Podcast Summary
Analyzing Business Financials with Acquisition.com's Equation: Entrepreneurs can assess their business's financial health and growth potential by calculating 5 key variables: new sales per month, average sale price, number of customers, customer churn rate, and gross margin. Tips provided to determine average sale price and customer churn rate.
As an entrepreneur, having the right tools and frameworks is crucial for growing and managing a successful business. Alex from Acquisition.com shares one such valuable equation for analyzing a business's financial health and growth potential. This equation, which requires five variables, includes the number of new sales per month, average sale price, number of customers, customer churn rate, and gross margin. By calculating these numbers, entrepreneurs can gain insights into the financial health and growth potential of their business. Two of the hardest numbers to obtain are the average sale price and customer churn rate. Alex provides tips on how to calculate these numbers to make informed business decisions. Additionally, he offers a bonus sixth number for further analysis. This equation is a valuable tool for entrepreneurs looking to make their businesses more efficient, profitable, and attractive to potential investors.
Evaluating a business's health and growth potential: Calculate churn rate for monthly client loss and unknown lifetime value for long-term growth potential.
Understanding key business metrics such as current revenue, price, churn, lifetime value, and gross profit is crucial for evaluating a business's health and potential growth. During a conversation with a business doing 100 new sales per month and having 380 active clients at a price of $1,000 per month, it was discovered that they had a 13% churn rate and an unknown lifetime value. By calculating the churn rate, we can determine the number of clients lost each month, which is an essential metric for understanding the business's growth potential. However, most businesses do not know their lifetime value, which is the total amount a customer is expected to pay over their entire relationship with the company. This number is vital for understanding the long-term value of each customer and the overall growth potential of the business. By calculating these metrics, we can gain valuable insights into a business's current state and future potential.
Business with high LTV and gross margins: This business has a high customer lifetime value, gross margins over 90%, and rapid growth, making it an attractive investment opportunity with a low cost of fulfilling orders and a customer acquisition cost below the customer's lifetime gross profit.
The discussed business has a customer lifetime value (LTV) of $77,100 and a gross margin of over 90%. With a current revenue of $400,000 and a growth rate that is approaching an asymptote of $770,000, the business has significant potential for growth. The low cost of fulfilling customer orders, which is less than $100 per month, ensures that as long as the cost to acquire a customer is less than $7,000 (the lifetime gross profit per customer), the business will remain profitable. The business's high LTV and gross margins, combined with its rapid growth, make it an attractive opportunity.
Reducing customer churn can boost business revenue: Cutting churn from 13% to 3% can increase business revenue to $3.3M per month, mainly through margin
Growing a business can be achieved by acquiring more customers or increasing the value of existing ones. The speaker provided an example of how reducing customer churn from 13% to 3% could significantly increase the business's revenue. By calculating the new customer lifetime value (LTV), the business would become a $3,300,000 per month business, almost all of which would be margin. The speaker emphasized that reducing churn might be easier than trying to acquire 10 times more customers. He also mentioned that there are various ways to decrease churn and encouraged further exploration of the topic.
PE Firms Look for 80% Customer Retention for Enterprise Value: PE firms value businesses with high growth, sticky customers, and strong profits, aiming for 80% annual customer retention to maximize enterprise value.
For a business to have enterprise value, private equity firms prefer to see an annual customer retention rate of 80%. This means keeping 80% of clients from one year to the next. A business with a 13% monthly churn rate, for example, would be retaining less than 20% of its customers by the end of the year. Private equity firms consider three main variables when evaluating potential buyers: growth, stickiness, and profit. A business with high growth, a sticky customer base, and strong profits will be highly valuable. Conversely, a business with low growth, a non-sticky customer base, and low profits will be less valuable. The goal for acquisition.com is to identify weak points in a business model and improve it to increase its value. Business owners should calculate their potential max value based on these fundamental metrics to understand their weak points and growth potential. This analysis can be done without complex financial calculations or Excel sheets.
Focus on key metrics and removing biggest constraint for business growth: Identify and address key business metrics and the biggest constraint to unlock growth and reach full potential
To grow a business, it's essential to understand key metrics such as new customers, sales, current clients, revenue, and prices. Additionally, identifying and removing the biggest constraint is crucial for business growth. Alex Schmozzi, from Acquisition.com, emphasizes this concept, known as the theory of constraints. By focusing on the fewest actions that yield the most significant returns, business owners can efficiently remove the biggest constraint and allow their business to reach its full potential. Schmozzi's team at Acquisition.com is currently generating $85,000,000 in portfolio revenue, and they have nothing to sell but their expertise and knowledge.
