I have two separate clients right now who represent polar opposites when it comes to strategy and approach. Both are in the tech space. Let me paint a brief picture of the divergence in strategy to showcase what I mean.
Firm one is a software testing specialist. They have a large staff due to the nature of their business, which is based a great deal on “staffing.” In fact, if you were to hold a gun to my head, I would describe their business as a staffing business. It’s a high-margin enterprise, but the costs are also not cheap either as most of the costs include people, one of businesses’ biggest overhead costs. In addition, the company owns some fairly high-profile real estate which they purchased at the top of the market in 2008. The company has existed for well over a decade.
The strategy of the owners of this business is very hands-off. They work in the business, but have placed management in control of the day-to-day operations. They have said, “we’ve got great managers and have set it up that way so if we leave for say a month they’ll be able to easily fulfill and manage the company.” It’s essentially a lifestyle/silent-owner business.
The second client is in a specific niche selling SaaS-based solution to enterprise clients and resellers. The company has been around for about five years. Unlike the first company mentioned, most of this firm’s employees are overseas. They’ve a team of online chat and support agents as well as phone agents who work from the Philipines. They’re entire focus is maximizing bottom-line profits. The owners built and are the chief tech officers who add, tweak and make amendments to the product. They “toilers” in the business. The company is only five years old.
The biggest difference between the two firms: firm number two’s revenues are must more predictable and consistent and firm number two makes about 4x more in regular EBITDA (earnings before interest taxes, depreciation & amortization). They’re a little cash machine.
Some would argue it’s difficult to compare a human services firm to a software-as-a-service company, but I would argue the difference has more to do with the strategy than the business model of these similar companies. This is at least partly obvious thanks to a statement given by client #1:
We could optimize and cut staff, work on the projects ourselves, sell our office, work remote and otherwise cut costs in a number of ways and we would be making about a million a year, but that’s not the type of business we want to run.
That is almost a 180 degree mirror of a message I received in an email from client #2:
We are all currently working from a virtual office including myself, [the other owner] and our support guys in the Philippines. Using a minimalist approach we keep our costs to a minimum so as to be VERY profitable and still be able to support a scaled model with thousands of subscribers.
Neither strategy is wrong. Both companies exist and are profitable, but company two in this example is more prepared for M&A opportunities than the other firm. They’re maximizing cash flows which acquirers like to see. In addition, they are able to maximize current profitability for their own benefit.
Company one, despite fundamentals, would like to receive somewhere around 12x EBITDA (after tax, mind you) for their company, which is a difficult endeavor given their current profitability. However, if they pursued their potential strategy outlined in the first quote above, they could easily reach their goal. However, this is fundamentally misaligned with their corporate culture and the reason their business was started in the first place: to give the owners time flexibility and autonomy.
If company one in this example were to maximize for just two or three years, then they could see the payout they hope for. Company #1, on the other hand, is looking for strategic and financial buyers that will offer them a very high multiple and a quick payout. Keep in mind, company two is almost 1/3 as old as company one and the owners’ payout will be much more substantial in the end and most likely happen much more quickly.
The ultimate question here is: what is your strategy for your business? Are you creating something you could sell for an extremely high multiple? Do you want freedom of time to pursue other hobbies, leisure or family activities? I’ve painted this posts as if the numbers are everything. Fortunately, they’re not. Sometimes a strategy that maximizes family time is perhaps the most important type of business one could start.
But if numbers are what you’re after, the strategy of company #2 is the obvious path toward the success of the “financial” payout. What’s your strategy?