Daily business mentoring tip – You must have a back end

November 25, 2011Post by Laura Humphreys

Here’s one of the best thing my dear old dad taught me about business.  “You gotta have a back end!”  My dad made his millions and retired age 50 when he sold his photocopier business.  He told me how he managed to sell it for so much. When he sold or leased a photocopier he made a huge margin on the sale of the machine…. but this wasn’t where the real wealth of his business was.  For every machine he sold, he also signed the client up to a ten year contract to supply all the ink, toner, paper and regular servicing that went with that machine.  So every machine gave him ten years of guaranteed income.  He could project his earnings out with total accruacy and plan his business around this.  And the person who bought his business knew they had guaranteed return on investment.

I took my Dad’s advice to heart when I started my advertising agency.  Having set a goal to sell it within ten years, I wanted to make sure that it would be attractive to a potential buyer.  I considered my Dad’s advice and asked myself how I could apply the ‘back end’ theory to an advertising agency.  We were selling a service not a product.  So how could I do it?  For me the answer was simple.  We needed to get our clients onto fixed term contracts, with committed spend each year.  This way not only would I be able to do accurate forecasting of future income, but so would a potential buyer when they eventually came knocking at my door.

From day one of building my agency I set out to attract clients that were big enough to be able to commit to fixed term contracts with me.  Every strategy I put in place was geared towards this goal.  Step by step I built up a reputation that enable me to attract such clients.  When my potential buyer came along I had a top tier of blue chip clients all locked into three year contracts.  I have no doubt that this fact alone enabled me to command a higher sale price for my business.

Think about this for your business.  Do you have a ‘back end’?  How can you lock your customers into committed on-going spend that will allow you to accruately project your future income?  This is the key to a high value business.

 

From the desk of liber8yourbusiness.  Small business mentors and experts in exit strategies.  Wellington, New Zealand.