Build a better business now

Adam Gosling
Do you have a vision for your business? Do you want to grow for gold and play at the big end of town? Perhaps you have big plans for a big exit that includes a major trade sale to ensure a comfortable retirement? Or maybe you have your eye on the plans for Australia to get its own version of the tech-heavy Nasdaq and want to take your company public?

There are plenty of options out there that can help you accelerate your business far beyond what you could achieve through organic growth, but regardless of which growth path you chose there’s one thing they all have in common. You have to get the fundamentals in place first.

You need a strong management team with the skills and expertise to do more than run the business operationally. You need deep demonstrable relationships with existing customers and suppliers. You need a solid financial plan, a marketing strategy and a proven ability to win business, before most inventors will sign the cheques that launch your outfit toward the big time and your own net worth toward the rich list.

Before you start hiring more sales staff, recruiting engineers and planning how to increase your marketing spend, you need to make sure that’s what you really want. Moheb Moses, a co-founder and Director of boutique channel consulting firm Channel Dynamics, points out that a lot of resellers aren’t all that interested in growth. Many are happy with the success they have achieved. They have a comfortable lifestyle and the last thing they want is to complicate things with the high stress and hard work of a growth strategy.

Well good on them! Maybe you aren’t satisfied with the income you earn from your business and you are determined to buy a better house, drive a better car and drink better French champagne. Still, growth might not be the best answer warns Moses. It’s something that causes a great deal of consternation for his clients, which are generally vendors looking to increase their revenue from the Australian market.

Vendors tend to make the assumption that resellers want to grow, he says. There are elements that do, but there are those that don’t. The dynamics of gross profit for resellers and vendors are very different. For vendors, with low cost goods and a 60 to 80 per cent margin, increased revenue is an easy answer. For every extra dollar they sell that’s 60 cents more in the bank.

For resellers it is different story. If a reseller is making 25 points margin in their business, earning an extra dollar only puts 25 cents in their wallet. A 10 per cent increase in sales is nothing compared to a 10 per cent increase in margin. So resellers tend to profit more by focusing on cutting cost or growing margin by increasing the services they sell. More gross revenue can mean higher costs, more work and only a little more money in
your pocket.

Okay, so let’s say you’re still committed to a growth strategy. You want to increase sales, increase staff and double your turnover. What options do you have?

Generally it comes down to two choices. You either work harder, smarter and wait longer to grow organically, or you look for some way to fund your business so you can change quickly with backing that allows you to expand.

As any experienced operator knows, organic growth is one of the hardest strategies to pull off. Sure it works fine for a while, but each time the business reaches out for a stretch target, resources and funds become scarce, threatening the cashflow. Operational and support staff are pushed to their limit, credit facilities are pressured and even the slightest hiccup can bring down the whole house of cards. Resellers don’t go broke because they can’t sell stuff, it’s because they can’t pay their bills.

Vivian Stewart, a Director of Hall Capital, has a long history in the Australian IT industry. Co-founder at Magna Data and angel investment group TiNSHED, Stewart has also held senior marketing positions at Intel and worked with the University of Technology in Sydney as a Commercialisation Manager bringing new technologies to market.

Hall Capital helps companies find money, either private money invested by high net worth individuals, or through public floats to the stock exchange. It also does a lot of work in mergers and acquisitions, trade sales.

While getting investors to put money into your business might mean giving up some of the equity, it’s worthwhile, says Stewart. “It is just a decision people need to make. Investors bring in discipline and structure that helps make sure you are prepared for scalable growth. That old adage about having a little bit less of a larger, more solid and less risky pie, is better than having all of something really small”, he says.

“Not having a financial runway laid out for your business is one of the major reasons businesses fail,” says Stewart. Preparing for investment means you have to look hard at your business and make sure it is on the right track, otherwise nobody else will risk their money with you.

CRN asked Stewart what a reseller might need to do to make their company worthy of attracting investment, and how a business like Hall Capital would help them achieve it. Stewart explained how the high profile IPO route was not suitable for all businesses and it certainly isn’t the first goal you should head for. Typically capital is invested in a business in stages.

The friends and family stage might provide initial seed funding anywhere from $50,000 to $250,000 investment. If things go well a company may look for an angel, or start-up investor. This is usually a high net worth individual with $400,000 to $1 million to invest in your business. If this goes well, a second round of funding to take the business to the next level is quite common. While a stock market listing may bring all the glory, Stewart said an eventual trade sale to a larger organisation is “much more likely” than a public float.

The work and costs involved in listing are considerable. You can expect half a million in governance alone and the process exposes the organisation to a high level of public scrutiny both through the float process and forever more.

Regardless of whether you want to attract private or public investors, Stewart says the ground rules are the same. To make a company attractive you have to be able to demonstrate what future it has. Is the management team complete? How is the money going to be used? What strategic alliances are in place with vendors and customers? Is there a point of differentiation (other than price) and a track record of sales? “Investors are not looking to invest in any old business”, explains Stewart.

The key to success is having hard evidence that your plan is working. You need to present a solid business plan that shows how much business you can win in the future and how you will fulfil that; you need quality management and processes; external evidence the business is on the right track; patents and trademarks; strategic alliances; ability to get government grants; exposure in the press; all these things come together to make your business look like a good risk
“Not every company has to list on the stock exchange, it is not the only way to raise capital”, says Robert Judd, manager at Business Strategies International. People tend to overlook the money available from government sources in terms of rebates and market development grants says Judd, whose organisation helps business to identify and apply for market development funds and other grants available to them. One example is COMET which is designed to increase the commercialisation of innovative products, processes and services.

Like Stewart, Judd’s company helps business find money. He says his first step as a consultant is to understand the business and what your capital requirements are. Making sure you are accessing whatever grants and incentives are available to you is a good way to get capital and it doesn’t put your home on the line or mean you have to sell a share of the business.

Both Judd and Stewart agree that most small businesses lack in two important areas – financial management and marketing. Often, company finances are handled by a bookkeeper and maybe the multi-tasking owner, but that’s not good enough. Similarly marketing (and we don’t mean sales) is an area that is typically under-represented in the management team of a small company looking to grow through capital injection. But that doesn’t mean you should rush out and hire a new CFO and a CMO, says Stewart.

The calibre of people required to sort through these issues properly are usually far too expensive for a small business to employ. So consultants like Judd and Stewart usually put the business in touch with highly experienced strategic professionals who can work on a contract basis, sometimes even just acting as a mentor. These external specialists also provide much needed distance from the day-to-day operational needs of the business and provide a better strategic picture of what you are doing and where you should be heading.

“I find that few resellers have a marketing strategy or even a marketing function”, says Moses. They are very sales focused and because there is little marketing done they have to initiate every sale. They have to go out and find business. Everyone CRN spoke to agreed that resellers can rarely articulate a clear value proposition.

“They have one, or they wouldn’t be able to get more business”, says Moses. It’s a message you need to take to your customers, to the press, to your vendor and distribution partners and to potential investors.

You need to be able to say what it is you do, how that helps you win customers and how it helps them when you deliver. For example, Moses points out that the distribution of leads by vendors and distributors is often quite arbitrary because they don’t know the individual value proposition their channel partners can bring. If everybody knows what your business does best, you can get better leads.

Hannah Watterson is the principal behind Watterson Marketing Communications. With more than 20 years experience doing public relations for Australia’s IT industry, Watterson understands the business and what can and can’t be achieved. The benefits, she says, are more wide ranging that simply media relations. “A PR program that addresses not just media but also the reseller’s customers and prospects can help build the company’s profile and promote its differentiators in a very competitive market. It can also help bring the reseller to the notice of the vendors and so improve those relationships, and it can help them attract staff”, Watterson told CRN.

Hiring an external Public Relations consultant can be affordable and can have significant long-term pay-offs, but long term is the key. While some companies may try to spend up to quickly raise their profile ahead of a listing, launch or other major event, this probably won’t have much affect on their profitability. A sustained campaign of communications directed at the right media and your target audience of customers, vendors and other partners can raise awareness and push home your value proposition with the right people.

“A stop/start program will ultimately be a waste of time and money. You need regular contact to build relationships and a profile”, says Watterson. A reseller needs a budget of around $30,000 a year to support an effective public relations program. It also needs an existing customer base – as proof of its capabilities and a clear understanding of its target market and offerings. “The executives also need to have the time to commit a few hours per week to the program”, she said.

A communications specialist can help you identify target media and develop materials for them. They will advise you how to interact with the media and then use the news releases, customer profiles and any resulting coverage in other communications campaigns. “For example, the reseller might also use the materials in a customer newsletter or on its Web site. PR does not begin and end with submitting a news release to the media”, explains Watterson.

“Smaller companies can focus on one or two key publications and build a close relationship with those titles offering expert comment for features and news of deals. They can also leverage the PR activities of their vendors – if they have played a significant part in a big deal they should encourage the vendor to issue a release on the deal and include information on, and quotes from, the reseller”.

It was the same advice we got from most of the consultants we spoke to – leverage the skills and marketing activities of your vendor partners.

David Paddon, Director of Go To Market, a consultancy specialising in providing business consulting and lead generation to the IT channel says his organisation generally goes through half a dozen steps with a company. “If a manager says to me he has a poor sales pipeline it is generally an indication that something else is wrong, something isn’t working properly”, says Paddon.With more than 20 yeas in the IT industry holding executive and board-level positions, he specialises in the planning and execution of business development strategies, has marketing skills that he has deployed across the Asia Pacific region and can point to significant sales, profitability and market share growth successes.
His business, Go To Market works with resellers and their vendor partners to increase sales productivity and develop and implement marketing strategies while acting as a management coach and mentor for smaller reseller organisations that have revenues as low as $5 million per annum, which seems to be the entry level we heard from most consultants.

“The first thing we start off with is determining what their goals are for the year. What is in the pipeline and what is already booked? Then we can look at the gap”, explains Paddon.

He first helps you identify where future sales might come from: Your installed base? Existing customers who are candidates to be up-sold to new products? New customers who can be sold existing products? Or even new customers that can be sold new products?

Naturally you need a different strategy to achieve success in each area. To build new customers you need sales people who are “hunters”, to exploit existing customer relationships to gain new sales, a “farmer” might make a better representative for your company.

Paddon says he next looks at the value proposition the reseller brings to the table. What is their value to the customer? What can they deliver? Is it unique? Is it highly prized? Next he does the same process with a focus on the vendors involved. What is the vendor’s value proposition? Do they provide leads, training, pre-sales, margin?

Once Go To Market has a picture of the business in mind they take a closer look at the sales reporting. “Management already understands the need to know what deals are going to close in short time,” says Paddon, “but if we are going to grow the business a company also needs to understand what prospecting is being done.”

“We know from research in the U.S. that 80 per cent of the leads from telemarketing aren’t followed up”, Paddon says, by way of example. Of those that are called, 30 per cent are hot prospects. Forty per cent are actually good prospects, but give the sales rep an answer that sounds like a no but really isn’t. It is more like “Don’t bother me now, come back in six months time”, Paddon suggests.

But the sales rep never comes back. Paddon talks about “Lead Relationship Management” programs which help resellers improve the consistency, predictability and quality of their sales pipeline. You have to track not only how many leads end up in a sale this quarter, but put in relationship building programs to develop the prospect over time.

If you track this properly, you can determine how many and what type of leads you need to generate a sale. By implementing a program for quality lead generation, argues Paddon, then tracking your success and cultivating leads over the long term, resellers can outperform the market.

The process has another effect though. It not only brings growth results, it allows you to build a solid picture of your sales pipeline and future revenues that you can present to potential investors. It becomes a part of the company’s business plan, part of its monthly cash flow analysis and profit and loss predictions.

Give this data to your new part-time CFO and they become part of the evidence of your company’s worth. So when you go to investors you can say: Here are our main revenue streams and this is what underpins them.