By Ken Lucci
One lesson I have learned about business is that it is not how much stuff you sell, how much revenue you generate, or how big your operation gets that necessarily determines the value of your business. Instead, it’s actually what you keep at the end of the day and what you do with it that matters most.
When operators seek out my services, it usually involves me reviewing financial statements, analyzing operating statistics, and assessing their overall companies to create enterprise valuation reports for banks, either as part of strategic growth planning or in preparation for a potential acquisition. Many businesses I examine have grown revenue by 10, 15, or 20 percent (if not more!) year over year, which is usually the first thing owners point out. But where the rubber meets the road, so to speak, in determining overall enterprise value is not looking as much at top-line revenue growth as it is examining bottom-line profit. Unfortunately, too few companies have net profits growing at the same pace as their top-line revenue.
Creating long-term value is not about making one big deal, capturing one large customer, or coming up with one big idea that changes the world. It’s mostly about the hundreds of small decisions we make as well as a few big strategic ones along the way. Let’s start with the perceived “small” decisions that can either help or hurt our goal of creating long-term value.
Deciding to hire another full-time employee: One of the most rewarding things in the world is to give someone a job, but one of the most devastating is to lay off an employee because you no longer have the money to pay them. Before deciding to hire another full-time employee, look at the total cost of adding the position. This includes taxes, benefits, and all related expenses, including any onboarding costs. Ask yourself, can part-time people do this? Can you give someone a raise in pay and realistically give them more responsibilities to get this done without sacrificing quality? Can you hire a temp worker or outside service to handle these tasks?
Deciding to buy a new vehicle: Buying new equipment is much more of a financial commitment than just a monthly payment. For starters, as soon as you buy it, the value drops by 10 percent or more. So never put yourself in the position of being “upside down” on a vehicle purchase long term. Ask yourself where exactly is the additional revenue coming from to pay for this vehicle. What is the marketing and sales plan to introduce it to customers? Can you find a local affiliate or partner with someone who already has this vehicle in their fleet? How much is the total loaded monthly cost of this vehicle, including insurance, maintenance, repairs, consumables, and depreciation calculated?
"Creating long-term value is not about making one big deal, capturing one large customer, or coming up with one big idea that changes the world.""
Deciding to keep your existing vehicles: I visit many operators each month and I always notice what vehicles are on the move and which ones are idle during prime time. Every decent piece of reservation software allows you to generate vehicle production reports. If you do not see adequate revenue coming from a specific vehicle for two or three months in a row, sell it or find a local affiliate to help you book it fast. As a general rule, each vehicle in your fleet should be generating between $80K and $120K a year depending upon type.
Deciding to price your services too low in order to capture business from competitors: This is an epidemic in our industry that I see everywhere I go regardless of operator size or market.
To start with, you should know your hourly costs by service category and set your prices based on that data. And there are several ways to look at this. The easiest is to calculate loaded vehicle cost and loaded labor cost per hour per vehicle type. Then add up every business expense and come up with what I call a “turn the key cost percentage,” which basically means how much it costs you to open up your business in the morning before you generate one dime of revenue, including your base cost and all of your overheard. This should be added as a percentage cost on top of your hourly per vehicle and loaded labor cost before your markup.
Once you’ve examined those comparably smaller items, think about the big or strategic decisions that affect long-term value, the ones that could literally make or break you.
Deciding to take on a new customer type or service line: Many operators have migrated their businesses to larger vehicles and other service types in response to the rise of TNCs, the recession, and the uptick in group work. Case in point is how many traditional limousine companies are racing to buy motorcoaches without doing any research into what is a costly investment. The only time a business should consider entering another market segment or serving another customer type is after performing thorough market assessments, competitive analyses, and, most importantly, calculating the cost and financial impact the decision will have on their core business.
A great exercise is to create a revenue and expense proforma on the new service line to determine break-even and profitability points before making any decisions or expensive purchases. The worst way to do this is to buy vehicles, establish lower rates than the competition, and race in to the business with reckless abandon and no real understanding of it. This is usually a recipe for financial disaster.
Deciding what to pay your staff and yourself: Yes, staff salaries are a big decision. If you pay your staff too little, you may have too much turnover, fluctuating service quality, unpredictable revenue production, and higher recruiting and training costs. If you pay yourself less than what you could make working for someone else, you are not creating a secure future for yourself and your family. In either case it may be time to re-evaluate these areas if your goal is creating long-term value.
Deciding whether to rent or to own: One way to create long-term value is owning the real estate where your company operates and even deriving rent from other tenants to not only help pay the mortgage but also ease the pain of slow seasons of the primary business. But, keep in mind that the decision to buy real estate should be based on operational and financial practicality and not ego. It does no good to operate out of a show place that you have no equity in when one bad month means you can’t pay the mortgage. The most profitable operators I come across own property that makes sense for their business and generates additional income for them in the long term.
The passenger transportation industry is changing and growing due to many factors, but growth for the sake of growing—without strategically creating long-term value along the way—usually ends with little or no reward for the business owner.
Ken Lucci is a consultant to the chauffeured transportation and hospitality industries. He can be reached at Klucci@drivingyourincome.com.