Are You A Hub-And-Spoke Owner?

Here’s Nine Warning Signs To Find Out and How to Fix Them 

Think for a minute about your role in your business. Are you at the top of the pyramid in an organizational chart that looks like a Christmas tree? Or, maybe you’re stuck somewhere in the middle like a hub in a wagon wheel? If you were to draw an image to visually represent your role in your business, what would it look like?

As anyone who has tried to fly out of Chicago O’Hare Airport during a snowstorm knows, a hub-and-spoke model is only as strong as the hub. The moment the hub is overwhelmed, the entire system fails.

Acquirers generally avoid hub-and-spoke managed businesses because they understand the dangers of buying a company too dependent on the owner. So, if you want to make your business more valuable, one factor to address is the hub-and-spoke model. Here’s a list of nine warning signs you’re a hub-and-spoke owner and some suggestions for pulling yourself out of the middle of your business: 

1. You sign all of the checks 

Most business owners sign the checks for a number of reasons including cash flow management and to avoid misappropriation of your valuable cash. But what happens if you’re away for a couple of days and an important supplier needs to be paid?

How to fix it: Consider giving an employee signing authority for checks up to an amount you’re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home rather than the office. That way, you can review all signed checks and make sure the privilege isn’t being abused. 

2. Your cell phone bill is over 20 pages long 

When your employees are out over their skis a lot, it shows up in your cell phone bill because staff are calling you to coach them through problems. Often it’s because you’ve hired too many junior employees.

How to fix it: Sometimes people with a couple of years of industry experience are a lot more self-sufficient and only slightly more expensive than the newbies. Also consider getting a virtual assistant who can act as a first line of defense in protecting your time and taking a lot of administrative tasks off your hands. There are a plethora of gig employees that are able to support you. You can also find a virtual assistant by filling out a request for proposal at http://www.ivaa.org/. 

3. Your revenue is flat when compared to last year’s 

In a normal, non-pandemic year flat revenue from one year to the next can be a sign you’re the hub in a hub-and-spoke model. Like forcing water through a hose, you have only so much capacity. No matter how efficient you are, every business dependent on its owner reaches capacity at some point. Think about the funnel: the diameter of the funnel determines how much money comes out of the bottom.

How to fix it: Consider narrowing your product and/or service offerings by eliminating technically complex offers that require your personal involvement, and instead focusing on selling fewer things to more people. Standardization helps here.

4. Your vacations suck 

If you spend your vacations dispatching orders and solving problems from your cell phone, it’s time to cut the tether. Is your family always pestering you to close your laptop and come to the beach?

How to fix it: Start by taking one day off and seeing how your company does without you. Build systems for failure points, but otherwise let things run their course and resist the urge to jump in. Work up to a point where you can take a few weeks off without affecting your business. 

5. You spend more time negotiating than a union boss 

If you find yourself constantly having to get involved in approving discount requests from your customers, you are a hub. Same is true for vendor agreements. And, employee matters.

How to fix it: Consider giving front-line, customer-facing employees a band within which they have your approval to negotiate. You may also consider aligning your salespeople’s bonuses to the gross margin for sales they generate. That way, you’re rewarding their contributions to profitability rather than chasing skinny margin deals. 

6. You know all your customers by first name 

It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together rather than the quality and consistency of your products or services.

How to fix it: Consider replacing yourself as the rainmaker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get comfortable dealing with someone else. 

7. You close up shop every night 

If you’re the only one who knows the close-up routine in your business (i.e., counting the cash, locking the doors, and setting the alarm), then you’re very much a hub.

How to fix it: Write an employee manual of basic procedures (close-up routine, e-mail signature to use, voice mail protocol) for your business and give it to new employees on their first day on the job. Even in a B2B business, basic policies can be a big help in getting you out of the middle.

8. You get cc’d on more than five e-mails a day 

Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made it clear when you want to be involved in their work and when you don’t need to be.

How to fix it: Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from you. Otherwise, they can leave you out of the e-mail chain. (Bonus, we all get too many e-mails, so this helps free up some of your time too!)

9. You get the tickets 

Suppliers wooing you by sending you free tickets to events can be a sign that they see you as the key decision maker in your business. And, if you’re the key contact for any of your suppliers, you’ll find yourself in the hub of your business when it comes time to negotiate terms.

How to fix it: Consider appointing one of your trusted employees as the key contact for a major supplier and give that employee spending authority up to a limit you’re comfortable with. 

Any of these ring true with you? In our experience, the most valuable companies are those that can run effectively on their own. Each time you fix one of these hub-and-spoke attributes, you create more value and a company that’s more fun to own. After all, your goal is to run your business rather than having it run you!

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Track These Seven Key Performance Indicators

Acquirers love key performance indicators. Here’ why you should track them, even if you’re not planning to sell your company.

Baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base as a percentage of the number of times they get the chance to try. 

Similarly, doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth but by the infant mortality rate, a ratio of the number of births to deaths. 

Acquirers also like tracking ratios (they call them “key performance indicators” or “KPI”) and the more ratios you can provide a potential buyer, the more comfortable they will get with the idea of buying your business. 

Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two values, which is what gives them their power. 

Whether you’re planning to sell your company in the near future or down the road, here’s a list of seven KPIs to start tracking in your business now: 

Revenue per employee 

What: Net revenues divided by the number of “full-time” equivalent employees (“FTEs”). The resulting ratio will be listed as a dollar value.

Why important: Payroll is the number-one expense of most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line.

Business Insider estimated that Craigslist enjoys one of the highest revenue-per-employee ratios, at $3,300,000 per employee, followed by Google at $1,190,000 per bum in a seat. Amazon was at $1,010,000, Facebook at $920,000, and eBay rounded out the top five at $530,000. More traditional people-dependent companies may struggle to surpass $100,000 per employee.

Employees per square foot 

What: Calculate the number of square feet of office space you rent and divide it by the number of “full-time” equivalent employees (“FTEs”)

Why important: You can judge how efficiently you have designed your space. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee. And, post-pandemic, this ratio will likely become even more important.

Sales per square foot 

What: Gross sales divided by the square footage of all your operating locations.

Why important: By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a respectable retailer might be $300.

With real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be. 

Net Promoter Score – Ratio of promoters and detractors 

Fred Reichheld and his colleagues at Bain & Company and Satmetrix, developed the Net Promoter Score® methodology, which is based around asking customers a single question that is predictive of both repurchase and referral.

Here’s how it works: survey your customers and ask them the question “On a scale of 0 to 10, how likely are you to recommend <insert your company name> to a friend or colleague?”

What: The percentage of the people surveyed who give you a 9 or 10 are your ratio of “promoters.” Similarly the ratio of detractors is the percentage of people surveyed who gave you a 0–6 score. Calculate your Net Promoter Score by subtracting your percentage of detractors from your percentage of promoters. 

Why important: The average company in the United States has a Net Promoter Score of between 10 and 15 percent. U.S. companies with the highest Net Promoter Score include USAA Banking (87%),  Trader Joe’s (82%), Costco (77%),  USAA Auto Insurance (73%), and Apple (72%). Understanding where your company rates will give potential acquirers insight into the value of the customer base they may assume.

Customers per account manager 

What: How many customers do you ask your account managers to manage?

Why important: Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with. It’s hard to say what the right ratio is because it is so highly dependent on your industry.

Slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction). That’s when you know you have probably pushed it a little too far. 

Prospects per visitor 

What: The proportion of your website’s visitors who “opt in” by giving you permission to e-mail them in the future.

Why important: Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony how to convert more of their website traffic into customers.

Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic. They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.

The easiest way of increasing opt-in rate is to reward visitors for submitting their e-mail addresses by offering them a gift they’d find valuable. Information products (such as online white papers, e-books, videos or calculators) make ideal gifts, because their cost per unit can be almost zero.

Prospects to customers 

What: Similar to prospects per visitor, another metric to keep an eye on is the efficiency with which you convert prospects – people who have opted in or expressed an interest in what you sell – into customers. 

Why important: Conversion Rate Experts’ Dr. Blanks and Mr. Jesson recommend you monitor the rate at which you are converting qualified prospects into customers, and then carry out tests to identify factors that improve that ratio.

Conversion Rate Experts more than doubled the revenues of SEOBook.com, the leading community for search marketers, by converting many of SEOBook’s free subscribers into customers. Techniques that were found to be effective included (perhaps counter intuitively) restricting the number of places available; allowing easier comparison between SEOBook and the alternatives; communicating the company’s value proposition more effectively; and simplifying its sign-up process. The trick is to establish your benchmark and tinker until you can improve it. 

To sum it all up, acquirers have a healthy appetite for data. The more data you can give them – in the KPI ratio format they’re used to examining – the more attractive your business will be in their eyes. 

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