How to Spot Opportunities in Your Business

How To Spot Opportunities In Your Business

Occasionally we've been asked to value businesses for readers of this newsletter.

The challenge is we often lack specific knowledge of the industry these businesses operate in. So it's hard to dial in on a reasonable valuation range beyond generic Ebitda multiples.

One workaround is comparing the business ratios of the company you are valuing with others in that industry. Like Gross profit margin, asset ratio, wage % of revenue, rent % of revenue and so on.

Most countries make this information publicly available (here's New Zealand). Tax departments compile this data to spot businesses doing unusual things.
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Ex. On average, hair salons in New Zealand doing more than $500,000 in revenue spend 38% of their income on wages. While those doing between $250,000 and $499,999 only spend 34%.

So if a salon we're looking at is spending 55% on wages - This might be an opportunity to buy and rapidly increase profits with better management.

Out Take:

This isn't by any means a magic wand, but by comparing yours or other businesses to average industry ratios, you can quickly spot what might be deeper issues or opportunities in a business.

Last year we had cashflow issues in our Ecom business and did a deep dive into comparable business ratios. We found our wage and stock-on-hand costs were many standard deviations above average.

So we spent the better part of 6 months bringing down these costs, which has considerably improved our cash flow position.

When Adding Friction Makes Sense

This might be the only scenario where it makes sense to add friction to your business.

Last year, we flooded our gym with leads which led to our team spending so much time booking and doing consults that they struggled to get any other meaningful work done.

The problem was, though, that our lead quality had declined.

So our sales conversion rate dropped from 75% to less than 50%. And the guys looking after sales wasted a lot of time on tyre kickers.

So we changed our marketing funnel and introduced more friction.

Framework: Friction in this context is how difficult you make it for your customers to achieve an outcome. Like buying a product, contacting your support team or signing up for a free trial. Generally you want to remove friction where possible.

Previously, via a website form, we asked people who wanted to try the gym to give us their contact email address and phone number. We then reached out to them and booked them in for a consult.

Now we force people who want to try the gym to book a consult on our website via an embedded Calendly form.
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Asking people for this extra commitment instantly cut our number of leads by a third, improved our conversion rate to ~75% and had no noticeable effect on our membership sales.

The best part was that our team got ~10 hours a week back to spend on other work.

Our Take:

We can’t say that this hasn’t cost us some sales, for us this was the right thing to do because our resources were already stretched too thin.

Secondary to that, it’s difficult to find the right balance between friction and ease of use; too much friction will scare people off altogether.

We got lucky here and added just enough friction to remove the tyre kickers but keep people serious about joining a gym coming through our funnel.