The Fallacy of, “We Won’t Overpay.”

The Fallacy of, “We Won’t Overpay.”

“We’re not going to overpay. For anyone or anything.”

A president of a company recently said this about a key hire he planned to make.

The delta between the candidate’s ask and the offer they were willing to make was somewhere between 30 and 50k per year.

For a very profitable $25 million dollar (annual revenue) company.

That was underperforming.

And it was so wrongheaded.

 

Why he said this, I’m unsure.

Pride, perhaps.

Stinginess, like that of Scrooge McDuck before Huey, Dewey, and Louie changed his heart?

But it betrayed poor thinking.

How, you ask?

First, this guy clearly didn’t know the market rate for the role. I had to help him with it.

Second, even if he knew the market rate, he had no clue how hard it is to find someone really good, let alone serviceable, for the role he was seeking to fill.

Third, never once had we discussed, in dollars and cents, what this hire, if successful, would produce in terms of earnings for the company.

And that last item is what matters.

Note: there’s the “market rate” one might pay for a standard role that can easily be filled. Then there are those that are nigh impossible to find, and they’re in a different category altogether. They produce more than you could pay them unless you’re giving up meaningful equity.

 

When it comes to building a company, founders and execs need to consider that it’s all about how they invest their dollars.

(Even if you want to create a culture or change the world for good. Cash is the fuel of all companies.)

They are going to BUY revenue.

It can be through marketing spend.

It can be through developing products.

It can be through acquiring companies that have customers. (Hello, M&A.)

And it can be through acquiring talent.

The question isn’t, “Are we going to pay to buy revenue?”

It’s, “What’s the right amount to pay to buy those customers or that revenue?”

This can be achieved through some lifetime value calculations. And looking inside to determine, “What’s that revenue, and what are those earnings, worth to me to buy?”

The next question one needs to ask is, “What’s the right means to acquire that revenue?”

I don’t hear this asked enough.

It’s too often assumed that it’s hiring a stud talent.

Because we’re buying revenue.

But the default is, “We need to hire these people to build this team because that’s how it’s done.”

Maybe it’s not. I’ve written about competing and strategy here and here.

The right path could be acquisition. It may be faster to buy customers via M&A and produce a better IRR than growing organically. If I’m a CPA, I’m looking to grow via acquisition because of the multiples in that space. (Check out Buy Then Build if this appeals to you in the slightest.)

The right path could be marketing spend. Paid search, perhaps? Zuckerberg’s platform. Brin’s. Hoffman’s. Affiliate, if you’re D2C ecommerce. Email marketing. Even direct mail (yes, it still exists). Industries are growing up around all these marketing mechanisms.

Maybe the right path is investing in product development because you have the customers but need them to buy more from you. If you own a customer base (in terms of market share), this is the best way to go.

And then there’s buying talent. And all the misunderstandings that go with it.

 

Buying revenue may mean you need to buy the talent. That means paying the right people the right amount of money so they’ll work for you doing something you need them to do, the right way.

If your model of attracting, qualifying, and closing business is either:

• very straightforward and clear, and can be done efficiently and profitably with people, OR
• ambiguous and requires great thinking, creativity, and expertise to discern

… then you’ll likely need to acquire customers by finding the right talent.

Some products and services won’t sell without a human there to have the conversation with the prospect. Some will change over time as consumer behavior changes, and as companies learn how to meet (and even pre-empt) customer questions earlier in the process.

Some sales are complex and murky, and involve building a case with a buyer and several stakeholders over a period of time. This requires people. And a lot of investment in the process, customer understanding, and even marketing. It’s not for everyone, and if you’re going this route, you need to be sure the payoff is worth the investment.

You have to find and attract talent. You have to invest in retaining that talent. And that’s more than comp. It’s a relationship. Culture. Development of the person. It’s hard and ongoing.

And if you don’t want to find, attract, and retain great talent, find a different business model.

 

What did the Oracle of Omaha say?

In Roger Lowenstein’s Buffett: The Making of An American Capitalist, Buffett is noted for being able to correctly price (value) risk, which is why he loves insurance companies as investments.

What most of us are terrible at is pricing the value produced by talent, and thus, what we should pay that talent.

Let’s go back to the discussion with this company president.

Here’s what he needs to consider:

• If this candidate can perform, what do I expect the additional revenue produced to be in 6 months? 12? 24? 36?
• What will that additional revenue produce in terms of earnings?
• What does that do to our ability to invest in further growth?
• How does that impact our multiple for those looking to acquire us?
• What’s the difference in value created?

And he needs to answer those questions for poor performance, average performance, and really good to great performance.

Then he can start to answer, “Here’s what I’m willing to pay.”

Because he’d start to understand the value, or as Buffett would say, what he’d get.

Or he can start over and ask, “Is hiring this person the right way to grow my company?”

 

How are you thinking about buying revenue?

Talent? Marketing? Product growth? Or acquiring books of business?

Answering, “What’s the revenue worth to us?” should be followed by a close examination of, “What’s the best path for us to get there?”

 

Need something to help you think about growing sales? Check out Perry Marshall’s 80/20 Sales and Marketing. It offers insights on pricing, customers, sales models, focus, and more. Read it twice, at least.

 

Want to talk about growth? Email me at adam@thenorthwoodgrp.com