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Do You Have The Best Business Model?

11 March 2020

During our group executive calls, one of our clients was asking about how to transition to a business model that has higher returns. 

Ultimately, there’s a deeper question here: is your business model serving you and your goals? 

In this clip, we go into some broad-stroke concepts that you should be thinking about when it comes to what kinds of activities your business is focused on. 

We are looking to invest in good businesses.

If you would like to have an obligation free discussion about selling your business, please email shweta@growthidea.co.uk. You can find more about our investment criterion on https://growthidea.co.uk/private-equity.

Prefer to read rather than watch and listen? No problem – here’s everything I said in the video as text: 

How do we effectively manage the transition from one business model to another? Specifically going from a broad service business to a narrowly focused consultancy.

I might unmute you Danny if that’s ok, so you can explain a little bit more and then people should be able to help you.

Changing an Agency Business Model

Good morning all. Yeah, it’s quite a big question. The idea is to go from a generic broad service-based creative business where we are kind of doing everything – from strategy to designs to build – to effectively productising something, we’re calling it the Huddle Hack. We’ve been selling it for about 5 years.

Essentially it’s a workshop-type product that offers, a lot upfront, a lot of value upfront. And that’s kind of where we want to play.

So the new model will rely less on fixed overheads and resources in house and it will be more going back to our roots, which is more of a collective collaborative model, where we’re pulling people together on specific projects.

And that’s partly in recognition of a project-based business like ours, with the peaks and troughs of winning business and then having to kind of scramble to deliver that business, has that feast and famine type scenario. We’re trying to avoid that.

Focusing on High Margin Areas

So what’s the best way to manage transition from one business model to another? And specifically in this case when he wants to go from a broad service business to actually offering consultancy.

Also Danny, I think I’m on the right track when I say this: actually, it’s not one business model to another, because consultancy is part of your current business model. So you’re simply saying that I want to focus on the first bit and not worry so much about the build and the design and all that bit.

So it’s more the strategy and the consulting side of it, right?

This is for everyone on the call: if you look at your whole business model, you will realise that there are certain parts of the business that are very high margin and then there are other parts of the business, which actually, cannibalise that high margin. Because that’s how you’ve defined it.

And there are moments in business when you can actually redefine based on what is your work-life priorities.

I’m making a general point here. It’s not easy to switch, what Danny is talking about in that ‘we want to focus in a certain way’ – it’s not easy, because there are so many societal norms attached to saying what’s actually a proper agency, what’s actually a proper business.

And funnily enough, I’ll tell you the kind of questions that people ask.

“Oh, so where is your office?”

“Oh, so how many team members do you have?”

“Oh ok, so how many of them are on your payroll?”

And they still ask these questions you know, rather than asking, ”

What profit do you make?”

“What is your turnover?”

And these are such wrong questions in today’s world where actually the economy is moving towards a gig economy. You want to keep things as fluid and as variable as possible. And there are people making huge profits and huge impact in the market place without getting lost in fixed costs or your traditional business models.

So again, you have to identify with what lens you are seeing the world and the business in its true sense.

Your High Cash Flow Entity Creates Your Portfolio

Now when Danny was discussing this, his main concern was actually if I move towards consulting, and if he’s the main brand in that, then is the business really an asset? Or does it become more of a self-employment?

And the point is, what you need to understand, everyone on the call, is that yes you can have 1 entity, which is a high cash flow generating entity, right. It might not work without you fully, or it might not have a huge multiplier of 4 or 5 or whatever.

But the point is it generates good cash flow which you can then take to deploy in your other assets in your portfolio, which could be your property, your stocks, it could be investing in new ventures, new startups or having another asset proper business, right.

So it’s how you build your portfolio.

But whatever you’re building, you need cash flow for that, you need positive money coming into the business.

Maximising Your Assets’ Potential

Now, there could be an asset that you’re sitting on but if that asset is not really maximising its potential, and it’s for everyone on the call, I’m making a general comment here, if it’s not maximising its value, then the asset value is also impacted, and the time and energy that goes into it is just incredible.

Reduce Your Concentration Risk

Also, the issue with some business models is that it’s actually relying on 1 or 2 big projects. I have clients who I am working with right now, and other consultans are working on right now, where one or two contracts are contributing to 60% to 65% of the business. And it feels amazing, the businesses are like huge. It feels amazing, till the time the contracts are there. But as soon as they go, like that, the business just crumbles. And it’s a scary position to be in.

So the constant effort is, how do we reduce concentration risk?

So that’s the nature of the agency world, and that’s 1 figure that one needs to be mindful of, which is what Danny was saying, famine and feast. You feel good and then boom, contract finished and you feel like ok, again hard work.

Your Business Model Should Be Shaped To What You Want

So it’s about sitting back, and really reflecting, and saying “what do I want?” What kind of personal life? What kind of cash flow? What kind of business criteria which is important to me as a person?

And then let the business be defined around you, and not the other way around. I always say this on a couple of levels.

The first is, the business has to be around you and not the other way around. The team needs to adapt around the business and not the other way around.

These are fundamental life philosophies that you need to focus on.

Looking at what we are talking about here Danny, I have reflected on this. Slept over it, mulled over it, thought about it, and actually, I feel confident about this. Because this is where your core competence lies. This is where you enjoy the work. And it’s a high margin and low fixed cost.

So on many, many fronts, I am getting ticks in my boxes and I’m like, “yeah, this makes sense.”

Do I have to change things significantly to do this? The answer is actually no. It’s the same target market maybe a little bit of fine-tuning, but it’s the same proposition. And it’s just that we are scaling up one thing, which we are absolutely awesome at and which we will enjoy and it’s a high margin.

And that’s it, you will start seeing the results, versus diffusing ourselves trying to do everything just because that’s how we did it 10 years back, and now we just need to carry on with it.

So it takes a lot of courage to change the direction of the ship. To say, no, this is where I want to go and this is what I would enjoy.

We’ll talk more about this in-depth, but I thought I’d make some more important points for people to just reflect on. Check out our other blog on the different levels of business strategy here.

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We are looking to invest in good businesses.

If you would like to have an obligation free discussion about selling your business, please email shweta@growthidea.co.uk. You can find more about our investment criterion on https://growthidea.co.uk/private-equity.

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