Selling a company is one of the biggest decisions in the life of any entrepreneur. But to get the best result and, above all, the best price for the sale, there are a number of do’s you must address and don’ts you must avoid.
Read on to find out the 6 do’s and don’ts when selling a company!
3 don’ts when selling a company:
1. Don´t forget to carry out a reliable valuation of your company
Failure to carry out a reliable valuation of your company means that you won’t know how much your company is actually worth. Subsequentially, you will not be able to reasonably argue a price to your potential buyers. You could be asking for a price that is above your means, or you could be oblivious to the fact that your company’s true worth is greater than what you are asking for.
2. Don’t proceed with the sale of your company without a professional strategy
A smart seller must consider why they want to sell their business and how to clearly face the selling process. If you’re not clear on this, it can be detrimental when it comes to selling your company because the buyer might notice odd things about your attitude and become concerned. They can mistake your insecurity for insincerity, leading the buyer to question you and your company. This raises their risk perception and, as a result, lowers the value they see in your company.
Having a professional strategy is crucial to a successful sale although it is difficult to do this on your own. Professional advisors can help you every step of the way to ensure you get the most out of the sale.
3. Don´tnegotiate with a single buyer
When a single buyer realizes that you are negotiating solely with them, they may take advantage of the situation. They’ll begin to play with time, extending deadlines and demanding for more and more concessions. As a result, it’s critical not to make the mistake of selling your business to the first company or investor who approaches you. This decision should not be made without a comprehensive study and analysis of all possible offers and prospects.
A professional advisor would know the best way to find the best potential buyers and would help you in this kind of negotiation.
3 do´s when selling a company:
1. Do be prepared to take your company off the market and professionalise the selling process
During a company’s sale process, you may learn that there are no potential buyers or that there are buyers who are willing to pay less than your minimal price. In this circumstance, you must be prepared to take your company off the market and continue operating it, creating value for one or two more years before trying to sell it .
“A professional advisor can focus on the selling process while you put your full focus on your company, so it doesn’t lose value during the time of the operation. This is the best way to ensure you don’t miss out on the best deal for something you’ve been working on your whole life.”
2. Do keep the interests of the minority shareholders in mind
First, agree on the sale with them and include them in the process from the beginning. A good agreement between the co-owners needs and expectative will ensure the more successful result possible in the selling process.
3. Doface the company’s intrinsic obstacles
Once personal obstacles are clarified you should face the company´s obstacles. With professional advisory you will know how to face the unavoidable steps in the selling process. Regularizing contingencies, hiring prestigious auditors, clarifying the company structure, avoiding long-term obligations, establishing a competent and cohesive workforce, and defining and documenting business procedures will be used to overcome these challenges.
If you are thinking of selling your company and want to ensure you follow the do’s and don’ts and make the most of the sales process, do not hesitate to contact us without any commitment:
Do you know how to prepare your business for sale?
Imagine that one of your friends tells you he will run a marathon tomorrow, but he hasn’t trained a single day. What would you say to him?
It is likely that phrases like “you’re crazy, it’s dangerous for your health” or “without doing any preparation, it’s reckless” would come out of your mouth. You would be right. Preparation in racing is essential.
It is the same in many other facets of life, such as preparing your business for sale.
1. When preparing your business for sale, the more attractive you make your company to the buyer, the more you can ask for and the more you will get for it
As advisors in mergers and acquisitions of companies, we usually indicate that preparation is behind 90% of the success of a company sale. When an entrepreneur decides to sell a business, we often find companies are not prepared for an optimal sale, so it would be advisable to spend time to resolve any ‘weaknesses’ that we find before the sale because these factors will certainly reduce its value and/or hinder the sale process. Logically, this takes time, and unfortunately, on too many occasions, the entrepreneur no longer has it.
Provided you have this time, preparing to sell your business one to two years in advance is advisable. The aim is to focus on improving the company, which will increase its value, make it more attractive to buyers and increases the likelihood of success. It is also important to remove obstacles that could hinder the sale and minimise its negative impacts and equity consequences.
The work done during the preparation of the sale of the company focuses on identifying the critical aspects for improvement, acting on them, and reducing the possible risks that a potential buyer would perceive today. Throughout this article, we indicate some aspects you should work on to prepare your business for sale.
It is time to get the company in shape to seduce investors. The “training” begins.
2. What products or services do you have in your portfolio?
The first thing to do is conduct an extensive analysis of your products or services. Analyse what your costs are, the margin you apply, etc. Ask yourself if diversifying your portfolio of products or services makes you more competitive and attractive to an investor.
Work on the differential elements of products that are difficult to copy, patents, exclusive area contracts, specific qualifications from the public administration, etc. Buyers can highly value any of the above. To do this, it is recommended to reflect on whether there are barriers to entry in your sector and see if you have key elements that will enable a buyer to overcome these barriers.
Linked to your portfolio of products and services, you should analyse whether they can be exported. That is, if they can be sold/offered outside your borders. Nowadays, many investors are looking for a product or service portfolio that is diversified in terms of customers and geography. They are looking for the product or service to be saleable in markets they operate in, often globally in the case of multinationals. If you have not done so, try to analyse the foreign market (for example, your neighbouring country) to see if it is beneficial to have new alternatives to commercialising your products or services.
Try to be product-oriented and not service-oriented. Even a service company can standardise them into an efficient product.
3. Preparing your business for sale: do you have control over your stock if you sell products?
To prepare your business for sale, it is best to keep a monthly inventory of your stock as up-to-date as possible and at market value.
If you have unaccounted stocks, you must regulate them if you do not want your company’s value to be reduced during the sale negotiation. Keep in mind that the buyer is not going to pay for unaccounted inventory. There may be tax contingencies, so this would open up “hot” negotiation points in selling the company.
Avoid stockouts. Plan your purchases and the stock you have in the warehouse so that any unforeseen event does not lead to a stockout with customers left out of supplies. For example, during the 2020 pandemic, some companies had to stop production due to the shortage of raw materials because they did not have a safety margin in their warehouses.
If you have not already done so, invest in good software for management control. Small and medium-sized companies usually find opportunities for improvement in day-to-day management with solvent software.
Overcome resistance to change on your part and the part of your employees. Good software is an investment that pays off in profitability, efficiency, and management control.
4. The importance of knowing who your customers are when preparing your company for sale
Here, the quantity and quality of your clients are key to an investor’s attractiveness. If your client portfolio comprises only a few companies, consider whether it is appropriate to look for alternatives.
New services or products
Create new products or services that allow you to have a diversified client portfolio and not depend on just a few. The investor will ensure that the company’s future is not compromised at the time of your exit and that they remain in charge of the company.
In addition, when selling the company, excessive dependence on one customer may lead to a reduction in price or a conditional payment in the future, depending on the maintenance of that customer.
Ideally, ensure no customer accounts for more than 15% of your income statement.
Qualify your customers
You should also analyse the quality of your customers. To do this, break down the margin you obtain with each one of them.
We have worked with companies where reducing sales by eliminating unprofitable customers resulted in an absolute margin improvement.
How you charge your customers is also important to prepare your business for sale. If you charge for your services in advance, for example, in the form of bonuses, be careful about the correct allocation of sales.
Sometimes we see that companies recognise the entire bonds as revenue when they sell it, and, in reality, they should recognise it when they provide the service. Failure to do this correctly can result in profit adjustments for the year that affect your margin and EBITDA. This can affect your company’s value.
Remember that company value will be key in negotiating the final sales price.
5. What about your suppliers?
In the same way, we talked about customers. The same applies to suppliers. It is not convenient to depend on just a few. Have alternatives to any rise in raw materials, any change in contract conditions, etc.
Look for alternatives to be able to face price increases of materials. In today’s environment, we see more and more industrial companies facing a generalised price increase in raw materials. Rising fuel and electricity prices accentuate this.
Companies with a more efficient material supply strategy (a more significant number of suppliers) and a repercussion of a price increase to customers will be able to defend margins better.
6. Preparing your business for sale: what condition is your machinery in?
If your machinery is obsolete, try to find a way to renew it and maintain it properly every year. If an investor has to make large investments in fixed assets (CAPEX) when entering the company, he will probably try to deduct it from the price he offers for the company.
7. Is your corporate structure suitable for the sale?
If you know you want to sell your company, as part of the sale preparation, we recommend hiring a tax advisor who is an expert in company sale and purchase transactions. You need to have an appropriate corporate structure according to the operation you want to carry out.
There are many corporate factors that you must contemplate when you prepare your business for sale that will affect it fiscally:
A holding company forms the corporate structure.
The sale of assets instead of shares.
The inclusion of real estate in the company.
Dividend policy before the sale.
You must have a tax plan for the operation between 6 months and a year before starting the sale of the company.
Factors with fiscal implications must be considered when preparing your company for sale.
On the other hand, family factors will also affect the sale and, in some cases, even prevent it. Some examples are companies with many shareholders, some even untraceable, companies in the hands of the “generation of cousins”, or in which its shareholders are at odds. Identify as soon as possible any possible family conflicts and put them on the table as soon as possible, and let yourself be advised and mediated by expert lawyers in these types of family conflicts.
8. The working conditions of your employees are also key when preparing your company for a sale
Company’s structure
The first thing to do is analyse whether you have become “the orchestra man” in your company. Does everything depend on you?
If that is the case, you need to professionalise your company. Create a structure that allows you to distribute responsibilities and in which everything does not depend on you. If you don’t have one, hire a general manager to manage the company and report to you as president or CEO.
This will allow you to make a much smoother transition when the buyer, whether a financial investor or an industrialist, enters the company. The deal often falls through when the buyer observes very hands-on company management, especially with international buyers.
Workforce
Focusing on your workforce, you must regulate all your employees, i.e., pay overtime, per diems, etc. Analyse the possible employment of freelancers or the status of partners who provide services in the company.
Buyers look for well-organised companies and do not want problems to arise because of any labour irregularities. All possible sources of problems detract from the attractiveness of your company. Therefore they can lead to complexity in the price paid in the form of contingent payments, escrow accounts or lowering the price.
The labour aspect in a service company is especially relevant for the sale of the company. As long as everything is in accordance with the current regulations, you will avoid possible contingencies in the sale process. Remember that the objective when you prepare your business for sale is to eliminate obstacles that may hinder the process.
Key employees
Also, it would help if you created a management team with attractive incentives for the fulfilment of objectives and with personal development plans to keep them loyal to the company.
It is advisable to involve key executives in the sale because you will need them to offer the best face to the investor and ensure that the company is in the best hands.
When you prepare your business for sale, it is desirable to prevent executives from leaving during the negotiation phases of the sale, as this could be devastating to the buyer’s perceived value.
One measure we have implemented on occasion with the entrepreneur has been to inform key executives of the sale idea and reward them with a percentage of the transaction value. This will encourage them to collaborate to improve financial ratios during this period.
9. Do you have a clear strategy for your company?
Improvisation is not a factor that attracts investors’ interest. Do not define your strategy “on the fly”. Small and medium-sized companies often do not have a strategic plan.
Strategic plan to prepare your business for sale
A strategic plan defines some crucial points:
Where the company is.
Where it wants to go.
The objectives to be achieved.
The means to achieve those objectives.
Therefore, draw up a strategic plan containing all these, including a business plan for 3 to 5 years. Within your business plan, try not to generalise. Focus on doing a few tasks very well and not too many regularly.
You must involve your employees in this strategic plan, making them aware of it, defining the company’s overall strategy, and specifying it at lower levels that will take the form of action plans (departmental or of the different areas).
When you put your company on the market, any investor, whether financial or industrial, will ask for a realistic and credible but also ambitious business plan on which to base the company’s future.
This will help you give credibility and generate interest in the investor. Keep in mind that the buyer will have more resources and will accelerate the growth of your company.
Strategic plan’s compliance
When you prepare your business for sale, you must monitor the degree of compliance with the strategic plan starting from the operational management of the defined action plans to see its coherence and deviations.
In this way, buyers will see that the projections are being fulfilled when you are in the sales process. This will have a triple effect:
Give investors confidence.
Lower risk of the transaction.
Increase your company’s value.
Advantages of having a strategic plan when selling your company.
Competitive environment of your company
Your competitive environment is essential.
Be sure to analyse your competitors during this process. Try to track your competitors’ performance annually and compare yourself with them.
It is crucial to make an industry comparison. You need to identify if you are growing at the same level as the industry. Are you below or above? Are your margins aligned with those of the industry? If not, try to find the reason behind this situation.
You have to know what your role in the market is to be able to negotiate the sale of your company.
10. How is your company doing financially?
Preparing the company for sale requires a thorough review of its financial status. This extends across many areas, from real estate assets to the company’s cash surplus.
Balanced scorecard
A balanced scorecard is a management tool that facilitates decision-making. It gathers a coherent set of indicators (KPIs, key process indicators) that provide top management and area managers with a coherent vision of the business or their area of responsibility.
Do you have a balanced scorecard for the financial control of your company? If not, now is the time to do it.
The information provided by the scorecard helps focus and align management teams, business units, resources, and processes with the organisation’s strategies.
Budgets
Although it sounds logical, preparing annual, quarterly, or monthly budgets is important. Preparing an annual budget at the end of each year is necessary for the successful planning of the company. Also, for setting short-term objectives.
In addition, keep control of your accounts monthly, calculate budget deviations and look for their origin.
Debt’s managing
Seek to define your company’s financial debt. It is crucial to be clear about what is part of the company’s debt. We refer specifically to the debt with a financial cost to banks and any other institution (leasing, bondholders, invoice discounting, etc.).
In this sense, it is also necessary to differentiate debts with customers, such as advances, that are generally considered debt.
Another issue that you must manage is debt with partners. If it exists, you must formalise it through loan contracts so that it is clear how it will be amortised when it comes.
Real estate assets
The company frequently owns the asset where it is located. Sometimes, it even owns unnecessary assets for the company’s operation. Analyse the real estate assigned to the operation of the company.
It is always advisable to separate the real estate activity from the productive activity, charging a market rent to the company.
Surplus cash
One point that it is recommended to review is the surplus cash. In small and medium-sized companies, it is common to find a conservative profile, where the profits of previous years have not yet been distributed and have increased the cash flow.
At the company’s point of sale, it is necessary to extensively study the real cash needed for the company operation (working capital) and have a clear idea of the amount that can be distributed to the partners before the sale.
Finally, avoid cash flow tensions. Manage your cash, if possible, by charging your customers in advance, generating a positive cash flow cycle.
The valuation of your company is an essential step during the sale of a company.
The valuation will allow you to understand the strengths and weaknesses of the company from a financial perspective. These strengths and weaknesses are translated into numbers and affect the company’s value. This is especially important for preparing the company for a sale process.
You may be surprised by how the value changes when you touch some elements, for example, paydays or stock days. It will help you understand how potential buyers tend to value the company. This way, you can maximise the price by taking steps before the sale that will affect the valuation.
You must take time to understand the different valuation methods. Also, the values of companies similar to yours that have been sold. This way, you’ll have a logical orientation of your value range depending on your actions.
The importance of preparing your business as well as possible for sale
During the final stages of the sale, the potential buyer will always perform an audit or due diligence of the company’s financial, legal, commercial, labour, environmental, and business aspects. Therefore, anticipating possible contingencies that may arise in the due diligence is essential to prepare your business for sale.
On the other hand, there is a lot of information to prepare for the buyer’s review. Anticipating its preparation will speed up the subsequent review process and alert you to possible deficiencies in the information.
As you have seen, you cannot go out to sell without first preparing yourself. Start training now if you want to reach your goal and sell your company. Preparation will be the key to your success.
Are you considering the sale of your company and need professional advice? Do not hesitate to get in touch with us or fill out the form below:
With the digitalization of many industries and given the COVID situation, the restaurant industry has been shaken up and transformed in order to survive. Restaurants, regardless of the segment they appealed, had the same model for decades, if not centuries. You sit down, order, eat and pay (what differentiated from one to the other was this order). Then came the on-demand delivery companies. The Deliveroo, Glovo and Uber eats of live provided restaurants, which had a finite sit in capacity to extend their orders to an online audience. This new revenue stream developed in the idea of creating restaurants, or branded kitchens that only sold through on-demand delivery platforms.
Cloud restaurants are known by various names such as ghost kitchens, shadow kitchens, virtual, or dark kitchens. But the basic idea remains the same: restaurants have an online presence, and their food can be ordered through food aggregator apps or through the restaurant’s own app, but the restaurants themselves don’t have dine-in facilities. Like many retail food chains such as McDonalds, KFC, etc they have expanded this revenue stream, and have also streamlined their digital sales operations to a Dark Kitchen model. Now there are companies like Rebel Foods (formerly Fassos) that base their sole business model on digital sales. This has given way to an exponential propagation of companies that develop many brands representing different cuisines under the same company. They fall under different strategic models. Some operate under the same roof, others operate based on the demand and delivery facilities optimization.
Business model explained
Advantages over traditional restaurants:
Low Operational Cost
Low Set up and Introduction Cost
Allow to better segment the target audience
industry 4.0 – Automation, traceability and Data
Applied Metrics
Food cost % of total costs
Food cost % per item
= Item Cost / Selling Price
Menu Item Profitability
= (Total Number of Items Sold x Menu Price) – (Total Number of Items Sold Per Item Portion Cost)
Preparation
= (prep) Times per item
Quality Rating
Rejection Rates (of orders)
P&L Assumptions
This article was written by José Ramírez Terc, specialist in 21st century business models.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
If someone is creating content online, editing it, and publishing it periodically, they are probably in the media site business. They produce content, bundle it, and distribute it. The media industry covers a wide variety of areas like advertising, broadcasting, and networking, news, print and publication, digital, recording, and motion pictures, and each has its own associated infrastructure. We call these media sites or media apps.
It’s understandable to think that social media sites like Facebook, Tik Tok Instagram or Quora are media sites, as they mostly make money from advertising driven by the content consumption metrics on their sites. That is what a regular media company’s business model would revolve around.
Instead of creating their own content these businesses strive to create user communities that create content. This makes them companies based on the User-Generated Content business model. They deserve their own business model because their primary concern is the growth of an engaged community that creates content. It has some similarities to the E-Commerce / Marketplace model. Instead of joining buyers and sellers, they bring content creators and content consumers into the same platform. Hence, user engagement is the main driver for this model.
This model is driven by its unique funnel of user engagement:
Based on Graph 12-1: Croll, Alistair, Yoskivitz, Benjamin: “Lean Analytics: Use data to build a better startup faster” . 2014 O’Reilly Media Inc
Applied metrics
Engaged Visitors:
Measures the user stickiness (how often they use the site or app)
Content Engaged Users:
Users that interact with content
Content creation:
The % of users that actively create content
Engaged funnel changes:
Ratio that measures how people changes from one level of the engagement funnel to others
Content value:
Perhaps the heaviest metrics of all, as it holds the weight of user content engagement and interaction to monetize the business.
The business value of content (ads and donations).
Content sharing and virality:
Ratios that measure the % of content that get shared.
Virality:
User engagement based on content sharing.
Includes new users from shared content.
Notification effectiveness:
% of users that act upon a notification.
Day-to-week ratio:
How many of today’s visitors were engaged earlier in the week.
This article was written by José Ramírez Terc, specialist in 21st century business models.
Humanity’s dependency on mobile devices has boosted the need for almost all organizations, private or public, from all sectors to have a presence on our phones and other mobile devices. Mobile device market penetration is the main factor for the growth of the mobile apps market.
This business model can be viewed from 2 different perspectives, or through a combination of both:
As an extended source of an original business model such as media, e-commerce or SaaS
As a stand-alone business activity, such as games and social networking.
This business model emerged from the expansion of the iPhone and Android smartphones’ ecosystems, which now support all sorts of other technologies including IoT and virtual reality. How big is this market now? Well, here are a few facts:
The iOS App Store has more than 1.85 million applications and the Google Play Store has more than 2.56 million, and thousands of new applications go live every day (Statista).
By 2021, there will be roughly 7 billion mobile users worldwide (Statista).
According to Appanie’s “State of Mobile 2021” report, in 2020:
An app was download 218 billion times.
$143bn was spent on app stores.
Daily time spent on a mobile per user reached 4.2h.
92% of time spent on a mobile is using apps, while social. networking and communication apps account for 44% (Hootsuite).
$240bn was spent on mobile app ads.
VC investment in mobile tech reached $73bn in 2020 (Crunchbase).
Mobile apps business model cycle:
Mobile apps make money through:
App purchase
Downloadable content
Customization
Upsell
Advantages (game apps)
Elimination of countdown timers
Cross-selling
In-app ads
Applied Metrics in Mobile Apps
Downloads
Hou many people have downloaded the application.
Customer acquisition cost (CAC)
How much it costs to get a user and to get a paying customer.
Launch rate
The percentage of people who download the app then actually launch it and create an account.
Percent of active users/players
The percentage of users who have launched the application and use it on a daily and monthly basis: these are your daily active users (DAU) and monthly active users (MAU).
Percentage of users who pay
How many of your users ever pay for something.
Time to first purchase
How long it takes after activation for a user to make a purchase.
Monthly average revenue per user (ARPU)
This is taken from both purchases and watched ads. Typically, this also includes application-specific information such as which screens or items encourage the most purchases. Also look at your ARPPU, which is the average revenue per paying user.
Ratings click-through
The percentage of users who put a rating or a review in an app store.
Virality
On average, how many new users a user invites.
Churn
How many customers have uninstalled the application, or haven’t launched it within a certain time period.
Customer lifetime value
How much a user is worth from cradle to grave. In the case of a mobile app, LTV is calculated using averages of the money spent by every player post-churn.
P&L Assumptions
This article was written by José Ramírez Terc, specialist in 21st century business models.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
Following customer demand, businesses have found ways to deliver everything as a service (XaaS). In general, these business models are dependent on cloud computing to generate value for their customers. Why? A business model based on the cloud market group provides varying levels of fault tolerance and resilience, the ability to scale up/down to meet capacity and performance requirements (depending on the workload created by its users/consumers) and are usually intended to operate their day to day functions without the need for human intervention.
There are too many to count, but generally every digital service can be delivered X as Service (XaaS). To name just a few:
Analytics as a Service
Artificial intelligence as a Service
Backend as a Service
Business process as a Service
Code as a Service
Content as a Service
Construction as a Service
Container as a Service
Contact Center as a Service
Contact Information as a Service
Communications Platform as a Service
Data as a Service
Desktop as a service
Database as a service
Energy storage as a Service
Games as a Service
Government as a Service
IT as a Service
Knowledge as a Service
Mobility as a Service
Monitoring as a Service
Mobile backend as a Service
Machine Learning as a Service
Media Processing as a Service
Network as a Service
Payments as a Service
Recovery as a Service
Robot as a Service
Search as a Service
Security as a Service
Transportation as a Service
Unified Communications as a Service
There are countless examples of XaaS, but the most common encompass the three general cloud computing models: Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). It is important to understand the difference between the various cloud services.
Applied Metrics in XaaS
Since X as a Service models are, arguably, the most customer centric models, their analysis metrics are more of a reference to the user/customer engagement. To explain these metrics and financial models, we will concentrate on the SaaS business model.
Months to Recover CAC
Helps determine how long after you’ve closed a customer you recoup the total CAC. In other words, months to recover CAC gives you an idea of how quickly a customer starts to generate ROI for your business.
Divide CAC by the product of monthly-recurring revenue (MRR) and your gross margin (gross revenue – cost of sales): = CAC / MRR x GM.
Customer Engagement Score
Provides you with a glimpse at how engaged a customer is. Indicates the likelihood the customers will or will not churn.
Each company’s customer engagement score scale will be different depending on how a typical customer or user uses your software. To create your own customer engagement score, create a list of inputs that predict a customer’s happiness and longevity. Once you have your list of inputs and have assigned a value to each one (depending on how critical they are to customer stickiness) you can calculate an engagement score across the board for your customers so you can quickly and easily evaluate customer health with one data point.
DAU / MAU (Daily / Monthly Active Users)
It calculates the daily and monthly active users respectively.
This is a benchmarking metric: for comparisons with competitors. Every service model has different usability. You cannot compare Google Calendar with Spotify, for example.
It is also a good metric to envisage how a product/service is to be used.
If DAU/MAU ratio is 60% or higher, this means that people use the product more than four days a week, and the product qualifies as a daily usage product.
Lead-to-Customer Rate
Shows exactly how well you’re generating sales-ready leads and if the rate is improving over time. It outlines, on average, how many leads turn into paying customers.
Take the total number of customers for any given month, divide it by the total number of leads, and multiply that number by 100. For example, five customers in a month with 500 leads would result in a 1% lead-to-customer rate.
P&L Assumptions in XaaS:
Revenue Assumptions:
This article was written by José Ramírez Terc, specialist in 21st century business models.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
Omnichannel is an e-commerce strategy that requires linking physical, mobile and web stores so that consumers can shop seamlessly across all channels. Omni-channel (or omnichannel) refers to a sales approach that uses multiple channels to reach customers and provide them with an excellent shopping experience. It covers all the ways brands and customers interact with each other. It is more of a strategy than a business model. We are taking the time and effort to explain this strategy for two main reasons:
It is one of the main strategies of an e-commerce business.
It provides a source of data for measuring the customer engagement of an e-commerce business.
Whether they are shopping at a physical store, by phone or by laptop, an omnichannel approach is designed to make shopping as smooth as possible. It means that the end-to-end process – from distribution and promotion to communication and sales – is well-integrated.
Omni-channel vs Multi-channel
Both omni- and multi- are prefixes that suggest “many” or “multiple.” Omni-channel goes beyond utilizing many channels. It is designed to integrate all avenues to ensure that customers will be able to make transactions with their preferred brand in any manner that they want. When a brand adopts an omnichannel approach, details entered by customers through one channel will be integrated with all other channels.
With non-essential retail chains closing their doors to help combat the spread of COVID-19, retailers have been relying on omnichannel services to keep their stores afloat.
78% of online shoppers have used some omnichannel feature in the last six months, according to Digital Commerce 360.
The same source, who published a 2021 omnichannel report, stated that:
61.6% of retail chains in the top 1000 offer both buy online or pick up in-store.
21.7% of consumer brand manufacturers with stores, 20.6% of catalogue/call centre retailers with stores, and 20.4% of web-only merchants with stores offer this omnichannel feature.
38% – The percentage of shoppers who say they will “buy online, pick up in store” more frequently over the next six months
82.3% – The percentage of stores analysed with a dedicated parking spot for shoppers picking up online orders.
78% – The number of stores analysed that could get the product in a customer’s hand within two minutes of them entering the collection line.
This article was written by José Ramírez Terc, specialist in 21st century business models.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
A marketplace is a platform where vendors can come together to sell their products or services to a curated customer base. The role of a marketplace owner is to bring together the right vendors and the right customers to drive sales through an exceptional multi-vendor platform – sellers have a place to gain visibility and sell their products. The marketplace owner earns a commission from each sale.
Marketplace owners do not own the inventory their platform sells, unlike online store owners. In some cases, marketplaces could invest in their fulfilment and other costs not associated with their core matchmaking business model to increase customer experience and satisfaction. For example, Amazon’s distribution and fulfilment centres.
Some key characteristics are:
Interaction between supply and demand.
No inventory.
Focus on customer satisfaction.
Lean and scalable operations.
Mind-blowing facts regarding marketplaces
50 of the 100 top marketplaces launched in 2011 or later. These include retailers that have been around for a while and recently began allowing other merchants to sell on their sites. More than half have been launched in the last 7 years.
The top online marketplaces in the world sold $2.67 trillion worth of products in 2020. Sales on marketplace sites, like those operated by Alibaba, Amazon, eBay and others, accounted for 62% of global web sales in 2020, according to Digital Commerce 360’s analysis.
Although the top three marketplaces—Taobao, Tmall and Amazon—account for nearly two-thirds of the $2.67 trillion in GMV of the Top 100, several other marketplaces worldwide grew almost 100% last year—including Etsy in the U.S. and Ozon in Russia. Collectively, these marketplaces grew 29%—faster than the 24% growth of global eCommerce.
Ranked marketplaces by Gross Merchandise Value
Types of business models in marketplace
B2B: wholesale suppliers sell their products or services to commercial buyers.
Revenue models: commission, subscription, listing fee, and visibility upsell.
Example: Alibaba, Global Sources, IndiaMART.
B2C: businesses sell their products and services not to other companies but directly to customers.
Revenue models: commission, subscription, listing fee, and visibility upsell.
Examples: Amazon, Deliveroo.
C2C or P2P: connects individuals with similar needs, tastes, and incomes to share products and services.
Gross Market Value is generally not considered revenue as the filings of all these marketplace companies show. Marketplaces recognize transaction fees as revenues. Taking payment and dividing it by the Gross Market Value will give you the Take Rate percentage, which is its metric that shows how much value is being extracted.
Marketplace companies raising capital can make sure they avoid any potential misunderstandings with investors by using transaction fees as revenue and showing Gross Market Value separately. It’s important to know that most investment firms with revenue size requirements will use the fee revenue metric to standardize size versus other opportunities.
This article was written by José Ramírez Terc, specialist in 21st century business models.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
As expressed in the intro of this series, 21st century business models use technology to create new value in business models, customer experiences and the internal capabilities that support their core operations. The term includes both digital-only brands and traditional players that are transforming their businesses with digital technologies.
In part I, we introduced general metrics that 21st century business models apply as they become more customer centric.
A bold but not wild statement would be that e-commerce is the parent of all 21st century business models. It refers to the business of selling products online, via computer, and purchases via mobile devices such as smartphones and tablets. E-commerce is often used to refer to the sale of physical products online, but it can also describe any commercial transaction facilitated through the internet. Therefore, we can think of it as a tree trunk, where all of the other digital business models are branches. It didn’t evolve that much until cryptocurrencies, and new business models came along. We now see companies with mixed business models combining online and offline channels:
Top e-commerce players
E-commerce takes on a variety of forms depending on the relationships between businesses and consumers and the different objects being exchanged in the transactions between them.
Retail: The sale of a product by a business directly to a customer without any intermediary.
Wholesale: The sale of products in bulk, often to a retailer that sells them directly to consumers.
Dropshipping: The sale of a product manufactured and shipped to the consumer by a third party.
Subscription: The automatic recurring purchase of a product or service regularly until the subscriber chooses to cancel.
Physical products: Any tangible good that requires inventory to be replenished and orders to be physically shipped to customers as sales are made.
Digital products: Downloadable digital goods, templates, and courses, or media that must be purchased for consumption or licensed for use.
reCommerce: Resale of used, defective or repaired goods.
Important terms to know about the e-commerce
With many branches extending out of E-commerce, the following terms would be used in many customer/user-centric business models. Knowing them would provide a head start to understanding the rest of these models.
We can see below how these terms are used as assumptions to fill in an E-commerce business P&L (take a look at the colour coordination, as P&L items are supported by a number of assumptions).
P&L Assumptions
This article was written by José Ramírez Terc, specialist in 21st century business models.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
In this article, we will talk about general metrics used in 21st century business models. We will first explain some general metrics applied to almost all of the models, and then we will dig deeper into some of the 21st century models in the 3rd part of this series. We will explain their general value propositions, highlight metrics to evaluate them and expand on other relevant information.
Referring to Metcalfe’s Law (which states that the value or utility of a network is proportional to the number of users of the web), the main goal of these companies is to grow at an exponential pace by attracting and engaging a network of users/customers.
We need to understand that these companies require the infrastructure to support the inflow of clients, so they spend at what appears to be an unsustainable rate. Hence, we need a new way of analysing 21st century companies.
There are increasing returns to scale in 21st century businesses, which differs from how returns accrue to old-world businesses. Because growth and maintaining the architecture that supports that growth is their primary mission, we need to look at how we assess these companies to understand why sometimes a lack of earnings and a correspondingly high multiple might not necessarily be a bad thing.
Even if a 21st century company is profitable, understanding which metrics directly affect these companies’ valuations will help understand their business models better to make a better assessment. In the following sections, we will review some of the 21st century models.
2 types of general metrics used in 21st Century Business Models
When assessing a 21st century business plan and financial model, there are two types of general KPIs, customer and financial. We can say that these available metrics are the root for all the other metrics to be explained in this series and they are employed differently in different business models.
Customer KPIs directly affect the uppermost items in a P&L. They are more related to customer acquisitions, which turns into revenues. They explain in a broad sense how the network effects are materialising in a business. If there is any recurrence from customers, these metrics can explain how these customers convert into future cash flows. All in all, these are the revenue drivers.
Financial KPIs are used to explain the value of these customers/users in a comprehensive valuation. They also explain how direct costs affect that value. We are more used to financial KPIs than customer KPIs. From here on, each 21st century business models is reflected in branches of both these general KPIs.
1. In a marketplace model, GMV is probably extremely high compared to actual revenues as it takes all sales made through the platform instead of the income received. 2. For companies with no net profits or positive EBITDA but with a strong user/customer base and high growth, it is best to use EV/active users or EV Revenue (Sometimes Annual Recurring Revenues (ARR)) for valuation purposes.
Explaining Churn
Customer Churn:
Measures how much business you’ve lost within a specific period. It is one of the most critical metrics in tracking the day-to-day vitality of your business.
As most digital businesses operate under some recurring revenue model, keeping customers is as important as acquiring new ones.
To calculate customer churn take all your monthly recurring revenue (MRR) at the beginning of the month and divide it by the regular monthly payment you lost that month minus any upgrades or additional revenue from existing customers.
Customer churn rate = (Customers beginning of the month – customers end of the month)/customers beginning of the month.
Do not include new sales in the month, as you are looking for how much total revenue you lost.
Revenue Churn:
It’s essential to measure revenue churn alongside customer churn to evaluate the outside impact some customers might have over others. Tracking and understanding revenue churn is necessary for measuring a company’s financial performance and outlook.
To calculate revenue churn, take the monthly recurring revenue (MRR) you lost that month — minus any upgrades or additional revenue from existing customers, and divide it by your total MRR at the beginning of the month.
Explaining Lifetime Value / Customer Acquisition Cost (LTV/CAC):
Customer Acquisition Cost (CAC):
It shows precisely how much it costs to acquire new customers and how much value they bring to your business.
When combined with LTV, this metric helps companies guarantee that their business model is viable.
To calculate CAC, divide your total sales and marketing spend (including personnel) by the total number of new customers you add during a given time. For example, if you spend $100,000 over a month and added 100 new customers, your CAC would be $1,000.
CAC Payback Period:
It helps determine how long after you’ve closed a customer you recoup the total CAC. In other words, CAC Payback Period gives you an idea of how quickly a customer starts to generate ROI for your business.
CAC Payback Period is calculated by taking your Customer Acquisition Cost (CAC) divided by your Average Revenue per Customer (ARPU). CAC Payback Period = CAC / ARPU
The general benchmark for startups to recover CAC is 12 months or less. High performing SaaS companies have an average CAC payback period of 5-7 months.
Lifetime Value (LTV):
The average amount of money that your customers pay during their engagement with your company. The metric provides businesses with an accurate portrayal of their growth and can be explained in three steps:
Divide the number 1 by your customer churn rate. For example, if your monthly churn rate is 1%, your customer lifetime rate would be 100 (1/0.01 = 100).
Find your average revenue per account (ARPA) by dividing total revenue by the total number of customers. If your revenue was $100,000, divide it by 100 customers and your ARPA would be $1,000 ($100,000/100 = $1,000).
Finally, find your LTV by multiplying customer lifetime by ARPA. In this example, your LTV would be $100,000 ($1,000 x 100 = $100,000).
LTV shows what your average customer is worth. And for those still in the startup mode, it can display your company’s value to investors.
LTV / CAC:
Shows the lifetime value of your customers and the total amount you spend to acquire them — in a single metric.
Healthy between 3-5X. Anything lower than 3 means either you are spending too much or making lousy marketing investments. Anything higher than 5 could mean that you are not investing enough in your marketing, hence missing out on good potential business.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
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