Alex Hormozi’s Brutal Advice For IT Businesses
In this episode, we break down Alex Hormozi's 4 biggest business risks for companies under $10M and apply them specifically to IT companies and MSPs
I share real-world examples from my experience working with IT companies and provide actionable strategies to mitigate these risks. Whether you're running an MSP or scaling a tech business, these insights will help you build a more resilient company
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Welcome to Repeatable Revenue, hosted by strategic growth advisor , Ray J. Green.
About Ray:
→ Former Managing Director of National Small & Midsize Business at the U.S. Chamber of Commerce, where he doubled revenue per sale in fundraising, led the first increase in SMB membership, co-built a national Mid-Market sales channel, and more.
→ Former CEO operator for several investor groups where he led turnarounds of recently acquired small businesses.
→ Current founder of MSP Sales Partners, where we currently help IT companies scale sales: www.MSPSalesPartners.com
→ Current Sales & Sales Management Expert in Residence at the world’s largest IT business mastermind.
→ Current Managing Partner of Repeatable Revenue Ventures, where we scale B2B companies we have equity in: www.RayJGreen.com
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Transcript
Speaker 1
Alex Rumsey recently recorded a video highlighting the four biggest risks that are in businesses under $10 million and what you can do to eliminate them from your business now. All four of them to a tee are mistakes or risks that I see in the IT companies and MSPs that I'm a part of growing really frequently. So what I'm gonna do in this video is highlight what Alex said, like, what are those four and how do you how do you mitigate them from from his standpoint.
::Speaker 1
But I'm gonna take it one layer deeper. Talk about what it means to your IT business specifically. And if you don't know who I am, I'm Ray green, former managing director of the U.S. Chamber of Commerce and CEO for investor groups that I lead turnarounds for. And now I'm the founder of MSP Sales Partners, where we help I.T. companies scale sales.
::Speaker 1
So I'm going to jump straight into this and get to the beat.
::Speaker 2
Let's go and it all starts with number one. Come in as a single person. That is vital to the operations of the business. And if they were gone, the business would decrease materially in the amount of money that it makes or disappear altogether. You've got these functions that occur in the business on a regular basis, and there may be multiple people that can do these functions.
::Speaker 2
And so the opposite of key interest is redundancy. Meaning if one of these people disappear, we still have a flow for, let's say, dollars to go across this bridge. You can still keep kind of make its way through, but all of a sudden she's got one here. And it doesn't matter how many different redundancies you have in the rest of the system, if this goes away, there's no way else for the dollars for the costumers to move across and hopefully into your pocket.
::Speaker 2
That's my little pocket for you. Why this matters is that if you have key men risk, you don't have an asset, you have a high paying job and I don't see that to insult you. I see that so that you can be aware of it so that you can actually fix it.
::Speaker 1
Okay, so I've seen this frequently in businesses and to an extent, when you're under $10 million, it is very difficult to not have key man risks somewhere in your business, whether it's on the tech side, you know, where you've got your level one, D level twos and you know, having somebody like not that be the, the single bottleneck.
::Speaker 1
And you've got the marketing and you've got the sales and you've got all of these things that are moving at the same time. It can be really difficult to say, like, hey, let's get complete redundancy across the board. But if you don't manage to create redundancy for the key man, then you're making it one. Well, like it's a risky business, like the the risk level is higher.
::Speaker 1
And two, you don't have a real asset that you can sell. When I was working with private equity groups, this was a big deal. When they went into a business and they were evaluating and doing due diligence, they would look at it and say, well, the owner is still completely required for virtually everything. So if we buy that business, we're gonna have to keep that person around for, for years.
::Speaker 1
And they will oftentimes say what they'd say, okay, this is part of the deal. You're going to stay here and you're going to help us create redundancy. And so it's not that you can't necessarily sell it, but it will affect your valuation because that's its more risk. Right. And there's a process and a lot of work that needs to be done.
::Speaker 1
If you do the work before you sell it, you're going to get a lot more money for it. The other thing is, you know, you may have a business where you've accepted that you are coming in, right. Like the you have a more of a very high paying job with some autonomy and some flexibility, and you're working with clients, but you were going to be the service delivery person.
::Speaker 1
You were going to be tech with helpers, right? Like you were going to be the primary person you like doing the tech, right? And you only want enough business to sustain you and maybe another person or two or a little micro team to help you on admin, other stuff. And that's completely fine. Like there's nothing wrong with that.
::Speaker 1
But if you want to build an asset, if you want to build something that scales, if you want to build something that you can sell at some point, then you've got to identify where are the key risks, the key man risks in the business. And most of the time you're going to see them on delivery, or you can see them on sales like you have one person that's a that's a rainmaker that brings in all of that money that may be you.
::Speaker 1
And if something happens to that person, the money tree dries up, all right. Or you have it on the delivery side where you're the person or somebody is the person that's responsible for fulfilling all of the work that is being sold. And it's still the same type of bottleneck because you go sell, and if you can't fulfill, then the monetary is still going to try to think about solving key man risk though, is it's not just about selling your business.
::Speaker 1
Right. Like it's not just about the exit at some point. It's it's about the ride along the way. And it is less stressful and less risky and simply more fun to be in your business when you are not the core of everything that's that's required. Like because you can actually be key man in in both of those seats.
::Speaker 1
Like if you're the rainmaker and you're the delivery person and you're trying to build something that's scalable and you're trying to build something that's a business at some point where work is being done by other people, now you've doubled down on the risk, right? So you've got to go get all those clients, and then you've got to fulfill all those clients.
::Speaker 1
And that's a really tough spot to be in.
::Speaker 2
So if you're thinking to yourself, okay, this is me, I'm definitely key man or there's somebody my business just came in a marketing sales operations product. Then there are two major ways that you can solve this. So the first is through processing people, just like I walked through earlier where I said, okay, what are the actual steps that I do in order to solve this market, or the actual steps that I use to think through creating products?
::Speaker 2
One of the actual steps that I use to think through creating sales process, driving sales results, etc. so it's process, and the people who will then do those processes within the business. The second way, and this really only applies if it's not you who is the person who's key man is incentives. And so if it's you, you only have option one.
::Speaker 2
If it's somebody else other people, you have option one and option two to solve the problem.
::Speaker 1
All right. Now process and people two excellent ways to address your key managers. Now between the two I would I would look at processing people first because processing people fixes the problem. When you create incentives to kind of mitigate the risk associated with the problem, the problem is still there, right? Like if I have that rainmaker, that single salesperson that's bringing all the deals and I create an incentive and I give them some equity to work into that.
::Speaker 1
And you know what? I'm certainly reduce the likelihood that they're going to leave. And, you know, created a lot more alignment. And, and that's and that's that's ideal. But the problem still technically exists. Hey, if somebody gets hit by the beer truck, then what incentives can't fix that part. So if I have the choice, I'm gonna look at process and people.
::Speaker 1
Now, one thing to think about what this is, you want to make sure that if you're solving it with process and people that you don't just create another key man risk, right? When you when you do that. And the way that you do that is break things down into their components. The more that you break a process down into its components, the more scalable it is, the more repeatable it is and the less risk that there is.
::Speaker 1
So an example of this would be I'm the rainmaker and I want to fix that problem. So I go hire another rainmaker and I hire somebody. I say, you know what? Well, I need somebody that can prospect. I need somebody that can run these these discovery calls. Really? Well, I need somebody that can, you know, run the assessment, do good proposals, close the deals.
::Speaker 1
Has a good network and understands, you know, everything from, you know, like canvas and prospecting, you know, creating the creating the opportunities and then nurturing those opportunities and closing those opportunities. Right. If I get one person that can do all of those things, I probably or at least and high likelihood that I have created another key man, because there's a lot of complexity involved in that, and it's hard to find somebody that can do all of those things.
::Speaker 1
So if I do find somebody that can do all of those things, it's probably a unicorn, which means I probably created another key man risk. The other way to do that then would say, let's break this down to its components, let's break that whole process down. And let's say I've got outreach and prospecting right? That that's going to include canvasing, outreach on LinkedIn, some lead generation stuff, maybe some cold calls.
::Speaker 1
I've got a qualification process, I've got a discovery process. I've got, you know, some and then I've got my proposal. So I break it down and I say instead of hiring one person, do all this. What I'm going to do is I'm going to hire a builder or a setter or an SDR to run this part of the process.
::Speaker 1
And I'm going to continue to do this. Then I'm going to hire a salesperson that can run the discovery and deliver the proposal piece. Right. And then I'm going to what I've done is I've got it into individual components. Now this is less risk because one you don't have keeping it in one spot of the process. But to finding somebody to do independent roles like this is a lot easier than finding somebody to do all of it.
::Speaker 1
So remember, the more you break it down into components, the lower the likelihood that you're going to fix the key man with another key man. The incentives piece I get this and you know, equity is expensive, but it does work like it is an expensive incentive for for an owner. But it does actually work when you have the right person involved.
::Speaker 1
So we have, through my company, Repeatable Revenue Ventures, we work with just a very small number of IT companies that are scaling up in the like. It's it's 1 or 2 people a year. It's equity based. It is. We get in there, roll up our sleeves and we in some ways become a little bit of a key man.
::Speaker 1
Right? Like because we get in there, we have the knowledge, we have the expertise, we're bringing in the bandwidth and we're going to like figure out how to allocate all this capital and scale this company up. As we do that during that process. We are a key man, right? Because we've we're driving the ship, we've got the strategy, we've got the partners that we can bring in if we need, you know, to to get capital or something else.
::Speaker 1
So we are key men, but we're highly aligned because it's equity based, like we're all charging towards the same finish line. Like we know what the endgame is here and we have complete alignment. So incentives do work. Now one thing I would add to process and people and incentives is I would add systems and automation with AI, with automation, there are a lot of things that you can actually look at fixing elements of your keyboard risk without hiring other people, without adding complexity to the business, and without any of the risk of bringing in other people or giving up your equity.
::Speaker 1
And what I mean is take the sales process example. You can look at that and say, okay, on the SDR, bdr a side, one of these processes can I actually have I do like what can I systematize, what can I automate and get built into my my sales engine that is going to work for me consistently, repeatedly, never going to quit, always going to do what it's told to do and trained on and fix pieces of your key in that way.
::Speaker 1
So absolutely process and people incentives. I would also be looking at ways to address the problem without people because more people means more complexity. So if I can solve it for the robot, sorry for the job market, I'm going to solve it with the robot before I add somebody to my business.
::Speaker 2
So the easy litmus test for good delegation is that after you've given the responsibility away at someone else's actually doing the actions, then the performance of the department or function GitHub remains neutral or goes up. That is when you have successfully delegated. It's not that you give something to someone that makes it delegation. You can give something to somebody and completely abdicate or basically get rid of responsibility, but with no feedback loop to determine whether or not you did a good job or that they're doing your job.
::Speaker 2
Okay.
::Speaker 1
So this is insanely important. Like very, very critical. I cannot tell you how many times the problem isn't actually being solved, but we think it's being solved because we've checked a box and hired somebody and put them in that seat and moved on. So we want that center SDR, BTR, and we go out there, we do some interviews, we hire.
::Speaker 1
Okay, cool. Like you're perfect. Do you seem like you can do it? BTR work, you're in the seat. Here's a playbook. See you. That is not how you are going to set somebody up for success. And that's not how you're going to actually solve the problem. So if you're solving this problem through process and people there's a quality component to this.
::Speaker 1
There's a qualitative nature to this. That is you've got to find the right person. You've got to give them the right onboarding experience. You've got to train them on the right things. You've got to have a playbook for them to operate with, and you've got to have a feedback loop with coaching or ongoing management, whatever that is. I mean, it's true in any part of the business, particularly true when you're going to start building up a sales organization and you're making your sales hires, you cannot just hire somebody and then hand that off and immediately step out and go on.
::Speaker 1
Like even when you hire another unicorn, for example, if you go out and hire another key man, somebody to take full cycle sales, like guess, you know, there's risk, but you found the right person and then you think, hey, they're good. They're experience, they're smart, they know the like the goal is to sell more shit, always turn them loose and let them go.
::Speaker 1
And that's not how it works. Like when you hire a salesperson all the time, are closer or whatever it is you are promoting yourself to sales manager, meaning there are certain basic things that need to be done when you hire a salesperson to ensure that sales person is going to succeed and help you sell more stuff. That includes training.
::Speaker 1
It includes the right playbooks. It includes basic sales management, sitting down, listening to calls and checking in and looking at the numbers and coaching on some feedback and ensuring that you know you don't need to make some adjustments to the process, and that there's a feedback loop on the stuff that's going through sales back into the beginning of the system.
::Speaker 1
Like, okay, we're getting some unqualified deals. We're not getting enough leads. What's that telling us? You can't just abdicate that responsibility. That is not what delegation is, and that is not solving key man risk. That is feeling like you've checked a box and you're just like putting your head in the sand to to the fact that you still have the actual risk and now you have another expense on top of it.
::Speaker 1
So please, please, please don't make that mistake.
::Speaker 2
So now the entire key man was the next mistake the business owners under $10 million make is single channel risk. Now that's just a fancy word. So let me tell you when it's if more than half of your customers or leads come from one place, you have single channel rates. And the concept behind this is that if that were to stop, it would materially affect your business on a long time timer.
::Speaker 1
Okay, so I've actually witnessed the impact of single channel risk in multiple companies. In fact, a couple companies over $10 million and one specific story, as we were in a company a couple of years ago when Apple actually made changes to its inbox. Right. Like it made changes on its software that essentially, you know, the stats that you were looking at, the open rates, things like that, because of privacy settings.
::Speaker 1
And I'm I'm not you're the tech person I me they did something right techie. And what it did for the marketers of the world was we now lost the ability to believe the open rates that we're seeing on on our, our numbers. Like if you're doing cold email and I was at an organization and we were doing outbound, we were doing cold email, we were doing it at volume and looking at the numbers and we went, shit, yeah, this is like it's the primary channel of where we're getting all of our business.
::Speaker 1
And now one of the major metrics that were that we're looking at, we've got to we've got to reevaluate now in that case, it didn't necessarily mean emails weren't getting through, but it affected our ability to get visibility into that system. And because that was a primary channel, that was a risk. Now, the second time that I was part of this is when I was at an organization.
::Speaker 1
I was building up a sales team for someone, and they were relying on paid ads. Paid ads on Facebook basically drove 99% of the business. They had a, you know, a lead magnet funnel that we would do, you know, follow ups on, with, with SDR and to speed the lead, then we would do the run the sales process, move those things through them through the process, get them to closing in the fuel for all of that, like the beginning for all of that was Facebook ads.
::Speaker 1
And Facebook made a change to its paid algorithm and it changed everything. And in this case, it was leads coming in the door. It was volume. It was actual cash that was hitting the bank that was being affected. And because that was the single channel, that was the only channel where new things were coming in. Growth was at risk of completely stopping.
::Speaker 1
And what we had to do was scramble. We just start looking at, okay, what assets do we have? Okay. We have a huge new newsletter list. Okay. What other things can we get fired up pretty quickly and how can we address this core problem. And you know, if we if we thought we were going into that quarter with, you know, proactive priorities, we very quickly realized, oh shit.
::Speaker 1
Like we have to to make an adjustment, look at where your demand is coming from and ask yourself, like if this was turned off tomorrow. Like, how big of an impact would that have on the business? And you know, based on the definition here, you know, do you have key channel risk? If you do. Let's talk about how do you address that.
::Speaker 2
There's a variety of solutions that I'll walk you through. So number one is that if you're a tiny business, you don't need to worry about this yet. But my biggest advocate for being a small business is that you're going to have one primary method for getting called people, which is usually going to be outbound number one, which is you're reaching out to prospects, you don't know who you are.
::Speaker 2
Two is going to be affiliates. So again, you've got third parties that are sending you traffic through and you've got ads that are ways that people are coming into the business. You've got organic. So this is going to be likely how you're going to be getting customers. Now I would recommend that you do one of these three and then plus this, this may seem like a little bit of a departure from some of the things I started before.
::Speaker 2
Worth what channel, what avatar one product up to $1 million a year. And that's true. It's just that I've seen like so many people be able to manage this. It's such a high return for such low effort that the organic that you put here is not really to acquire customers. It actually functions more to amplify what you're doing with these other channels.
::Speaker 1
Okay. So his suggestion is if you're tiny, don't worry about it. And what I would define as tiny is if you are if you're under a million bucks, you don't need to worry about the risk of one channel. You need to worry about the risk of no channels. Right? Like you need you need one good channel that's that's actually set up.
::Speaker 1
The suggestion here is get some organic content and then look at, you know, the other three like do one of the other three. And essentially what he's saying is organic content is just a prerequisite. Like you need that because it amplifies everything along the way. And the other three are what really turn into the main system for you, that the organic content's not necessarily the main system.
::Speaker 1
It's it's there to nurture people along the way. It's there to validate what they're thinking. And the other pieces are the ones that you're looking really to systematize that you can, like get that dialed in and scale it. And I like the way my my friend Robin Robbins actually thinks about this, and she calls them marketing oil wells, like, so you're you're really looking like a and like if you're drilling for oil, right?
::Speaker 1
You're going to go out there, you're gonna explore, you're gonna say, okay, let me let me test this. Let me, let me try this, let me try this. Let me, let me find the the site, the platform, the channel that I'm then I'm going to look at and then let me systematize that thing. And then I'm going to pull the lever like I'm going to drill that maybe for all it's worth.
::Speaker 1
And while I'm doing that, I'm going to go look for another one. And that's how I like to think about it, because if you keep doing that over time, what you will have is a variety of channels that reduce the volatility of all your lead generation. So you can have some volatility in independent channels. And that's okay, because on the whole it's going to be steady because if one's down another one's going to be up.
::Speaker 1
And that's the benefit of looking at it that way long term. Now one thing I would add here is on the organic content piece, many of you are putting out content, but it's just it's just straight GPT shit, right? It's you're just you're asking, you know, I or GPT to write you a handful of LinkedIn posts and then you're copying and pasting that into LinkedIn or into Facebook.
::Speaker 1
That's not what we mean here, right? Like that organic content strategy isn't going to work like that is actually the same thing as hiring an SDR and then abdicating the responsibility, like, okay, I hired that person. I'm out. Like done does not mean good. So if you want your organic content to work, then you've got to look at the problems that you're you're solving for your clients, the, the pains that those problems are causing them.
::Speaker 1
The thing that sets you apart and makes you unique gives you some, you know, personality or brand or something because you're in a crowded marketplace, right? Like there are MSPs. I mean, still, there were more MSPs that started again last year than ever before. So more and more people are coming into the market. So if you were putting out copy and paste content from GPT three or from, you know, Claude, your name, your AI tool of choice, then you're not doing yourself any favors.
::Speaker 1
In fact, you might be doing yourself a disservice because if people see it, they go, oh, that's that sucks. Like and keep on scrolling. So when we say organic content, we mean content that resonates. How can you educate them through your content? How can you help build authority and credibility in your services and differentiate yourself? Because if you're not doing those things and you're not adding value through the content that you're putting out, then you're not really doing the organic strategy.
::Speaker 1
You're not going to get the benefit of it amplifying your other channels and nurturing your prospects through the cycle. And of these three great, the outbound and the affiliates and the paid, I would recommend outbound. Once you get outbound, it is yours. It is very difficult to to take that away once you understand the channel. Like once you go through the work of understanding cold email and you get the messaging optimize, you get the delivery optimized and you get the processes of following up optimized, and you get that dial and you own that, and you can turn up the knob and turn down the knob as you want.
::Speaker 1
When you go into paid and to an extent, affiliates, there are other risks that are associated with it. So if I can, if I can build and own and get one channel up successfully, I would look at outbound.
::Speaker 2
The way that we solve this is, a standardized process that I've had to jump through with a lot of companies. So the first thing we do is we shore up long term nurture. So long term nurture means a combination of making more content and email specifically follow up. Because a lot of people, a lot of businesses don't do a good job following of leads.
::Speaker 2
or: ::Speaker 2
So think of this as, in a way, another customer stream. But it's an incredibly low risk customer stream that is the most profitable of all streams. And so email marketing, for example, has, depending on the source, a 42 to 1 to 36 to 1 return on dollars, it's like, oh my god, like, why would we not do that?
::Speaker 2
So we do this to decrease our risk, increase our cash flow in the short term to get that engine going. The next engine that I like to make sure is very strong is my referral engine. And so if I haven't put a strong referral system in place to get customers to send more customers, it makes sure that I'm asking multiple times in different and creative ways throughout the customer journey that I implement that next.
::Speaker 2
Again, we're getting more from what we put out, and if we get more, that's going to increase our cash flow without adding cost basis to the business. If there's a think of it as like decreasing risk and increasing our ability to make bets after we've got the long term nurture fire and we've got the referral system going, this should give us a little bit of padding to then invest in the second channel.
::Speaker 2
Now when I say invest, the way that typically works is that you will see no outcome for an extended period, and then all of a sudden it will start working and you may get frustrated in the short term that you're not seeing immediate results. But welcome to business. You have to think long term about the value. What a second acquisition channel or third acquisition channel means to you.
::Speaker 1
Okay, so I really like this. And it's you know what's interesting is when I look at how we've built things intuitively, we have followed this process. But I've never really heard it broken down like that. Now, the idea of locking up your nurture makes complete sense. Like, why go out and work really hard to get more people to pour in buckets if the boat has holes all over the damn place, right?
::Speaker 1
And if you don't have something in place to nurture people along the way with email, with podcasts, with YouTube, like some sort of long form content or something that is bringing people through the journey and allowing you to stay top of mind, then there's no sense working to get three times as many leads in the door, because your conversion rates within it are probably not healthy enough.
::Speaker 1
Then getting the referral network built out allows you to get some demand and some things coming in the door while you're building out this other engine. Because the other engine is going to take time, there's going to be a learning curve, and you're going to have to pay down some of what Formosa calls the, you know, the, the ignorance debt and like, oh, I didn't know this about this channel and this about this channel.
::Speaker 1
So if you have a good partner network, a referral network out there that's helping drive demand in the interim, then you're in good shape. Now, what is the referral or partner network looks like for an IT company? That may mean some JV partnerships. You know where you're going out and you're finding people that are also talking to your audience and you're setting up, you know, some type of cadence with webinars, with a JV partner, or you're working your network group, whatever that is.
::Speaker 1
Right? Like go out there and try to shore up a handful of partners that you feel like you can drive. Some demand. Then go start your marketing Oilwell process. Right. The piece about the leads not getting worked, I think cannot be understated enough, and this is something that I see a lot when we run our sales arts, we go in and we look at every aspect of the sales just to of look at what would it take to scale, right.
::Speaker 1
One of the things that I almost always find is that there is a ton of money locked up in the pipeline, and it's because there's been this exclusive focus on lead generation in getting more leads and and how do we get more volume and we get more bookings through. We get more assessments. How do we get more this more and more and more.
::Speaker 1
But then the conversion rates within that are miserable because you don't have the bandwidth to actually follow up with. Effectively all the new leads are coming in the door. Are you hitting people on LinkedIn that view your profile to to start new conversations? Are you calling people that click your your newsletter, like when you send out your your blog or email newsletter or your drip sequence when people engage with that, are you prospecting into that?
::Speaker 1
When people get your lead magnet, are you following up within minutes? Within seconds? Do you have your phones being answered all the time? If I call the phone number that is on your website right now, will somebody answer and get me to a salesperson right now? If you really look at it, you say, we actually have leaks all over the place, and we've been so focused on how to get more leads in the door, we haven't actually looked at all the areas and all the data within the CRM that you already have.
::Speaker 1
Like a lot of times I see people trying to get one of these. I'm like, you've got 10,000 contacts in the CRM today. What you're saying is out of the 10,000 that you have, you don't have any opportunities. No one in this list of 10,000 actually has a need or doesn't like their current service provider, or doesn't have an agreement coming up with their current service provider, or isn't getting slow response time any of those things?
::Speaker 1
And it's crazy, right? We just think we need more coming into the system. Instead of looking at how do we optimize the system. I personally learned the importance of this lesson. Both the order in which you go about this and the impact of not being able to follow up on your leads last year, because I put an ad in a I sponsored a newsletter like you know, several hundred thousand, email subscribers.
::Speaker 1
away a course and we had over: ::Speaker 1
ackground. So okay, but I had: ::Speaker 1
ould have said, look, we have: ::Speaker 1
I mean, granted, the the ROI as the return on aspect was awesome on that, but I was never really fully able to squeeze all the juice out of that because it was too much like it was too much for me to effectively follow up on. So to me, the two lessons here are the order that you're going to do it like shore up the nurture piece, get the referral piece, and then go like hammer that that channel and start the marketing oil wells.
::Speaker 1
And to don't overlook the opportunities that you have sitting right in front of you. We're talking about key channel, but there is one key asset that may be sitting right in your own backyard. That's the data that you have sitting in your CRM. Like, don't let thousands of leads that you currently have go untouched and uncalled.
::Speaker 2
Now that we've covered single terrorist, the next mistake that business owners make under 10 million is key customer risk. And we're almost there. And you can see this tiny little gap here. I guess we could fall down here to our debts, but we're going to assume that we've got some pretty good ups here. And we could we can make this little jump.
::Speaker 2
So here's a visual to kind of make this make sense for you. Is any customer or associated customer left tomorrow. Would your revenue drop by 20% or more now the reason 20% is called the number I choose that most businesses run out ten, 20, 30, 40% margins. And so if you had even a 40% margin, which would be a great margin, you lose half your profit.
::Speaker 2
This would be material to the business itself and its value.
::Speaker 1
Okay. So key customer risk. And he has a really good definition here right. Like so it's 20%. Some of you have 1 or 2 people that are just massive to your business. And while you have that customer that is high margin. Maybe just like your project of a project and they are keeping the business alive while you're writing that wave, it feels really good.
::Speaker 1
The the thing is, I've talked to many of you after you've lost that person and it can be an acquisition, it can be a going out of business thing, it can be a merger. It can be like all of these things happen in business. It's completely normal. So when you have that key customer, you've got to think how do I pretend that I lost this customer tomorrow?
::Speaker 1
Because something switches, right when I see people who have that the way all that's that's in their business and they're like, okay, this is this is good. I mean, I know it's there and we're trying to do some stuff and, you know, we're testing and I feel pretty good about it, you know, our outbound or our this or that.
::Speaker 1
And then you kind of move some balls forward and it's sort of a priority. But you know, you do have the luxury of focusing more on the tech side or more on the op side because, you know, this is really, you know, driving a lot of the revenue. And I feel pretty comfortable about that. But you get complacent when you lose that customer.
::Speaker 2
You go.
::Speaker 1
Oh, ship, I've got to get serious. And generally you go into like panic mode and, you know, you go into panic mode and then you start, then you start hustling, then you start prioritizing, then you start prospecting, then you start really hitting the ground running like, all right, I've got to get here. I've got to Kansas, got to hit every networking event.
::Speaker 1
I got to start sending emails. I got to hit everybody on LinkedIn. I got to post a bunch of content. Put yourself in that mindset before you lose the customer. And your life will be a hell of a lot easier.
::Speaker 2
So there are four proven ways to solve this problem. So when this business owner came up, I said, we're going to go through all four and you're going to pick the one that you think you have the highest likelihood of achieving. And so this is you. This is how you solve it. So the first way you can do it is that you simply go get more.
::Speaker 2
I got to draw these fish because I have to think about how to draw these, these little fishes here. All of a sudden you get a bunch more minnows, and then all of a sudden by percentage, that this ugly fish by percentage, you know what this will is and 70% of my business anymore. So you just keep adding minnows to your boat, and then all of a sudden you're like, you know what?
::Speaker 2
My minnows way outweigh my whale. And so I don't have to catch work anymore. The second way is that you lock this whale in to a long term contract. So just think about this whale as signing this life away. But you get Google or whatever this customer is to sign a three year, a five year, a seven year commitment, and you can add some bonuses in there and say you're going to have two dedicated rats, or you're gonna have some sort of discount that might be associated with that kind of commitment.
::Speaker 2
But when they do that, then it makes it more stable because it's unlikely that they're going to leave. And if you want to be smart about this, just a little pro tip, add a little break up thing, because some people are still going to back out on their agreement and you don't want to get into a legal battle, so you want to just give them some way in the future.
::Speaker 2
But just knowing that there's this nut that they're going to have to pay will prolong. How long they'll stay with you. And so I would probably charge somewhere in the neighborhood of 10 to 20% of the contract, all of the stuff negotiable as a breakup fee. So if someone has a five year deal that I might say you have to pay a year, I'm going to break up beforehand.
::Speaker 2
Another way of thinking about it is say whatever discount I gave you. You're going to have to pay to make up that discount for the entirety of the contract in order to leave the contract. Another one is that they have to give you 6 or 12 months of heads up. So there's a lot of ways that you can write terms around this, with a way to decrease the likelihood that they leave and disrupt the business.
::Speaker 2
Now that's path number two. The third path is and this is my preferred path is you just get more data whales. And then all of a sudden you realize, you know what, dude, I'm in the whale business, right? Why was that? Hudson Meadows, look at the meat on these guys. Right? And so all of a sudden, you don't try to outnumber minnows.
::Speaker 2
You make all of a sudden you're just go get 5 or 6 more whales, and this is it, 10% of 20% of business. So half for it is a nasty one. And for many of you, if this is your situation, it may actually be the right path.
::Speaker 1
Now here's what he shows you. The fourth one is you don't take the business right? Like you actually say no to the whale. And the rationale behind it is, you know, a lot of times they come in with demands, they come in with bespoke work, they require changes to your model, and the trade off simply isn't worth it, because you have to make so many concessions that it reduces your operational efficiency and distracts you and distracts your team.
::Speaker 1
And the source of distraction outweighs the reliability of of the revenue. And when you when you're not selling. And I feel like that's a pretty hard pill to swallow. But the reality is, like in that case, I've seen this many times, and in my own businesses where, you know, you allow that one person or that source of revenue to really just become an extension.
::Speaker 1
Now, here's what I'll say about the customer risk. And it's I have a friend, in in West Texas that has a company that builds industrial trucks. Right. Like, they, they, they do the fabrication and they take trucks that you buy off the lot and they turn them into industrial farm machines. Right. And a lot of it's custom bespoke work, this and that.
::Speaker 1
And he had a vendor, in a small town nearby that, that helped him with a lot of that, with a lot of the fabrication. And it was it was custom work. And, you know, he was he did he did good work. Well, what happened was that person, that vendor ended up allowing my friend's business to become basically all of his business.
::Speaker 1
And at some point my, my friend went to that business and said, hey, man, like we're basically all of your revenue. And I think it just makes sense to, to buy this business from you. And the guy wasn't ready to sell it. He was like, no, I don't, I don't want to. And you know, that's that the valuation is not high enough.
::Speaker 1
And I would rather not. And my friend was in the position of saying, well, listen, like if you if, if you don't sell it then I'm going to go somewhere else and that's going to kill the business. So why don't we do this? So why don't we make a deal? When you have that key customer, you are at risk of something like that happening.
::Speaker 1
Now. We just call it, you know, client concentration risk. Like when anywhere in the world it's like, hey, client concentration risk just like key man risk just like everything else. You go, okay, well that's a risk to the business. And I'm going to knock the valuation down as a result of it. Now the thing here to keep in mind is you've got to play the long game like it's you've got to play the long game.
::Speaker 1
You're thinking about getting more more minnows and getting more whales and locking in. Those contracts are saying no to to a lot of money because if you just play the short game, you'll get stuck on this, this hamster wheel of a ton of activity where you're not getting the output that you want. So you need to be really strategic here.
::Speaker 1
Look at, you know, the key customer risk that you have be really calculated with. How are we going to go about getting more of them or getting more minnows or solidifying this agreement that we have and be really strategic about it? Now, the fourth one is is an interesting one here.
::Speaker 2
Single vendor risk. So this is where one vendor. So think about any person that's a business that you pay to help you do. Business is responsible for a key function of the business. And so there's a ton of examples of this. If you have all of your customers from SEO, for example, and you have an SEO agency who does for you, if you have all your you know, leads from PPC or meta ads, and somebody else has all of that taken care of, but they're an outside company, that is key vendor risk.
::Speaker 1
All right. So he shared some some good examples as a software. You know he had a software developer for his company Alan, that they were that they were building and later sold. And that software developer had all of the the IP like knew everything. And so he had to find a way to build it in parallel to, to that vendor, and then also supplier for products like with the supplements business, you know, had one supplier and, you know, the negotiation and everything, was a, was a challenge.
::Speaker 1
Now for an IT company, you may be looking at, maybe it's one RMM, maybe it's one PSA, or it's a third party provider that you have like some some boots on the ground. If you're doing some, some work that's not in your, your actual market, something like that here's like it's it's very difficult to not have one like maybe all of your, your cyber stuff or maybe you're, you know, you're running your assessments through one, you know, you don't necessarily want to have redundancy for everything.
::Speaker 1
Right? So so you don't necessarily want to do that, but you want to be aware of what it is because key vendor risk wall type to mitigate without, you know, increasing expenses exponentially. It lowers your risk. Like if you address it, it lowers your risk for the business. It don't prove your ability to negotiate with that vendor because if they are a key vendor for you and they know that you're you're losing all your leverage in your negotiation, that's not good.
::Speaker 1
And you'll get better service. When somebody is a monopoly, they simply don't provide the level of service that you that you really want. And as you start to de-risk that, you'll see as your negotiation power goes up, your service levels will go up as well. So how do you address it? Here's here's what it says.
::Speaker 2
Number one rule always have backups for just about everything that's important. So you want to think about this in terms of acquisition conversion products. And then the layer on top of this obviously is processing banking. Anything that you do that that facilitates transactions with customers. And so the big solution and we're going to put this in big green letters.
::Speaker 2
So so solution number one is redundancy. Right now I want to be clear about redundancy. Sometimes redundancy looks like waste but is actually insurance the day you need it. Think about it this way. If I pay for fire insurance and my house never catches on fire, if I knew for a fact that my house would never catch on fire, that 100% of that money is completely wasted.
::Speaker 2
I just flushed the money down the toilet. I didn't get anything for it. If my house does catch on fire, the day catches on fire. Every one of those payments was 100% worth it. I see redundancy the same way, which is that it is insurance against existential threats to the business. And these are the things that I'm telling you now that I have these things in place.
::Speaker 2
It's like one, I have leverage in negotiations, which is probably the more reasonable thing that you get in terms of short term benefits of having redundancy. The second is that you sleep great at night knowing that your business can't get taken down, at least from the things that you know about like can't control the unknown unknowns, but at least control the nodes.
::Speaker 2
If the chickens do come home to roost and you do have that bad day and the bill is due, then you will be grateful that you had this redundancy in place. The second way of doing this is having mutually assured destruction. So what does that even mean? It basically means that it's the bigger you get, the bigger you are as a percentage of their business, the more they need to keep your business and not let you go.
::Speaker 2
Because basically you shift from them being, key vendor risk to you becoming key customer risk for them. And since the shift in power, basically, the bigger you get, the more important you are to them. And so there's this saying in the finance world where it's like, if you a bank $1 million, they own you. If you will make $1 billion, you owe them right now, obviously it depends on the size and bag and things like that.
::Speaker 2
But the same kind of kind of carries. Right. And so you want to understand what percentage of the business, their business you are. And that way if they fuck you they get fucked too. So this is where the size of the person that you're working with can be kind of a double edged sword. The small guys are probably the guys that most likely in the shady stuff.
::Speaker 2
On the other hand, that you become a huge percentage of their business, you have some leverage back towards them. And so redundancy number one, mutually assured destruction. Number two. And here's a big one covenants and terms. All right. So all the SEG which are just fancy ways of saying what do we agree to kind of like key customers because cash were key to their kind of opposite sides of the same coin.
::Speaker 2
All the terms that we asked from our customers before in the last section for mistakes. We also can ask now as the customer of the vendor. So we say, hey, if you want to start doing business with us, you have to give us a 6 or 12 month lead time to letting us know that that's going to occur so that we could find another vendor.
::Speaker 2
So it's number one is lead time. Number two is you can have a break up thing associate. Now you can imagine on the other side as a vendor you're like, this guy wants to put a breakup fee on me. My God, this guy's gonna be sticky. But at this point, when you have key components of the business that are outsourced, which I fundamentally don't do this anymore because I had been screwed so many times, which is why I think that marketing sales delivery should be in-house to a business, because it's just too important.
::Speaker 2
But like payment processing, it's unlikely. Here's our paper, I said, but just to be able to process your payments, right. There are some things that are going to be outsourced. You have to have trust. One is give that up. Two is the breakup. The third is that you have fees or fines associated with service level agreements, meaning you're going to respond to us on this timeline, you going to ship to US products or raw materials on the schedule.
::Speaker 2
You're going to get us leisure run this one about on this cadence. And when we think about it that way, that allows us to say, if you don't do those things, then you hedge the amount of money that you would have lost as a result of them not doing the work with the fine associates. It's basically a hedge.
::Speaker 2
Now, if you have a vendor, they're going to try and decrease what that amount of money is, but then also having transparency into understanding how important their role is is again, a double edged sword. What is the understand leverage on the other hand, if you get the term inside the deal in terms of the cash required from them to make sure that they're doing their job, you cover your downside.
::Speaker 2
Finally, and this is a bit of like a advanced move, if you become significantly bigger than they are or you're a huge percentage of their business and they're still important to you, that's where things like aqua hires and acquisitions can be very strategic.
::Speaker 1
Okay, so he says, you know, redundancy, mutually assured destruction, which I like, covenants and terms and then acquire like go, go buy the business. And that's similar to what my friend did. Like in terms of I've got the leverage, I'm going to acquire this and, and get a good deal, frankly. Now the one thing I would add here is contingency.
::Speaker 1
I mean, redundancy is excellent, but you know, do you really want duplicative tech stacks? Like, do you want complete redundancy on all of your cybersecurity options, on all of your everything that you're doing right, like everything in your business, you don't want to go duplicate that. You know, it is an insurance expense, but it's also complexity, right?
::Speaker 1
Like you're adding all of these new softwares and tools and things like that. And so at some point, it doesn't make sense to have redundancy for everything. What it does make sense to have for everything is contingency. Know where your your risks are, understand those, document those and identify which ones seem to be the the riskiest to you or an act of risk.
::Speaker 1
You know, like if there's a massive acquisition of one of the platforms that you provide services through, then you've got to look at that and you've got to pay really close attention and say, okay, this may be a place where we want some redundancy. What if somebody buys that and just like drops that piece off, you know, so contingency is the one thing that I would add for you as an IT company so that you're still allocating your capital efficiently, but still looking at how do I de-risk and not be thrown, you know, curve ball that's going to completely screw up my business.
::Speaker 1
So here you have it. The four risks are almost you said are prevalent in all small businesses and what it means to your I.T company. I hope this has been helpful. If it has, go ahead and subscribe to the channel for more business tips. How you.
