficiently and capitalize on new opportunities. This strategic agility directly contributes to an increase in business value.

6. Enhancing Investor Confidence

Investors look for stability and growth prospects in companies. A robust management succession planning system indicates that the company is prepared for the future, which can translate to increased investor confidence. This confidence can drive up stock prices, contributing to an increase in business value.

Conclusion

Preparing for future changes in the dynamic business world is not just advisable but imperative. Management succession planning is a strategic tool that ensures leadership continuity, protects the company’s reputation, and fosters growth. Companies that prioritize and implement these strategies are not just safeguarding their future but are also taking proactive steps to increase business value. The significance of management succession planning cannot be stressed enough, and its positive correlation with enhanced business value is evident.

Below is the transcript of our video on the topic:

Dave Lorenzo:
Are you ready to increase busienss value? We’ve got key driver number two, management succession planning to increase business value. You’re not going to want to miss this episode of the Inside BSS Show.

Hey Dave. Great. How are you?

Dave Lorenzo :
I’m great. Here’s what we’re talking about today. We’re talking about the second key driver to increase business value in any business, and that is management succession planning. Now, there are three things we focus on when it comes to making sure that the management team is the best it can be so that you can extract the most value for your business, whether you want to exit or whether you want to borrow money, or whether you want to sell off a piece of your equity or you just want to make sure you’ve got the best possible value for your business at any point in time.

Three Elements of Management Succession Planning to Increase Business Value

Those three elements when it comes to your management team are number one, making sure you have the best of the best at each position in your management team. Number two, making sure that you have fantastic retention strategies in place that will make you the employer of preference so nobody ever wants to leave.

And then number three, making sure that you have an eye on the future so that when you’re scaling from 10 million to 50 million or 50 million to 300 million, the talent can help you scale that business. My experience most of the time, the talent that takes you from 10 million to 50 million is different, 50 million to a hundred million is different, and then 150 to 300 million probably different people.

Identifying Top Talent to Increase Business Value

You need to have an eye on the future and your talent needs to have an eye on the future as well. Nicki G, let’s start off by talking about recruiting top talent. And for me, I’ve spent my entire career recruiting top talent in every business that I’ve had you and I have. We spent an entire summer, last summer recruiting top talent for an organization that we’re a part of, and one of the things that I think is essential to getting people on board, the people who are the best in each position is first and foremost knowing who the best are.

You have to be able to go out and assess each person, each position and making sure you’re getting the best person at each position. For example, when you’re starting your business, if you only can afford to hire two people and you need somebody who’s a jack of all trades, that jack of all trades better be phenomenal at one of the key elements of your business. The jack of all trades should either be a phenomenal financial person and they can also dabble in operations, or they should be a phenomenal operations person who knows a little bit about how to navigate around their spreadsheets so they don’t spend you into the poor house, right?

You’re only going to be able, when you’re starting to hire top talent in probably one role as you scale, you should look to understand who the top talent is in each of the roles that you need.

In the legal space, when you’re ready to hire a chief legal officer or a general counsel for your company, who’s the best that you can get? Who knows your industry inside and out, and who’s a great lawyer who understands business in the financial space, who’s the best that you can get that knows how to produce great financial statements that knows the nuances of managing, borrowing, and leveraging capital that knows the nuances of the operations of your business in your industry, but is also a numbers person?

Those folks are critical. Even if you’re not ready to hire them, understanding who the best are for each of the seats on your management team, that’s essential because when you are ready to exit, whether it’s a private equity company that’s going to look at you or a family office or you’re going to sell, say to your partner, you want to point to your management team and say, we’ve got all stars in each position.

They’re poised and ready to take you to the next level. Recruiting top talent starts with knowing who the best are in your field in each of the spaces that you’re going to have around your table. Now here’s the thing. A well-capitalized startup can probably go out and hire rock stars for each position, and that’s why they grow exponentially quicker.

If you’re bootstrapping, again, you got to get the jack of all trades, but they should be a specialist in one area and be adaptable to learn the other areas. When you are ready to add value and use this as a value driver, this is the second place we look because by upgrading your talent in some of these areas, you’re able to add an exponential increase to the value of your business. And I’ll tell you the place where I look to improve the talent first when it comes to adding value to a business is either in the sales or marketing function.

Here’s what happens: If your products are great and your operations team is great, and most entrepreneurs, they build a better mouse trap and that’s why they get into business in the first place and they go out and they hand their mouse trap out, people use it and they say, how can I pay you to get more of these? The way to exponentially increase the value of that business is with more sales, better sales or more of a sales effort or more of a marketing effort.

When I come into a business and I see a business that’s producing a great product with a great experience and their growth is stalled out, or it’s only like five 10% a year and it should be 50 or a hundred or 150 or 300%, I look at the sales function, I look at the marketing function.

If I immediately improve the talent in the sales and marketing function, that business explodes exponentially. From a management team perspective, if you’re looking to unlock value and your operations is good, your products are good, and you got your financials down the place to go is sales marketing, improving the talent there. That’s what I look at when it comes to recruiting for top talent and the management team.

Talk a little bit about retention and how management succession planning helps increase business value. Let’s say we get everybody in the right seats on the management team. We’re convinced we got top talent. How do we keep ’em?

Retention of Top Talent in Management Succession Planning

Sure, and this is critical because it is the essence of management succession planning. You’ve identified the talent out there and you absolutely need excellent talent in the top positions to increase business value. Once you’ve identified them, you should already know exactly what you’re going to do to make sure that you keep them at your company.

You want to reduce any sort of turnover. Obviously that’s an impact to your business, but should you be thinking about that will make these employees really want to stay with you When you work to get to that next level, it is about making sure one, first and foremost, they have to be compensated well, if you’re not compensating them well, they know what their value is, they’ll go somewhere else. It’s got to be what the pay is, whether regardless of the pay structure, making sure they’re well compensated, it’s in line with the market.

Heck, it should be competitive in the market for what you’re offering them. You need to offer good benefits these days. There are folks who are looking equally at benefits as they are at pay because we’re just in that type of environment right now. Both of these things are critical for management succession planning and they increase business value.

Providing outstanding benefits make you more competitive. By thinking about the whole package that you’re going to offer to get that top talent on board beyond just what you are paying them, you will increase business value and make management succession planning easier. Employees want to know that the company cares about them.

That’s the foundation of management succession planning and it helps increase business value.

How do you do demonstrate that you care? By thinking about how to support them. Maybe that’s through resources at your company, making sure that they have everything they need to be their best to be successful in your organization. That is critical. If they don’t have the right resources, they can’t perform at a top level, so that’s of utmost importance. Also, they want to be heard. They want to feel like their voice matters inside of your organization. Make sure you’re communicating with your employees and allowing them to have a say in matters that are important to the business.

The more employees are engaged and feel that their voice is being heard, they’re going to want to support your organization, increase business value and stay with it in the longterm beyond making sure that they’re having that great experience. You also need to be thinking about what can we do looking forward into the future to make sure these employees are staying with the company (management succession planning).

Top talent is coming to organization not only to have a great experience to be their best, but they’re thinking about their future. These are people who are the top of their game. They’re looking for a long-term home. They’re looking to position themselves so that they are achieving their maximum potential as individual professionals. So you’re going to help them do that by thinking about what that looks like moving into the future. So Dave, let me turn it over to you at this point because this is really our number three point today is making sure that you’re able to focus on the future with these employees you’re bringing on board.

Dave Lorenzo
So this is a recruiting and a retention strategy. So one of the ways that I’ve been able to recruit in entrepreneurial ventures, I’ve been able to recruit people from larger companies is by helping them understand that their future is tied to the future of the company. Let’s say that you want to scale from a hundred million to 300 million and beyond in your business, and you know that you need a really sharp operations executive. To do that, you need somebody who knows the ins and outs of every aspect of the operations of your business, and they’re at a multi-billion dollar per competitor.

Now, they’re not the number one at a multi-million dollar competitor or multi-billion dollar competitor in your industry, but they may be the number two or the number three, or they may be the regional head of operations. In order to recruit them over, you have to be able to sell them on the future of your company and where your company is going to go. If you can get them, you can increase business value and solidify management succession planning.

If you want top talent to stay with you, you’ve got to sell them on the future and where your company is going to go. We as entrepreneurs spend all of our time selling everyone on the future of our companies. This is what we are offering. I mean, you make widgets, you have a mousetrap. Nicola and I are in the business of helping you with your business to improve the value of your business, but what are we selling you on? What do we sell the people who work with us on the future?

We’re selling you on the future of your business. We’re selling our team on the future of our business. The way you retain top talent is by helping them see where they fit into the future of your business and helping them see how that’s going to pay off for them in the long run.

Now, pay can be money, it can be equity, it can be playing an integral role. Without them, you don’t get there. All of these things are part of the employee life lifecycle, part of the employee experience, and that’s what you got to sell management on at every level in your organization. You are an important part of our future. We can’t get there without you. When you recruit, you’re selling them on, I need you to play an important role. We can’t get there without you. They have to be a part of your future.

So much of what makes us entrepreneurs, so much of our DNA is wrapped up in being what Dan Sullivan calls a rugged individualist, right? We’re running into the fire every day and we don’t care if people give us a no. We’re just going to keep pushing until we get a yes.

The problem is to scale from one to 5 million or from five to 50 million, we need a team. We need other people. So we have to take that ego and push it down and say, look, I need you, your top talent, so I’m going to pay you at the top end of the pay scale, and if you stay with me for the future, you’re going to participate in this growth potentially.

We’re going to give you equity, we’re going to give you really great bonuses. We’re going to give you benefits that are at the best, the highest level of our industry benefits that we can possibly provide, and we’re going to make this experience phenomenal for you. At every level you are thinking about management succession planning and how it will increase business value.

This leads to an improvement in the value of your business because if you’re the employer of preference in your industry, you get the best talent. If you have the best talent and you have a retention strategy in place, your business is worth more.

Top talent is what’s going to take your business to the next level. Management succession planning helps increase business value. This is top value driver number two in our 10 point series.

We’ll be back here with our third point on how to increase business value on the next episode. This is the Inside BS show. I’m Nicki G, and you are

Dave Lorenzo:
The Godfather of Growth. Dave Lorenzo.

If you enjoyed today’s show, watch another episode and be sure to join us for point number three.

Dave Lorenzo:
We’ll see you tomorrow folks.

The post Your Management Succession Plan Increases Business Value first appeared on Exit Success Lab.

Business strategy is more important than ever. In today’s rapidly shifting business environment, the old adage ‘Don’t put all your eggs in one basket’ rings truer than ever. Whether you are a novice entrepreneur or a seasoned business mogul, understanding the various types of revenue streams and their strategic implications is essential. An effective business model doesn’t rely on a single source of income. Instead, it diversifies to ensure sustainability, scalability, and long-term value.

Embedded within this article is a highly insightful video titled: Diversity and Quality of Revenue Streams. The video features entrepreneur Dave Lorenzo. This dynamic duo delves into the intricate world of revenue streams, shedding light on their importance in crafting a foolproof business strategy, especially when planning your exit. Their engaging discussion not only covers the fundamentals but also presents the 10 key drivers of business value.

Throughout this enlightening episode, you’ll discover:

– The nuances that distinguish ad hoc, repeat, recurring, and passive revenue.
– The transformative impact of each revenue type on your business’s valuation.
– The critical importance of a diversified revenue portfolio for ensuring both business resilience and growth.
– And, the powerful leverage relationship revenue offers in formulating a successful exit strategy.

For those who prefer reading or might have missed a crucial point during the video, we’ve got you covered. Below the video, you’ll find a comprehensive transcript, ensuring you grasp every ounce of wisdom imparted by Nicola and Dave.

If you’re dedicated to fortifying your business foundation, ensuring its growth, and optimizing its value for a future exit, don’t skip this episode. And remember to watch till the end for actionable insights on enhancing your business’s value and a sneak peek into the next crucial value driver. Dive in now and fortify your strategic arenal!

Here is the Transcript from the Business Strategy Video:

Hey, entrepreneurs, are you ready to improve your business strategy and  increase the value of your business? There are 10 key drivers to business value, and today we’re discussing the first one to find out what it is to increase the value of your business. Now join us on this edition of the Inside BS Show. Hey, now I’m Nicki G. This is the Inside BS Show. Joining me today is my partner, Dave Lorenzo, the godfather of growth. Dave, how are you?

Dave Lorenzo:
Hey, now, Nicki G., It is always great when I get to hang out with you. Thanks for joining me today, or I’m glad to be joining you or I’m just glad to be here. So what are we talking about? We’re talking about revenue and business strategy.We are talking about increasing revenue through an improved business strategy, Dave. So Dave, revenue is revenue. Why does it matter where revenue is coming from for a business?

Dave Lorenzo:
I love this question, and in the beginning it doesn’t matter in the beginning, it just matters that there is revenue and that more importantly, there is cashflow, right? Because there’s a difference between revenue and cashflow. I don’t want to get accounting wonky with you, but you need money. But as you’re starting to think about adding value to your business, as you become more mature as an entrepreneur and as your business becomes more mature, you really need to think about the different types of revenue in your business strategy because some of the types of revenue are more valuable than others.

There are four different types of revenue in any business, and most businesses don’t really source all four. Now I know one of the types of revenue, because your business in professional services focuses really heavily on that, right? What’s the revenue type that you focus really heavily on?

Well, not necessarily me, but lawyers focus heavily on ad hoc revenue,

Dave Lorenzo:
Right? Describe for the folks who are listening to the folks who are watching what ad hoc revenue is.

Ad hoc revenue is looking for the next particular matter that you can handle. So using lawyers as an example, if you’re a litigation attorney, you are looking for that next litigation matter. It is a new matter, new business that you’ll be working on.

Dave Lorenzo:
You get that client, client comes in, you work really hard with that client, and the minute the matter is done, you forget the client was even there and you move on to the next client. That’s ad hoc revenue. Second type of revenue is repeat revenue, and you hate it when I do this, but revenue, revenue, that’s repeat revenue, right? You were waiting for that one. What is repeat revenue? Nicola?

Repeat revenue. Dave is working with the same client on a different type of matter. So it’s something else that the client has retained you to handle that you have not already handled before.

Dave Lorenzo:
If we use a dry cleaner as an example, and you bring your shirts to the dry cleaner every week, and all of a sudden you need pants hemmed, you go to the dry cleaner and you say, Hey, Esmerelda, do you happen to do tailoring? And Esmerelda says, absolutely, we do tailoring. So then that’s a different type of work you’ve never had Esmerelda do before.

She normally does your dry cleaning, now you’re bringing her your tailoring work. That’s repeat revenue because it’s the same client, but a different type of work, and we differentiate that from the third type of revenue, and we’ll tell you why in a minute. Nicki G, what’s the third type of revenue?

Third type of revenue to incorporate into your business strategy is reccurring revenue. So that is going to be the same client, same type of matter. In other words, you are performing the same type of work over and over again because that is an issue that continues to come up with a particular client who was sending it out to you,

Dave Lorenzo:
Right? Hey, Esmerelda, here are my shirts next week, Esmerelda more shirts, Esmerelda, here are my pants. Dry, clean them right over and over again. Dry cleaning, dry cleaning, dry cleaning, recurring revenue. So the difference between repeat and recurring revenue from the standpoint of attraction and business value is that acquisition intensity is higher for repeat revenue because you’ve never seen Esmeralda hem pants. You don’t know if she can do that, but you’ve seen her dry clean shirts so she can dry clean the shirts really, really well. So recurring revenue is more predictable.

The acquisition intensity is lower that I’m going to wear five of these shirts every week that I’m going to work. So you know that I’m going to come in on a Friday with five shirts from the last week. You can write it in your book. When you’re valuing a business, if the business is heavy into recurring revenue, it’s worth a lot more than if it’s heavy into ad hoc revenue or if it’s heavy into repeat revenue because it’s really, really predictable. That’s why we incorporate it into the business strategy.

The one caveat I will give you is if there’s a natural segue in your repeat revenue, you can add value in a business with that repeat revenue model.

For example, if you’re a roofer, but you also do stucco and you are a roofer in say, south Florida, and what you do is you specialize in repairing or replacing roofs due to a hurricane. You can also predict that for every three roofs you’re going to do, you’re going to have to do stucco on the outside of the house because the stucco tends to fail when there’s an extreme storm with extreme winds.

There is a little bit of potential predictability of revenue with repeat, but with recurring, there is absolute predictability. So that’s why we like repeat and recurring more than ad hoc.

Now what’s the fourth type of revenue?

The fourth type of revenue to think about in your business strategy, Dave, is passive revenue. Revenue where you have the lowest of acquisition intensity.

Dave Lorenzo:
And the reason passive revenue has the lowest acquisition intensity is because somebody just drops a big bag of cash on your desk, right?

Passive revenue comes from referrals or passive revenue comes when you go out and you deliver a speech and three people after the speech say, I need to work with you. I want to sign up right now. And they give you money and you start working with them. Or passive revenue comes when you write a book and people call you after you’ve written a book and they say, Hey, you wrote a book on exit strategy. I need you to come and help me exit from my business.

You did nothing to really go out and aggressively attack that market. It just came to you and it was kind of a natural thing and it was passive. There are ways to engineer passive revenue in your business.

It’s a little harder to predict, but if you have a way to generate that passive revenue, people who value your business will take into account the fact that, listen, this person does so much of this, there’s a huge opportunity for them to push down profit to the bottom line.

Take for example, Mr. Beast. I love talking about Mr. Beast. Mr. Beast is a YouTuber, Jimmy Donaldson. He owns a YouTube channel named Mr. Beast. Mr. Beast saw that he was getting a lot of eyeballs to his videos, and he thought to himself, Hey, listen, I’m going to start getting sponsors. And what happened was he didn’t think to himself, I’m going to go out and attract sponsors. The sponsors just came to him and they said, Hey, listen, if you talk about my product in the show, I’m going to give you x amount of dollars per video that you talk about my product in that.

In the beginning, that sponsorship revenue was passive revenue for him. What he decided to do was create his own product line, and the only way he goes out to market to sell that product line is by holding up his Mr. Beast bars on his show or by eating those candy bars on his show or by giving them out to the contestants on the show.

Everybody who watches his show, including my kids, they go out and buy Mr. Beast Bars and they want Mr. Beast Burgers and they want his sweatshirts and swag and stuff. So Mr. Beast, by talking about these things on his show and then selling them to people, I would consider that passive revenue. Now, if he had a sales team that went out door to door selling the Mr. Beast Candy bars that would be direct revenue or aggressive in-person revenue, that would be a typical normal driver of revenue.

But from just talking about it on Media Channel that he owns and he owns the product, I would consider that a phenomenal passive revenue stream in his business. So those are the four types of revenue in any business. Now, Nicola, why is this so important to the people who are entrepreneurs who are listening or watching the show today?

This is critical for your business strategy because you are working with less intensity to get that revenue in the door. Your business is no longer dependent upon looking for that next matter. If you’re focused on ad hoc revenue, your entire business is contingent upon the next matter coming in the door. That is going to completely change if you start shifting over to passive revenue.

As you go through the scale acquisition goes down and the types of revenue that you are receiving are going to be diversified, that is going to allow your business to thrive where it will never be dependent upon a single source of revenue for it to grow and for you to be successful with it. So you want to be focusing on achieving passive revenue because that’s going to help you get the most value out of your business.

This brings us back to the discussion that we’re having today about increasing the value of your business, and you will increase that value when you’ve diversified your revenue streams and is coming in the door from a variety of different sources.

Dave Lorenzo:
That’s right, repeat recurring and passive revenue should play heavily into your business strategy. I bundle all those together into the business strategy, put ’em in one big tent, and we call that tent relationship revenue. First thing I look at when you bring me in to analyze your business is how can we increase relationship, revenue, repeat, recurring, and passive that will help you increase the value of your business right from the beginning, right from the first day that we start working together?

This is only one of the key value drivers in your business. You got to join us back here again tomorrow for Key Driver two, key Value Driver two in your business. Until then, my name is Dave Lorenzo

Dave Lorenzo:
And we’ll see you back here again tomorrow for another edition of the Inside BS Show.

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