3
Putting the Process into Practice
Alex scanned the mail—still no check from MNY Bank. He closed his office door and considered his cash position. The Stapleton Agency had a payroll of $43,000 per month and monthly rent of $4,000. He could put off his other suppliers, but he needed to come up with at least $47,000 by month’s end. He glanced at his list of receivables and saw there was $68,000 that was sixty to ninety days in arrears. Along with some small clients who were paying slowly, Alex saw one $52,000 unpaid invoice issued to MNY Bank sixty-five days ago. The bank usually paid in sixty days. They weren’t terribly late, but Alex’s margin for error was slim. Since MNY Bank was his largest client, he didn’t like to pester them about collections, but he knew he couldn’t wait any longer.
Alex’s e-mail to Ralph Stone in the strategic sourcing department of MNY Bank was brief and cordial, and he hoped it would prove fruitful.
Hi Ralph:
I hope you’re well. I’m inquiring to ensure you received invoice #12-673 in the amount of $52,000. If you have a moment, could you please drop me a note to confirm it’s being processed?
Thanks in advance,
Alex
Alex hoped for a speedy response.
010
Having done what he could think of to improve cash flow, Alex mulled over his recent conversation with Ted and his outline for the Five-Step Logo Design Process. He had five days to visit ten prospects. He quickly mocked up a one-page sell sheet and had Chris lay it out and print ten color copies.
Alex reviewed the Stapleton Agency’s Christmas card list and highlighted names he had not spoken with in some time. He fired off two dozen e-mails and hoped to get at least ten meetings to pitch his new process.
011
Alex’s first two meetings were somewhat awkward as he refined his pitch. His third meeting of the week was with Ziggy Epstein. Ziggy owned Natural Foods Inc., an organic food company that made specialty yogurt and cheese in small batches. Her company supplied most of the specialty food stores in the surrounding area and had used the Stapleton Agency to build a Web site a few years ago.
Alex met Ziggy at a small office attached to her production facility on the outskirts of town. After getting the pleasantries out of the way, he got down to business.
“So, Ziggy, tell me about the new products you’re working on.”
“We’re launching a lowfat version of our yogurt and we’re really excited about a new line of organic ice cream we want to launch in the spring.”
“The ice cream line sounds like a great extension of your business. Have you come up with a name?”
“Natural Treats Organic Ice Cream.”
“That’s a great name. Do you have a logo for Natural Treats?”
“Not yet.”
Alex spotted his opportunity and launched into his pitch for the Five-Step Logo Design Process.
“Ziggy, it has been a while since we built your Web site. Including you and your team, we’ve had the opportunity to work with some great clients over the years. Recently, I did an assessment of all of the projects we’ve done and came to the conclusion that we’re very good at creating logos, so we’ve decided to specialize. We’ve developed a five-step process for designing logos and have achieved some great results for clients.”
With that, Alex revealed his one-page sell sheet and took Ziggy through the process he had mapped out with Ted’s help.
“This sounds like a great process,” said Ziggy. “I’d love you guys to work on a logo for our new line of ice cream. Can you send me a proposal?”
012
Alex got back to his office, energized by Ziggy’s reaction to the Five-Step Logo Design Process, and sat down to write a proposal. Having explained the methodology to Ziggy in person, he only needed to come up with a price tag. Alex started by estimating the number of hours it would take. He looked through the old dockets of logo design projects and estimated that the process, with some back-and-forth for Ziggy’s approvals, would take eight to twelve weeks and generate thirty-five billable hours for the Stapleton Agency.
Instead of putting his hourly rates in the proposal, Alex decided that since the project was so well defined, he would gamble and set the price for the Five-Step Logo Design Process at a flat rate of $10,000. The fee was a combination of what he thought a logo was worth, how much agency time it would take, and gut feeling. There was nothing scientific about it.
He e-mailed the estimate to Ziggy and crossed his fingers.
013
By the end of Friday, Alex had met with six past clients to pitch the five-step process. He was summarizing his findings when he heard the familiar ping of an incoming e-mail. It was a note from Ziggy.
Alex:
Thanks for such a speedy turnaround on the estimate. We’d like to proceed with your proposal. I’ve attached a signed copy of your estimate as a PDF. Let me know when you’d like to meet for Step 1!
Regards,
Ziggy Epstein
Alex pumped his fist and smiled broadly. He had his first client for his new process.
Alex took a celebratory walk around the block. He was basking in the glow of his new assignment when he looked down at his mobile—a missed call. Mary Pradham was trying to reach him.
014
After getting the formalities out of the way, Ted wanted the numbers.
“So how did you make out?”
Alex recounted the results of his test of the Five-Step Logo Design Process. He had sent twenty-four e-mails to dormant clients, which resulted in six meetings and one sale to Ziggy.
“Congratulations, Alex, that’s great stuff! How did it feel to be talking about your Five-Step Logo Design Process?”
Alex contemplated Ted’s question for a minute.
“I felt a lot more confident. In the past when I was pitching the Stapleton Agency I felt like I was groveling for table scraps. We didn’t specialize in anything, so I would take any project they would throw my way.”
“And how was pitching the Five-Step Logo Design Process different?”
“When I was pitching our process, I felt like I was an expert. I was in control. I felt confident that we have something of value, and I think that confidence was contagious for Ziggy.”
Ted smiled. “Good. That’s the way it’s supposed to feel when you own a product that you control. Alex, I want you to stop thinking of the Stapleton Agency as a service company and start thinking like a product company.”
TED’S TIP # 3
Owning a process makes it easier to pitch and puts you in control. Be clear about what you’re selling, and potential customers will be more likely to buy your product.
“But designing logos is still a service.”
“Fair enough, but your product is your unique methodology for designing a logo. A service company is simply a collection of people with a specific expertise who offer their services to the marketplace. Good service companies have some unique approaches and talented people. But as long as they customize their approach to solving client problems, there is no scale to the business and its operations are contingent on people. When people are the main assets of the business—and they can come and go every night—the business will not be worth very much.”
Alex pushed back. “But I’ve heard of a lot of service company founders who have sold their business.”
Ted, sounding more impassioned than at any other point in their meetings to date, stood his ground.
“When a service company is sold, the owners typically get some money up front and the rest of their money is contingent on hitting performance goals in the years ahead. It’s called an earn-out, and often the owners need to stay on for three years or more to get their money. During those three years, a lot can happen that makes it difficult for the owners to meet the acquiring company’s performance goals.”
Alex was surprised to see such intensity coming from Ted and needed to know more.
“Why are you so against earn-outs?”
“In an earn-out, you put a significant amount of what your company is worth at risk. The acquiring company is now in control. An earn-out is almost always a disappointment for an entrepreneur. You’ve assumed most of the risk and the acquiring company gets most of the reward if you’re successful. Acquiring companies use an earn-out formula to buy a business when they know the founders are the business. Your job is to build the Stapleton Agency up to a point where the business is independent of Alex Stapleton. That’s the only way you can sell without putting a lot of your compensation at risk in an earn-out. Alex, you need to train people to handle each of the five steps of your process so you don’t have to be the guy piecing every project together from scratch.”
TED’S TIP # 4
Don’t become synonymous with your company. If buyers aren’t confident that your business can run without you in charge, they won’t make their best offer.
Then Ted said, “Alex, it looks like something is on your mind. Tell me what’s bothering you.”
“I’m committed to transforming my company into something sellable and I love the Five-Step Logo Design Process, but right now my most immediate concern is cash. I’m expecting a big check from the bank and they’re a little late.”
Alex’s concerns seemed like music to Ted’s ears.
“That’s another reason to think of your Five-Step Logo Design Process as a product. When you have a product, people expect to pay for it in advance. When you go to Costco to buy toilet paper, don’t you have to pay for it before you use it? We’re used to paying for products up front and services after they have been rendered. Think about the last time you had your windows cleaned. The service was performed first and then you paid the bill. Products are paid for before you use them. Now that your service has been productized, you need to start charging up front for it.”
“I do expect to pay for products up front. If I turn the sell sheet into a brochure and put our fee on the brochure, it would look even more like a tangible product.”
Ted brought the conversation back full circle.
“When someone buys a company, they look at the amount of capital they need to tie up to buy the business. If your business is a cash suck—and it sounds like it is right now—then they will be willing to pay less for the business. If your business generates cash, they will be willing to pay more to buy your business. Alex, give me a rundown on how you bill for your service today.”
“Once an estimate is approved, we get to work on the project. Once we complete the project, we send our bill and wait sixty days or so for a check.”
“And how long does a typical project last?”
“That depends on the job, but a logo project usually takes eight to twelve weeks.”
“Alex, I need you to listen very carefully to what I’m about to say. You have a negative cash flow cycle. On a typical logo design project, it takes four to five months before you get paid because it takes two to three months to do the work and another two months before your invoice is paid. The more projects you sell, the more cash you sop up. No wonder your bank is on your case. Now compare your existing cash flow cycle with a model that allows you to charge in advance. You win the project and you ask to be paid before they experience the product. You then get to use their money for two to three months while you’re doing the work. Now imagine that you convince five or ten clients to go through the Five-Step Logo Design Process. Now you have $50,000 or $100,000 of your clients’ money to finance your business.”
Alex, thinking of the possibilities, smiled for the first time in the meeting.
“The more we sell, the more cash we accumulate. I’ll never have to grovel to Mary Pradham again.”
“And an acquirer will look at your business as a cash generator instead of a cash suck.”
Ted offered his instructions for the week.
“Alex, see how many more clients you can get a meeting with to pitch your Five-Step Logo Design Process. This time, make sure you include the price on the sell sheet and the words ‘Billed upon signing letter of agreement.’ This is your product and you get to decide how it’s billed.”
TED’S TIP # 5
Avoid the cash suck. Once you’ve standardized your service, charge up front or use progress billing to create a positive cash flow cycle.
Alex left Ted’s office feeling confident. He knew if he could start getting clients to pay up front, he would get Mary off his case and sleep a lot better at night.