9 Great Ways To Build Wealth As A Business Owner - Series (2 of 9)

This series of articles follows on from an article I published recently, titled “9 Great Ways To Build Wealth As A Business Owner”, where I mentioned that business owners who focus on building company value over company size, generally get to sell their businesses for a premium when the time comes to exit, allowing them to cash out the maximum with no regrets.

This article looks at Stephanie Breedlove's story about Breedlove & Associates and covers the 2nd way - Prioritize value over revenue.

STEPHANIE BREEDLOVE WAS ON HOLD. 

AGAIN. 

IT WAS THE THIRD TIME HER CALL HAD BEEN TRANSFERRED, AND SHE WAS GETTING FED UP. 

Cradling her infant son in one arm, she lodged the phone between her ear and shoulder as she fumbled to find yet another document that was required. 

An associate on the fast track to become a partner at Anderson Consulting, the predecessor to Accenture, Breedlove thought her task was simple enough. She wanted to pay the nanny she had just hired to care for her son. She had called one of the giant payroll providers, which showed little interest in setting up a new account to pay just one employee in an industry that makes a tiny margin on each paycheck it issues. 

At dinner that night, Breedlove recounted the story to her husband, a rising star at Ernst & Young. As she described the frustration of having her call transferred to multiple agents, each one less interested than the last in helping her, she had an idea. What if she set up a payroll company just for parents to pay their nannies? 

The concept was simple enough. By focusing on parents with nannies to pay, Breedlove could master the process of setting up a new account. Paying a caregiver requires a parent to complete a batch of confusing government forms. If Breedlove could simplify the process, she figured she could make a reasonable profit from busy parents that didn’t have the time to navigate a labyrinth of state and federal government departments. 

BREEDLOVE AND ASSOCIATES WAS BORN

While her husband kept his job at Ernst & Young, Breedlove worked her local connections and signed up a few customers. They told friends, and after two years, she had built her business up to $300,000 in annual revenue. 

Now Breedlove was at a crossroads. After paying her expenses, she had little to show for her efforts. She had given up a lucrative consulting career in exchange for a small business that was barely breaking even. Breedlove needed to grow her business or shut it down and return to Anderson, where they were keen to have her back. 

Determined not to give up, Breedlove decided to press on. Her challenge was to figure out how to grow. She had invested a modest amount of money in her company to get it started but had opted not to accept outside capital. From her consulting days, she thought the easiest way for her to grow was to cross-sell additional services to her existing customers. Breedlove made a list of the other services busy parents needed and came up with things like home cleaning, dog walking, and meal preparation. 

Each business idea seemed intriguing, and Breedlove knew she could sell her loyal customers on buying more from her. Faster growth would have been more exciting, and she would have received more recognition from peers and friends, who would no doubt acknowledge her company’s expansion. But Breedlove had started her business to solve a specific problem, and the idea of offering complimentary services meant she would be veering away from her vision. Breedlove vowed to stick with her initial idea even though it meant she would grow more slowly. 

Over the years, Breedlove continued to refine her system for setting up payroll for parents with a nanny. She tweaked her process regularly, delighting her customers along the way, who recommended Breedlove & Associates to their friends, which made finding new customers easier and easier. 

Although far from a juggernaut, Breedlove & Associates grew around 20% per year. Throughout the years, she received various offers from investors, but she declined, hanging on to her equity, knowing her main goal was to build a valuable company rather than become a posterchild of the industry. 

After 20 years in business, Breedlove & Associates was profitably generating $9 million in revenue from a customer base of 10,000 parents. Breedlove’s two sons were all grown up, and she was beginning to consider what was next for her and her husband (who had also just left his company, Anderson) to join his wife’s business.

Breedlove considered the landscape of companies that could benefit from the business she had built. One immediately stood out. Care.com was creating an online marketplace of local care providers and had amassed 7 million subscribers — mostly people with a need to hire a nanny or elder care worker. Parents looking to find a nanny could visit Care.com, type in their address, and immediately receive a list of local nannies rated by the parents who had entrusted the site to help them find a caregiver for their child . Similar to an Angie’s List for care providers, Care.com had recently raised a significant round of venture capital and was looking to expand quickly. 

Breedlove & Associates began the relationship by establishing a simple marketing partnership to provide content for their 7 million subscribers. Following a few months of delivering content and developing relationships with the Care.com team, Sheila Marcelo, Founder and CEO of Care.com, connected with Breedlove to initiate a discovery process to vet potential synergies between the two companies. 

Breedlove took the opportunity to open a discussion around acquisition. Marcelo immediately saw the potential of acquiring the payroll company and, a few weeks later, presented Breedlove with an offer to acquire her business for $39 million. To put that number into perspective, a typical service business in the United States may hope to garner one times its annual revenue. Here was Breedlove being offered more than four times that amount. 

Most owners would have jumped at Marcelo’s offer, but Breedlove demurred, believing Marcelo would pay more given the synergies between the two companies. Breedlove showed Marcelo how she had built a profitable, $9 mill ion company with 10,000 customers. She reasoned that if just 1% of Care.com’s 7 million subscribers were to buy Breedlove’s payroll service, it would create a company seven times the size of Breedlove & Associates almost overnight. 

Just six weeks later, Marcelo upped her bid to $55 million in cash and Care.com stock. Breedlove, having negotiated a price equivalent to six times her annual revenue, agreed to the acquisition. 

Prioritize Value Over Revenue

Value Builders like Breedlove commit to a product, service, or bundle that does one thing well. They aim to make that offering so different that it gives them a protected niche. 

When customers see what you offer as unique, they become less able to compare your price with another provider. With more control over your margins, you’re ready to invest more in sales and marketing, which further inoculates you from the competition. The other benefit of a point of differentiation is that it makes it hard for would-be competitors to imitate you, which is why an acquirer may reason it is cheaper to buy you out than set up shop to compete. 

Most founders do the opposite. Chasing the recognition that comes with growing revenue or hiring more employees, they take their initial success and water it down by cross-selling additional products, leveraging their relationship with their customers to sell them merely good offerings on the back of their great product or service. The problem with wandering too far afield is that while adjacent products may increase your revenue, they often decrease your attractiveness to a strategic acquirer. Like being asked to buy a cable package of hundreds of channels when all you want is a few, acquirers don’t like buying things they will not use. They often walk away from a deal where a great product has been watered down with dozens of less attractive products or service lines. 

Value Builders focus their limited resources on becoming so good in their niche that an acquirer reasons it would take too long, or cost too much, to compete. Most small businesses with limited cash can only afford to get that good at solving one problem for their customers. 

Taking Action

Make a list of your products and services. Review each item on your list, and consider the following questions: 

• Do you have a competitive advantage? 
• How durable is that point of difference? 
• Does your competitive advantage grow or become diluted as you grow? 

Commit to focus on the products and services that make you unique. 

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