If You’re Serious About Creating Value for Your Business, This is the Mindset You Need – Polsky Center for Entrepreneurship and Innovation

If your business is going to maximize its potential in today’s competitive environment, it needs to grow, attract capital and stand the test of time.

Across the hundreds of businesses we see each year as investors, there are attributes we look for that are either already evident before investing or that present themselves as opportunities to implement after.

Among our criteria, we seek out recurring revenue business models, low customer concentration and operational efficiency. If you’re serious about creating value, it’s time to adopt this mindset, too.

Recurring revenue: Vigorously move into the subscription economy.

Investors love revenue models with customers who pay a stable, predictable, recurring fee for access to a product or service. (Extra points if you are able to push through annual pricing increases.) It’s no coincidence they’re attracted to subscription service models — think Microsoft Office or Costco memberships. But you don’t have to be a corporate behemoth to move into the subscription economy.

Have you ever wondered why private equity is suddenly enamored with car washes? It’s partly because investors have had success shifting from a pay-per-wash to a monthly subscription model.

Why is this important? Because in determining your company’s value, you receive more credit for recurring revenue and substantially less for the business that isn’t definitively coming back. Think about underwriting the value of a customer who used a car wash once and may never return.

Customer acquisition: Build a sustainable go-to-market strategy — or acquire one. 

It should be hard to sleep at night when a substantial amount of your revenue comes from just a few clients. Think about a supplier whose largest customer is the Department of Defense with the contract up for renewal. And then the administration changes.

Unfortunately, we see worrisome customer concentration in many middle-market businesses. If that is the case in your business, invest in developing a sustainable go-to-market (sales) strategy to support organic growth. This is typically easier said than done, and often, the founder is the go-to-market strategy.

In either of those cases, consider buying a competitor to diversify your client base, ideally inheriting a stronger sales engine in the process.

Operational efficiency: Recognize what’s truly an asset and reinvest in the highest returning ones.

The best operators find ways to mitigate capital intensity in their business to enhance their return on investment. Hyatt, with its asset-light transformation, is a great example. How can you operate an asset-light hotel? By selling the underlying real estate and subcontracting the management of its branded hotels, the company has been able to significantly expand its free cash flow. In other words, Hyatt’s highest growth asset is in the fee generating value of the brand, experiences and repeat customers, not the underlying real estate. It’s a strategy you could theoretically use in any business that owns its real estate by selling it, simultaneously leasing it back and investing the cash for growth.

Even in businesses with unavoidable capital expenditure needs, you can still find creative ways to reduce the expense. Consider a route-based business with trucks: Owners could pursue operating leases instead of financing vehicles; increase the density of each route by adding customers; or find ways to increase each vehicle’s lifespan, all to maximize the return on every dollar of capital expenditure.

Here’s the bottom line. Operating a business is challenging enough, so don’t ignore opportunities that make it rewarding. Occasionally, swap your operator hat for that of an investor to maximize the value and potential of your business. Owners who think like investors are the ones who will thrive in today’s competitive market.