What are you in this business for?

[ebs]

I've starting a computer support company aimed at SMEs in the UK (Birmingham specifically) - we've got a $40,000 loan to start the business.

Of that, $20,000 is budgeted for telemarketing in our first year (appointment setting with businesses in the local area) to get contracts, each with a hopeful average annual value of $6,000.

I'll be doing all the work at first, we're projecting sales in the first year of $100,000. By year three, we're looking at $500,000 a year in sales and 4 or 5 employees.

We've done research on our competition locally and nationally in conjunction with a market research company and most of them offer a standard service, have a poorly designed website and don't seem very pro-active. Most charge rates of $40-$50 an hour. We'll be charging $80 ($140 out of hours) and the research we've done suggests the market will be happy with that, provided we are sending out qualified, professional engineers.

Ultimately, most competition seems to be one man bands who have started not a business, but a job - and they've priced themselves too low to be able to afford the costs of hiring someone.

I'm focused on building a profitable, sellable business - and in 5 or 10 years, I'd hope to be able to get a very nice profit just by selling what I've built up. Why are you in business? do you plan on expanding, or are you happy with what you've got?

(by the way, for anyone who hasn't heard of it, the emyth books make great reading, and a lot of our ideas have been bourne from their ideas)

 

[Blues]

I haven't gotten in business yet really for many reasons but I do want to start a business not a job as you put it. I actually hope to build up my business and then sell it.

 

[14049752]

I'm in business to build a mini-empire. Seriously.
My business is small right now, but I want to be able to expand in a few years and open up a branch location in another nearby area.

 

[MrMille]

Birmingham, UK uses the English pound, why are your prices in unspecified dollars?

 

[ebs]

Because this is a mainly American site - I've always done 'on the fly' calculations when posting to an American audience, to provide a rough dollar calculation - it tends to be a more universally understandable currency. The values in £'s are half of the posted values

 

[cmonova]

revenue

I've starting a computer support company aimed at SMEs in the UK (Birmingham specifically) - we've got a $40,000 loan to start the business.

Of that, $20,000 is budgeted for telemarketing in our first year (appointment setting with businesses in the local area) to get contracts, each with a hopeful average annual value of $6,000.

Am I miss understanding this? $20K for telemarketing that you hope to get 6K in revenue a year?

 

[Bryce W]

Am I miss understanding this? $20K for telemarketing that you hope to get 6K in revenue a year?

each with a hopeful average annual value of $6,000.

I think he means $6000 per business the telemarkers sign up. So if they sign up 12 businesses, he would like to reach $72000 a year.

 

[cmonova]

I think he means $6000 per business the telemarkers sign up. So if they sign up 12 businesses, he would like to reach $72000 a year.

That makes sense. the $6K total would not make sense to me.

 

[ebs]

That makes sense. the $6K total would not make sense to me.

That's correct - $6000 average contract value, not total value.

It's also worth mentioning that we're not doing telesales - all the telemarketers are doing is ringing people off a very targeted list (businesses within two miles, with between 3 and 10 employees, and between 2 and 10 desktop PC's who aren't on TPS (like the US do not call list I think)) to set appointments for us to go and meet the client. Telesales is just tacky

 

[hawks5999]

First off, I wish you the best of success. Entering with an exit strategy is something that a lot of people don't do when starting a business. A few things I want to throw out as thoughts and questions that I have:

What is your expected onboarding rate? You project 100k for year one. If you land everybody in month 1 that is 17 clients. You are projecting $500/mo clients ($6000/12mo=$500/mo). By yourself, you will never manage 17 clients especially if you are bringing them on in one month and the truth is you won't bring on 17 clients in the 21 days that an average month contains. A more realistic onboarding is bringing a client on every 2 weeks. To go from prospecting to close can't be done in a much shorter time. If you start out month one with 2 clients and add 1 every two weeks through the end of the year you end up with 24 clients and $78k in revenue. As a solo operation, 24 clients will keep you running crazy. There are 168 hours in a month (roughly speaking using 40 hour work weeks). That gives you 7 hours per month per client by end of year one. Let's say you have it all automated and managed so you only have to spend 4 hours per month per client. That leaves you 72 hours per month to prospect, negotiate, close, invoice, collect, renegotiate, network, do your taxes, etc. Probably doable, but again this is only $78k in revenue. To meet your $100k target you have to onboard 3 customers per month no later than month 4 and that means that by end of year you are running 33 clients. That gives you 5 hours per client per month. Ok, again, you are rocking with automating and management tools so you only need 4 hours per month per client. That leaves you 36 hours per month to build and run your business. I am assuming that you will never lose a client. However, you are charging $80/hr for hourly but trying to score contracts that will result in an effective rate of $125/hr. Granted, your customers should understand that they are paying for the managed services they are getting (managed antivirus, backups, patch management, etc.). But that raises a question about cost and therefore profit margin. On $100k revenue what is your projected gross profit (GP)? If you are doing everything yourself you can probably figure 60-75% GP. If you want to be more conservative calculate on 45% and expect it to drop to 30% or less when you bring on employees.

What are your expected results from your telemarketing? I've seen numbers that suggest you will need 100 calls to get 10 appointments to get 2 closes (more pessimistic (realistic?) numbers look like 1000calls/25appointments/4closes). Those numbers aren't hard and fast and it sounds like you are using a qualified list, so give yourself a 3x appointment advantage and 5x close advantage (you are good at selling to the C-level, right?) - 100 calls get you 30 appointments and get you 10 closes (there's your first 4 months). For 33 clients in year 1 your list should have 330 qualified calls (easy enough) and you should be able to meet with 110 of them and close 33 of them. This of course goes back to the time you have in a month and assumes a very good list. But for $20k you are expecting more than 330 calls since $60 per call is spendy for appointment setting telemarketers. Your list probably has 500+ names which is a reasonable grouping of businesses with 3-10 employees and 2-10 computers in a 12.5 mile area (pi x 2^2).

Do you have your own cash reserves going in or are you planning to use the other $20,000 as salary? What does your monthly budget look like? $20k over 12 months is ~$1650 month (not a livable amount, at least here in the US). The servicing on the $40k is ~$850/mo (I'm ballparking a 10% rate on a 5 year term). So that leaves you $800/mo to eat, clothe and shelter yourself. Granted, you will have monthly revenues that should be livable by month 6 so, let's say you only need the money for 6 months, that's $2450 month (factoring for debt servicing). Projected revenues in months 1 through 4 start at $1,000 and go to $4,500. By month 4 or 5 with your revenue and loan money you should be set. But without your own reserves, how do you keep the lights on during months 1-3? I'm not so worried about this for you as I imagine you have the cash reserves or salable assets or else the bank wouldn't give you the 40k.

I'd suggest you read the Guide to Successful Managed Service Practice by Erick Simpson if you haven't. He spends a good bit of time talking about valuation especially as it relates to contracts. A good word of advice from the book is to get 3 year contracts. The value of your company will balloon if you have 3-5 year contracts versus a 1 year or God-forbid month to month contracts. It's a tightrope though. Clients will look at you as a new business and scoff at the idea of 3 year contracts. Statistically, there is a great chance you won't be around in 1 year let alone 3 (I don't mean you specifically, just startup business in general).

My next suggestion is to raise your target monthly revenue per client. At $500/mo/client your model becomes unsustainable. Look for clients that you can get gross revenue of $2000 per month. You are looking at a different breed now, true. Instead of the 2-10 computers you are looking for 10-25 computers. But the difference is that you only have to onboard 1 per month and in 12 months you have more revenue and fewer clients. Your target is now to go after the company that has an IT employee that is costing them 60-90k a year and you are offering them outsourced IT for 25k. You look very attractive at that point. You just need to up your game and project professionalism. You were able to convince a bank to drop 40k in your lap so you have something good going for you.

Since you are wanting to sell, just add 1 client per month and 5 years out you have 60 clients generating 120k month with a 30% GP. That gives your company an annual GP of $480K. There are several ways to value a company and I'll leave it to you to decide how you'd pitch it, but 1.4 million in revenue and nearly 500k in GP is a valuable company.

Again, I wish you the best of luck and hope you succeed. I just see a lot of possibility for breakdown in your current model.

Now to answer your question: I'm in business to build a company that I can have managed and run by others within 5 to 7 years and look at possible sale in 10+ years. I'm following the model I just described and after 2 full months in business have 2 clients in process of closing. It's not as clean and simple as just signing them up for managed service contracts but that is the direction we are heading and I'm extracting revenue from them as we get there. My driver is that my first son was born a year ago and I want to be able to be involved with his and his coming sibling's schooling (homeschooling).
I need to read the emyth books as I've head good things about them. Thanks for the reminder ebs. I've attached a spreadsheet with the models discussed in this post. I don't claim that my model is perfect, it's just what makes sense to me.

 

[tkrabec]

Hawk,
I've read 2 of the e-myth books, they are good. Also 4 hour work week and the rich dad series, not as much about business but it will get you thinking.

 

[ebs]

Hawk, thanks for that - it's a lot to think about! I've probably slightly messed up the figures - $100,000 refers to the annual value of all contracts we have at month 12 + the ad-hoc work we've done throughout the year (network installations, voip installations). From the advice we've received from the telemarketing companies we've consulted, we can expect around 5 calls from every 200 to result in a conversion.

There is a brilliant site in the UK, MarketingFile, where we are sourcing our lists from. They allow you to select exactly the records you need, so within a 15 mile radius of me, there are 15,000 companies with 2 offices or less (so we don't end up with government, schools, national chains), 20 employees or less and 20 desktops or less, so we have no shortage of data for our telemarketing company to use. They are confident of getting 3-4 appointments a week, and of those, converting 1 every two weeks into a contract customer.

I'm actually remaining in work until we have enough contracts to prove that the business can succeed - it's not too much of a hassle, I'm on flexitime, so if I need to go to a sales appointment or service call, I can just make the hours up the day after. I have got cash reserves, but I'm not planning on using them, but if it comes to it I can survive 6 months without wages.

I've just bought the managed services book you recommend, along with a couple of related ones, so I'll let you know how it is! I think you're right about going after the bigger companies, and maybe 1-10 is a bit low, so I'll think about the best ways to attract companies with 10-20 machines, because, as you say, that will result in a much better profit.

Thanks for all your tips and advice, and good luck with your business!

 

[lazzo71]

Man, I would so love to make a living out of this gig. I certainly haven't made any projections though. I am doing it as a hobby at the moment and am generating a fair bit of business. It is refreshing to see guys at the business end of this enterprise, it definitely gives me some ideas if I want to take this into a full time job in the future.

 

[bagellad]

I am interested in the response rate you would get from telemarketing. I always assumed personal sales calls would generate more interest in the business and look more professional. But that would be draining.

 

[Bryce W]

I would be interested in the response rate too. I know as a business owner myself I hate telemarketers... I got a feeling other business owners may be the same.

 

[nonchalant]

Im in this business as a 'side-line' only to generate a second income. I prefer the comfort of working F/T for someone else & collecting my 4 weeks leave at the end of the year as well as the guaranteed paycheck each fortnight (lol).

Good luck with your venture though

 

[MrMille]

Because this is a mainly American site - I've always done 'on the fly' calculations when posting to an American audience, to provide a rough dollar calculation - it tends to be a more universally understandable currency. The values in £'s are half of the posted values

It's an Australian site, so AUD or USD, but with the rates being what they are, it's not a massive difference.

Just wanted to say I'm impressed by your proposition, but I'm not in a position to comment on the validity of your idea. I think Hawk is however.