Book Summary – The Purpose Is Profit (The Truth about Starting and Building Your Own Business)
McLaughlin went into business with two partners, Gus Poulopoulos, a recent graduate of Fordham University, and Tom Dever, the husband of McLaughlin’s assistant at Trammell Crow. To fund his start-up, McLaughlin relied on bootstrapping with his own money. He didn’t take a salary during his first year of operations. He paid his partners small salaries, and offered them each 5% equity in the new business. Both men signed “noncompete and nondisclosure agreements.”
“You are betting on your ability to turn your idea into a profitable business.”
To set a path for their new venture, McLaughlin and his partners use a strategy called “dynamic planning.” In this process, entrepreneurs first define their goals and then adjust their day-to-day activities and operations to fit changing circumstances and adjust to new information. This provides maximum flexibility for dealing with unknowns and uncertainties as they arise.
“You will set the pace, the tone and the direction. You will make the decisions, and you will be responsible for the outcomes.”
USI’s value proposition – “reducing real estate management and delivery expenses” for its customers – was central to its success. The company, which became an immediate hit with its clients, eventually achieved a 95% contract renewal rate, a compounded annual growth rate of 40% and a 20% net profit margin.
“Determine your distinctive competence, and apply it to a bankable business model that serves a customer need.”
When they opened USI, McLaughlin and his partners focused on entrepreneurial branding, which sums up a company’s vision, values and performance. Besides its name, USI’s branding included a great tagline – “Serving Real Estate, Management and Information Needs” – and a memorable logo with a blue flag bearing its initials and two white stripes.
“Expertise is not as sexy and exciting as passion. But starting a business in which you have distinctive competence will give you a much greater chance of being successful.”
As part of its branding, USI promised stellar customer services. It offered a meaningful guarantee that its products would work as promised, and it made staff members available every day, around the clock, to resolve customers’ concerns.
“If you’re feeling the pull toward the entrepreneurial life, sit down and craft a covenant. Document your goal to start up a business and sign it in front of a trusted friend.”
Sigma Communications Inc.
Nine months after opening USI, McLaughlin started another firm, Sigma Communications Inc., to publish a quarterly magazine, The National Register of Commercial Real Estate. While McLaughlin was passionate about this new venture, he lacked experience and competence in publishing. Sigma was a huge money loser. McLaughlin had to close it after three bad years.
“Develop a business name that introduces your unique advantage – combined with a tagline that clarifies your business purpose – then every time you send a message, you will be making a lasting impression.”
However, USI continued to be a major success. The firm’s sales force was extremely productive. For years, it closed 50% of its sales to prequalified prospective customers. One competitor concluded, “USI seems to win every time.” This was notable praise given that “USI was a multimillion-dollar upstart in the real estate outsourcing space surrounded by multibillion-dollar competitors,” including such major firms as Cushman & Wakefield.
“As you grow your business, invest the time to listen to your customers. Your customers will tell you about their problems and help you figure out the best way to solve them.”
The compensation program USI offered its salespeople distinguished it from its rivals. Sales staff members’ received a percent of the profit on each customer they served, not revenue. This pay structure encouraged each salesperson to think like a profit-and-loss manager. It tied salespeople’s personal income directly to USI’s income. What was good for USI was good for its salespeople, and vice versa.
“Team members are better equipped to focus on bottom-line results when they have a crystal-clear understanding of their goals, responsibilities and reward structure.”
In 2004, the leaders of Johnson Controls Inc. (JCI), a Fortune 100 company and a $25 billion provider of automotive systems and building controls, asked McLaughlin to discuss a merger with USI. Johnson Controls wanted to tap USI’s “secret sauce,” a JCI executive explained, referring to the firm’s “creativity, innovation, skill, speed and tenacity.” JCI wanted exclusive rights to purchase all of USI’s stock. Instead, McLaughlin appointed Barrington Associates to conduct an auction of USI.
“Building an effective sales force is vital to every organization…that requires face-to-face contact with the customer to secure an order.”
After 14 firms submitted bids for USI, JCI ended up buying the company for $80 million. At the time of the sale, USI was an Inc. 500 firm. McLaughlin became president and CEO of the joint Johnson Controls’ real estate and facilities management operation in North and South America.
“If you fill your roster with second-rate talent…expect second-rate results.”
McLaughlin had been in complete control at USI. Now things were different. He quickly became frustrated about having to report to his JCI boss, who followed a hierarchical governance structure in marked contrast to McLaughlin’s “entrepreneurial all-hands-on-deck mentality.”
“Too many entrepreneurs try to interact with customers through arm’s-length relationships. This is almost always a mistake.”
McLaughlin completed his 30-month contract and went back out on his own. He started another new business, Blue Sunsets LLC, which creates real estate projects among its other activities.
Following the “Startup Roadmap”
This roadmap for start-ups sets out the steps you can take to succeed as an entrepreneur. But, before you begin, deeply consider the crucial decision about whether to launch a new business in the first place. If you’re ready, follow the “21 steps to profitability.” Each step begins by asking yourself a major, strategic question:
- “Business idea” – Can you briefly describe your business? You should be able to explain your business in a few sentences. If you can’t, your idea may be too complex. That’s not what your prospective clients, colleagues or investors want.
- “Distinctive competence” – What distinctive know-how, abilities or experience do you offer? If you have a “competency void,” decide how you will compensate for it. Never start a business in a field you know nothing about or in which you’re not an expert. Success is elusive even when you know what you’re doing.
- “Product description” – Can you briefly explain your product and the problem it addresses, and identify your potential customers? Know your product’s primary features and benefits, what differentiates it from its rivals, and how it will evolve over time.
- “Market opportunity” – Do you understand your new industry and how it will develop in the future? Determine whether your product might transform its industry and why the industry is growing or not.
- “Target customer” – Who will purchase your product and for what reasons? Learn your targeted customers’ demographics, available budgets, motivations and special needs or wants.
- “Value proposition” – “What is your product’s unique benefit?” In what way does it fulfill a crucial consumer need? Most popular offerings solve particular customer problems. Your value proposition requires an explicit enumeration of the benefits your product supplies to consumers. Evaluate your value proposition based on how well it supports your business rationale.
- “Competitive advantage” – How is your business different from its rivals? Consider whether you offer advantages in technology, first-mover innovation, productivity, revenue-enhancement or cost savings.
- “Preorders” – Are you able to land advance orders from your prospective clients? Few issues matter more than securing formal sales commitments prior to launch. “Securing preorders is a vital psychological and economic hurdle that every entrepreneur needs to clear.” To develop preorders, create a list of probable purchasers, contact them and ask for their business. Leverage your network to secure introductions to likely customers.
- “Business model” – “How will you make money?” Many entrepreneurs so love their new businesses and their offerings that they fail to develop realistic business frameworks. Without a sound, sensible strategy, even the greatest new product or service may fail.
- “Revenue generation” – What will you do that earns money? Consider various possible types of income, including commissions, “product sales, service fees, advertising sales, data access fees” and “license fees.” Determine if your firm will serve as an intermediary that earns a fee at point-of-sale by uniting sellers and buyers. Will you create online content and a paying online community? Will you collect fees for providing specialized data? Will your firm have multiple revenue streams? As you generate revenue, create a “financial war chest for strategic advantage.”
- “Product pricing” – How much will your product cost your customers? Plan your pricing model, how you’ll cover product costs, and whether you’ll use competitive or premium pricing.
- “Production and distribution” – How will you develop, fabricate and distribute your merchandise? Manufacturers must consider their “raw materials, labor, machinery, inventory and distribution.” Companies that provide services must consider “staffing, travel costs, response times and performance reporting.”
- “Creative use of technology”– Can you use technology to become more efficient, better serve clients and create fresh income sources? Wisely using high tech helps you meet your customers’ needs. Use technology to add a profit stream based on “proprietary applications.” These help customers improve their operations, “manage workflows, eliminate process steps and gain access to critical information.” Determine what information your customers need to make better decisions and what tools you can offer to help them manage their work more efficiently.
- “Marketing” – What will you do to let your customers know about your offerings and to spur their purchases? Plan for cost-effective marketing that delivers the sales you need. Marketing includes any promotional goods, plus your “website, online advertising, social media, mobile, direct email, promotions…events, public relations” and “CRM systems.”
- “Sales” – “How will you secure hard orders from your target customers?” You can outsource sales or set up a direct-sales force, a call center or an e-commerce platform.
- “Resource requirements” – How will you design, manufacture, deliver and sell your goods? Quantify the costs that personnel, raw goods, machinery, outside services and financing will incur. Most operations require the right people as well as enough money to create a customer base, hire the right staff, develop their offerings, and manage their workforce.
- “Profit validation”– “Can you forecast a profit?” This requires expert staff or outside professionals to help you with budgeting and fiscal reporting.
- “Financial projections” –What will it take to make a profit? Figure out your monthly sales estimates, targets and pricing.
- “Cash flow” – “Will you have enough cash?” Outside investors will want to know about your operating cash flow before they invest.
- “Management team” – “Do you have a good plan for running your organization?” You know your management capabilities. Supplement your expertise with professionals who complement your skills. Use a “profit-based reward structure” to determine your managers’ compensation. This model rewards them for meeting your fiscal objectives.
- “Future growth” – “How will your company grow and make more money? Growth areas include adding customers, new products, and fresh geographic markets nationally and internationally. Seek corporate expansion in strategic partnerships, mergers and acquisitions. As you expand, “create profit centers” that help your business grow.
“Your business is your baby – it demands devoted care and regular feeding.”
Ethics and Accountability
No matter what your new business entails or what products or services you offer, your corporate culture must exemplify integrity, trust and accountability.
Meet every contractual promise. Pay your employees and suppliers fully and on time. When you make a mistake, admit it quickly and correct your error. Make sure that your customers, suppliers and investors can count on you and trust you. Ethical behaviour will be integral to your success.