Built to Sell

Angie’s first week at the Stapleton Agency was productive. Alex asked her to divide the prospect list into four territories based on quadrants of the city. Angie recommended one of her former colleagues from her time at the yellow pages directory to join her as the second sales rep. Based on her recommendation, Alex met with Seamus O’Reilly.

Seamus was also in the top ten among sales reps at Angie’s former company. The two had worked together and enjoyed the friendly competition of jostling for the top spot each month. In Seamus, Alex saw a lot of the same attributes he valued in Angie. He hired Seamus without hesitation.

Two weeks later, Seamus started at the Stapleton Agency. His first project was to erect a whiteboard in the middle of the office that detailed both sales reps’ weekly sales statistics. Each day, they updated their number of appointments confirmed for the week and the number of logos sold. They each had a goal of one logo per week.

By the fourth week of selling, Angie was consistently setting up ten appointments per week. Seamus was up to eight per week. Finally, on the last Friday of the month, Angie sold her first logo. She raced into Alex’s office with the signed contract. They both celebrated by ringing the bell Angie and Seamus had set up outside Alex’s office. The entire agency heard the commotion and got up from their desks to join the celebration.

Alex beamed all the way home that night. Not only had he built a process others could deliver, but someone else other than him could sell it. It occurred to him as he pulled into his garage that he didn’t even know the name of the company Angie had sold her first logo to. He reveled in the feeling of building something larger than himself.

Alex agreed to meet with John Stevens at his office to discuss the Spanish version of MNY’s new brochure. He rarely wore a suit, but for some reason decided to for this occasion.

The two exchanged pleasantries and John launched into a description of the changes he required for his brochure to ensure its suitability for the Hispanic market. Alex listened carefully. By the time he issued his last directive, John was collecting his things, signaling he was finished with him. Alex knew that it was now or never.

“John, it’s been a pleasure working with you over the last few years. In fact, we’ve worked on a lot of different projects together. The logo we designed for the wealth management division last year stands out for me. Do you remember that project?”

“This will only take a second, John. The logo we did for your wealth management division was not unusual for us. In fact, we have had great success designing logos for a lot of clients. So much so that we have decided to specialize in creating logos.”

“John, we’ll get you the first version of the brochure next Monday, but this will be the last brochure we create for you. The tradeoff for specializing in logo design is that we won’t be able to accept other types of projects going forward.”

“I understand, John, and I appreciate the support you have given us, but that’s the decision we’ve made and I hope we can continue to work together when you have new products to launch that need a logo.”

Harry Stumberger had been Alex’s accountant since he started the Stapleton Agency. Each quarter, Harry spent two days at the office, working with Alex’s office manager, Olga, to ensure that collections were on track and that taxes were being paid on time. Harry would review the invoices Olga had produced and the expenses they had incurred, after which he would issue a profit-and-loss statement that detailed the agency’s affairs for the previous three months.

Harry was scheduled to meet Alex at 10:00 a.m., and as usual, he arrived early. He stumbled into Alex’s office fighting with his umbrella. Alex was huddling with Angie and Seamus reviewing the latest numbers on the whiteboard and called out to Harry as he arrived.

“For each logo you sell, you bill $10,000 up front, which is great for your cash flow. Unfortunately, according to generally accepted accounting principles, or GAAP, I need to apply that revenue in three equal installments starting with the month you sell it and ending three months later. That means I can only recognize $3,333.33 of the $10,000 you bill for a logo project this month. You’ve gone from recognizing the revenue from projects in the month you win them to recognizing revenue across three months. It is having the effect of cutting your monthly revenue by twothirds on paper.”

“Yes, and next month too unless you start accepting other projects again. And if this keeps up, you can forget about declaring a bonus this year. You’ll be lucky to break even by the end of the year.”

Alex flicked the wipers on high speed and just made out the entrance into Ted’s underground parking garage through the rain. It was Tuesday and the combination of the rain and his meeting with Harry had dampened his mood.

The effervescent Cindy took his coat and provided a bright spot in Alex’s morning. Ted was finishing up on the phone and waved him in. Alex took his normal spot on the big white leather chairs in front of the coffee table in Ted’s office. Ted came over, greeted Alex, and asked for his regular update.

“Both Angie and Seamus are consistently getting eight to ten appointments per week. Angie closed five logos last month and Seamus closed four, so they are both tracking well against their goal of one logo per week each.”

“Of course he did, Alex. Harry is paid to count the numbers. He does not have the context for what we are doing. He has no way of distinguishing the good, scalable revenue you get from selling logos from the bad, one-off revenue you get from projects. To Harry, it’s all just revenue. Since your Five-Step Logo Design Process takes three months to deliver, he’s legally obliged to account for that revenue on your profit-and-loss statement across three months. As you move from ad hoc project work to a single productized service, there will be a point where, on paper, you’re in trouble. Let me ask you: How does your bank account look?”

“While you’re in the midst of making this change, you will show a loss on paper, and that’s okay as long as your cash flow remains strong and you keep selling logos. In three months, you’ll start entering months with revenue on the books from logos you sold this month. You will be starting each month with a base of revenue and adding to it with each logo sold. You need to sacrifice for the next three months until your paper statements catch up with the progress you’re making.”

“But my fiscal year closes in two months and I was planning to declare a bonus this year to pay off my mortgage. There won’t be much profit for me to take out of the company.”

“That’s true, Alex. You’ll probably need to trim your bonus this year. But think of this as very mild short-term pain for a very big gain down the road. If we can get someone to buy your business, you will be able to pay off ten mortgages. It’s worth taking a small hit this year.”

TED’S TIP # 10

Ignore your profit-and-loss statement in the year you make the switch to a standardized offering even if it means you and your employees will have to forgo a bonus that year. As long as your cash flow remains consistent and strong, you’ll be back in the black in no time.

“Yes, but you’ve been running the Stapleton Agency for eight years. Wouldn’t it be worth investing another two to finally get rewarded for all of your hard work? Besides, if you sold the business tomorrow—and I’m skeptical we could even find a buyer—they would only agree to buy your company if you signed on for a five-year earn-out. I’m really asking you for a two-year commitment as opposed to five. I’m actually going to save you three years.”

“When you put it like that, I guess I can’t refuse. I was getting excited about the prospect of selling and spending some more time with Pam and the kids. You know, Jenny will be entering high school this year, and Max is right behind her. I only have a few more years before they’re off to college.”

“I understand, Alex. The next two years will be hard work but they will also be much more enjoyable. Your cash flow will be strong. You will no longer be the ‘go-to guy’ for every client, which will reduce the number of client headaches you have. You’ll probably be able to take some vacation time with the family. I think you’ll find the next two years to be a lot more fun than the last two, and you will be able to have confidence in the fact that you’re building something sellable.”

Pam Stapleton had been married to Alex for fourteen years. She’d encouraged Alex to start the Stapleton Agency and had been his greatest cheerleader over the years. But that was before the orthodontist bills and the mortgage. Now Pam had grown used to the bonus checks Alex brought home.

“We’re making some changes so that my business will be sellable in the long term. But in the short term, I’ll make less money on paper. That means I won’t be able to declare a bonus.”

“But Alex, you promised we’d pay off the mortgage this year, and we told the kids we’d take them to Hawaii for spring break. We don’t have the money for that trip just lying around.”

“I know, and we can still go on vacation, but we’ll just have to pick somewhere less expensive. We need to make some sacrifices this year, but if we do this right, I’ll be able to sell my business and then we can take a lot more family vacations down the road.”

Over the next few months, life at the Stapleton Agency found a steady rhythm. Angie and Seamus continued to sell roughly one logo each per week. Rhina enjoyed having a system to follow, and Chris was getting efficient at creating logos. The clients of the Stapleton Agency were for the most part satisfied with the results. Olga continued to march off to the bank every Friday afternoon with more checks to deposit. Things were going well enough for Alex to take a day away from the office to do some thinking.

Alex inhaled the salt in the cool air as he stepped out of the car. Waves were breaking on shore as he walked along a path leading to the ocean. The trail cut through a tall sand dune that rose up more than sixty feet high on both sides. As the path turned south, the beach house came into view. It sat on its own with the next closest house at least five hundred feet down the beach. The entire structure was enclosed by windows, which reflected the sun as it rose in the east. The November morning meant that the beach was deserted. Alex imagined the hive of activity that must take place on a warm August afternoon.

It was off-season and none of Ted’s family were using the beach house, so he had offered it to Alex for his planning session. Alex surveyed his home for the next twenty-four hours. He started in what appeared to be the family room. It was large with modern furniture positioned to take in the sunrise.

He opened a large set of double doors to discover what he assumed was the master bedroom, removed his shoes, and lay on the king-sized bed, imagining waking up to the sun rising over the horizon. A small teak table on the patio off the master bedroom separated two steamer chairs. In addition to the expansive master quarters, there was a doorway leading to a bathroom with a twoheaded steamer shower and heated slate floors.

Off the kitchen there was a set of double doors, which opened onto a deck that stretched out for thirty feet and ran the circumference of the house. The hot tub crafted into the cedar was big enough for twelve people. He sized up the stainless steel Weber and determined that it had the perfect cooking surface for the ten-ounce filet resting in the fridge. This was going to be a good day.

Ted had agreed to lend Alex his beach house on the condition that Alex use some of the time to answer a simple question. Ted had written the question on a piece of paper and sealed it inside a small envelope, which he instructed Alex to open only after he got to the beach house. Intrigued, Alex opened the envelope. Inside was a single recipe card with a handwritten question scribbled on one side:

Alex:

What is the price at which you would be prepared to sell the Stapleton Agency?

Ted

Alex thought about it from a variety of angles. First he asked himself what the business would be worth to someone else. With his year-end approaching next month, Harry had given him a preliminary snapshot of how he would likely end the year financially:

Revenue: $1,400,000
Expenses: $1,313,000
Pretax Profit: $87,000

Alex understood that small service businesses like his typically sell for roughly three to four times pretax profit, which meant his business was worth less than $500,000. It wasn’t enough.

Then he came at Ted’s question from a different angle: What was the business worth to him? How much money did he need to feel free? The second number was a lot bigger. Given the wide gap between the two numbers, Alex decided to move on to the rest of his planning agenda but resolved to have Ted’s question answered before he left the beach house.

He spent the rest of the morning planning the year ahead. He thought about the financial performance he would need to attract a buyer and knew that he had to significantly increase both his top and bottom line.

Angie and Seamus were reliably selling one logo each per week. They charged $10,000 per logo, so they would likely sell a little less than $1 million worth of logos. He scribbled numbers on a pad and played with various scenarios. He had confidence that he could find more salespeople, but he also wanted to balance what Rhina and Chris could deliver. The Five-Step Logo Design Process was somewhat new, yet he definitely wanted to grow. He settled on a goal of $2.5 million in annual revenue and made a note that he would need to hire three more salespeople, as well as a new account director and designer to help Rhina and Chris manage the load.

Next, he turned his attention to his expenses. A pretax profit of 15 percent, or $375,000, was a reasonable goal given that he didn’t have any hard costs associated with the business of creating logos. He went through his expenses line by line, looking for costs to cut to make his profit margin goal achievable. He vowed to drop his subscription to Advertising Age given that he no longer offered advertising. There was no need for freelance copywriters, and he didn’t need to attend the American Association of Advertising Agencies’ annual media conference in San Diego this year, since he no longer bought media for his clients. He was pleasantly surprised at the costs he could cut out of the company given his focus on logos. The 15 percent margin number seemed reasonable even with three extra salespeople and help for Rhina and Chris.

The morning had been a success, and Alex rewarded himself by tucking into the sandwich he had brought with him from the city. After lunch, he walked down to the beach. As he made his way along the shore, his mind wandered back to Ted’s question: How much was eight years’ work worth to him? How much was realistic? The questions kept coming, and Alex was no closer to an answer for Ted.

The Weber’s automatic starter responded after just one depression of the knob. Alex put the grill on high and let it warm up for five minutes. He opened the bottle of Beringer he had bought and poured a glass but did not drink, opting instead to let the wine open up and embrace the sea air. With the grill at 400 degrees, Alex seared both sides of the meat and cooked it for five minutes. Dinner was ready.

He sliced a thin layer of steak and inspected the color—a perfect shade of pink. It tasted as good as it looked, and he washed his first piece down with a hearty mouthful of wine. He closed his eyes and savored the explosion of taste as the two flavors met.

Eating alone, Alex smiled and reflected on the progress he had made so far in working with Ted. Groveling for work from MNY Bank had been replaced by a steady stream of new customers; personally juggling the management of all of the clients had been replaced by Rhina following the instruction manual; and late-night calls to Mary Pradham had been replaced by figuring out how to invest his extra cash. His mind again turned to Ted’s question. He poured himself another glass of California’s finest. Perhaps encouraged by the wine, he decided to suspend the reality of what he thought his business was worth today and instead thought about how much money he would need to lead the life he dreamed of.

There were the requisite things he wanted, but overall he was surprised by how modest his material needs were. He liked his car. His house would need to be paid off. A beach house would be nice but not necessary. Maybe some travel with Pam and the kids. In all, his lifestyle needs were not that demanding. What he really craved was freedom. He had spent his working life at the beck and call of clients and was tired of having others tell him what to do. He wanted to feel free of needing to work. With the wine anesthetizing the reality of what his business was actually worth, Alex answered Ted’s question.