Selling your route

[Steve Brooks]

Hi Geoff,

Let's find a way to put some numbers to this acquisition -

The value of a customer to you is the product of the average tuning fee 
to you times the number of expected tunings (services) over the average 
purchasing lifetime of that customer.

If the seller has been in business for 25 years and has kept good 
records, estimating this should be easy. If you discover that the 
average customer stays with you five years, and the average revenue per 
year per customer is $250 then the value of each customer you acquire is 
about $1250. We assume that your performance will equal or exceed that 
of the seller.

As a new businessman in the area, acquiring the endorsed customer list 
of a popular tech who is retiring definitely has a significant, positive 
value. The cost of acquiring a new customer has been affirmed many times 
to be about five times the cost of selling services to a current 
customer. Why? Customer loyalty. If a customer has had past good 
experiences with a company, they will stay rather than shop around. 
There is risk in dealing with anyone new. In addition to being risk 
averse, people are lazy and will make the least effort to achieve 
anything, given a choice.

So, the second best thing is to have the recommendation of someone 
knowledgeable whom they can trust. If your seller has loyal customers - 
they will be somewhere between two and five times more likely to try you 
than another tuner. Alone, you are an unknown in town and have no 
advantage. It will cost you time and money to acquire a clientele and 
will take you some years to accumulate a full calendar. Any service 
provider should be willing to pay to shorten the time it takes to get 
established.

Having estimated the lifetime value of a customer, you can focus on the 
cost of acquiring customers. Let's pretend that the most effective 
advertising you have done is a direct mail offering to a list of piano 
owners in the area. Let's also say you mailed 2500 pieces at $1.50 each 
(all tolled) and it got you 10 new customers. Then each new customer 
cost you (2500 x $1.50)/10 = $375. So, you would lose money on them the 
first year, break even the second and be profitable for the remaining 
average 3.5 years. You could also judge that you would be willing to pay 
up to $375 per customer to anyone who can get you an opportunity to 
tune. (We ignore cash flow, new referrals etc. to simplify the 
discussion. You can always add qualifiers.)

You will want to make a deal that motivates your seller to convert as 
many of his customers to yours as possible. I would suggest paying him a 
commission on each new tuning he brings you. Knowing the lifetime value 
of a customer, you should be able to estimate what commission you would 
pay to anyone for a new customer. Think of it as paying for the 
opportunity to audition as a tuner. A one time price as you tune for 
each new prospect relieves both of you from dealing with the risks of a 
longer term, conditional payout.

By taking over an existing clientele you spend more time tuning and less 
time selling. There are many ways to insure his customers try you first. 
They won't shop if they like you.

To be continued (if anyone is interested)  ...

Steve Brooks

>
>
>     Hi All!
>
>     I have been working out the kinks in a contract with a retiring
>     technician in a new area, where I would move, relying heavily on
>     his client list, active business telephone number, and personal
>     endorsment for my future business.
>
>     I have sought the advice of several RPTs, and heard figures from
>     $3,000 - $40,000 for such a business transaction. Any real world
>     figures that might lend some aid in evaluating the monetary value
>     of a 25 year tuner/technician business would be helpful
>
>     We plan to use a percentage system for payment. One model is the
>     "blue skies" fee in which the percentage is paid on gross annual
>     income, arguing that business is brought from his reputation, and
>     that no reliable method can be employed for seperating new
>     business generated by me and my advertising, from old business
>     coming from his client base and their referrals.
>     The other model is a referral based percentage in which a
>     percentage is paid on annual income resulting only from clients on
>     the client list and direct refferals.
>
>     It is the feeling of some technicians (and some of my family as
>     well) that it isn't possible to sell a piano business assuming no
>     transfer of physical property because it is a sole-proprietorship,
>     and even if an old client trusted the seller, they will check the
>     buyer out against the competition just as they would without the
>     sellers endorsement. So one would do just as well to move into the
>     area, advertise agressively, and pick up those pianos without any
>     payment to the retiring technician. This is not my style but it
>     does raise some issues.
>
>     thanks so much for your thoughts on the matter!
>
>
>
>

-- 
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation." - Alan Greenspan, 1966