May 10, 2012

Time To Sell: Optimal Investment

We made a series of improvements to the business ... we improved Net Sales, we improved Gross Margin, and we improved Merchandise Productivity.

The business is healthier, as a result.

Now, businesses usually make one of two mistakes, when it comes to customer acquisition:

  1. Under Investment, in order to protect the short-term profitability of the business.
  2. Over Investment, in order to protect top-line sales.
The business that we are analyzing is over-investing, in fact, it is over-investing badly.

Look at what happens when we cut back on catalog customer acquisition activities by 60%, in this case.

My goodness!

This business, from a profit standpoint, is probably at an optimal level ... generating around $12,000,000 of Earnings Before Taxes a year.  Now, there's a price to pay for this level of profitability, because we end up with fewer new customers, yielding a business that generated only $90,000,000 of annual demand.

Both business scenarios probably have similar value:
  • A $106,000,000 business generating maybe $9,500,000 of annual profit.
  • A $90,000,000 business generating maybe $12,000,000 of annual profit.
But here's what matters, folks.

What matters is that a business, even a failing business, can be improved.  And if the performance of the business can be improved, then the value of the business can be improved.

2012 is a good time to start thinking about an exit, especially if your business caters to Judy.  When a business owns a customer file with 50% or greater penetration among Judy's generation, then the long-term prospects of the business can be questioned.  This gives the business owner or CEO an opportunity, a five year window, to significantly improve the productivity of the business, in preparation for an exit.

If this style of analysis is of interest to you, please contact me for your own, customized project --- click here.

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