Herman: John L. Herman Jr., Author

It is about the numbers...

After a recent speaking engagement a woman asked me to consult with her about the expansion of her business. We met and she showed me her plan. The company she founded seven years ago has grown steadily and she now has more business farther away from her home office than she wants to handle. She recognizes the need to expand by letting others come under her umbrella and set up offices in regions she can’t handle, yet allow her to get a “cut” of what they make using her business model.

While “Franchising” is a possibility, this owner is exploring “Affiliates” or letting other’s co-op work under her name, but their direction and ownership, in territories too far away for her to handle.

Her business is a service based business where she sends workers into the field for twenty dollars an hour and she pays those workers twelve dollars an hour. She finds the work, screens the customers’ needs, trains the workers, supplies them with Worker’s Compensation, handles billing and collections and issues the workers a weekly check. I love her business and the growth potential is amazing. She is sitting on a high rung on the success ladder right now and should feel proud of her accomplishments. But looking out five more years she knows she needs the expansion to happen for a greater revenue stream…and a greater value as she starts to look at an exit strategy down the road. Those new “Affiliates” will significantly enhance the value of what she has started and allow not only for a wonderful earnings increase over the coming years but also make her company more valuable to sell or merge with someone else because of her expansion.

If she gets the numbers right.

What should a new “Affiliate” pay to join her company? They can’t just set up shop now for nothing…she has seven years of sweat equity in what is becoming a “Brand” that the new affiliate will reap value from starting on the first day they begin operation. So, first we must figure out a fair value for the new start-ups.

The business makes money from the spread of her labor charge rate of about twenty bucks an hour and what she pays her workers, which is about twelve bucks an hour. Insurance, taxes, office overhead, marketing, and managing costs all come out of that seven dollar spread before there are profits. So for the new “Affiliates” what should she get from the seven dollars spread they will make? Her company is the Brand Name being hired, but the affiliate will be responsible for hiring, training, marketing, interviewing new customers, and providing the services in their respective territories. If the Home Office charges too much per hour from the spread the new affiliate may run away in a short period of time to capture all of the “spread” and if not enough of the spread is charged to the affiliate it doesn’t value the Brand Name.

You can’t simply charge a percentage and stop there. The set-up year will be crucial to the new affiliate, but as time goes by and the customer base becomes greater, the affiliate will not need as much attention from the Home Office and therefore should not have to pay as much. If all affiliates pay a flat percentage then good affiliates are punished. One affiliate may make a “spread” of one hundred thousand dollars and pay fifteen thousand dollars on the flat percentage basis while another affiliate grows to three hundred thousand dollars of “spread” and would pay three times as much to the Home Office while getting exactly the same value from the Home Office as the bad affiliate.

The amount charged must be greater in year one, and greater for the first level of success, and then go down as more business is created by the affiliate, encouraging affiliates to grow by allowing them to keep a higher percentage of their increased sales.

Setting up this first affiliate is critical to how others will join the business in coming years. By adding value from the Home Office through training sessions, joint marketing ventures, and shared accounts that might be in the affiliates territory…affiliates will stay with the program and not venture off into their own attempt to compete with this woman’s business.

After meeting with this woman and learning the structure and financial facts of her business I will give her my point of view of how she should proceed, what should be in that affiliate agreement, and how the percentage of revenue agreed to would be of benefit to both the Home Office and the Affiliate. And while creating that document could be “priceless” to this woman, my fee for the advice and the time I will spend helping her get the first one or two affiliates on board will not be outrageous, because my intention is to create yet another satisfied customer for my consulting income…someone who will tell others that what she got for my fee was worth more than what she paid for it.

• Posted: 26 June 2008
• Comments: 1
• Category: Business success

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