Running on Empty

“All this business needs to grow is marketing. I just haven’t been able to afford it.” Though I recently heard this comment from Tom (not his real name), I have heard the same comment dozens, or maybe even hundreds, of times.

Tom called me for advice on?how to sell his Nashville-based business. Though just in his early 60s (which doesn’t seem old to me now…), Tom was tired and ready to retire. The business almost collapsed during the 2009-2010 recession but had stabilized in recent years. Tom explained, “The rebuild process was slower and harder than I anticipated. But, I got two kids through college while we were getting the business back on track, so I guess I was doing a few things right.”

Tom and I were discussing the process to sell his company. I explained that the starting point of a successful transaction is a memorandum explaining the company’s history, financials, organization and growth plan. I told him potential buyers also need to see a plan for growth. And when I say a plan for growth, I mean a specific, tangible and believable plan to bring in new customers. That’s when Tom said his business would add new customers if he just had more money for more marketing.

There are three problems with Tom’s prescription for success: it’s not specific, tangible or believable.

Having said that, not having a plan for growth isn’t Tom’s biggest problem. You see, Tom’s answer reflects an existential problem with his business: it doesn’t generate enough money to reinvest in marketing. When I see a business that cannot afford marketing, I see a company that is, best case, in a dull holding pattern, or worst case, running on empty.

A healthy business generates sufficient cash flow to fund ongoing new customer acquisition. So when I write a memorandum before I take a company to market, I take extra care to understand my client’s customer acquisition plan. A smart buyer wants to know the company’s ideal customer, how the company finds that customer, and their cost to do it. From that, I derive the company’s formula for new customer growth: for X amount of marketing, we will gain another Y number of customers which should translate into Z amount of new revenue. Get the point, this is specific, tangible and believable. Having a plan like this will bring a premium when the seller takes his/her company to market.

“Ok Jim, I see your point, specificity is important,”?Tom said,?“but how many companies can actually do that? That’s pie in the sky thinking.”?I had to admire Tom’s honesty, and he was right. Not many businesses can be specific about their plan to grow to the next level. That’s why I so often hear the “more marketing” answer. But without a plan, or the business model to fund the growth plan, the business isn’t sellable for meaningful value. When a business is not generating significant cash flow to reinvest in marketing, it indeed might be running on empty.