The game featured future truck drivers against future air conditioning techs. No, not actually. Well maybe. None of the Redskins starters played. Third string rookie, Kirk Cousins, quarterbacked the Skins to an easy victory. We can draw one conclusion from the game. The Skins future truck drivers suck less than the Tampa Bay future truck drivers.
In my last post, I wrote about how partnering with large companies can lead to disaster. When your franchisor grizzly bear wants your lunch, you'll have to give it to him. Paul and I faced this problem a few years back. Those of you, who are clients, know that our firm provides accounting software services. If you need accounting software to run your business, we're your dudes for that. Since the early nineties, we have worked with a software package named, Peachtree Accounting Software. Peachtree has been owned by a number of different companies over the years, but they have been owned by Sage Software, Inc., a U.K. company, for more than ten years. Sage Software owns a number of accounting software packages from entry level bookkeeping systems to very sophisticated enterprise level packages capable of powering the accounting behind publicly held companies.
Here's your thirty second lesson in the accounting software business. There are two revenue streams: software sales and ongoing support. When we first entered the business back in the early nineties, Peachtree wanted the money from the software sales, but they left the ongoing support revenue stream to independent consultants, like us. They certified us and wanted us to sell software for them, but they saw ongoing customer support as a cost instead of a revenue stream.
We were happy to provide the support. We trained people to use the software, set up the software, and provided ongoing telephone and on-site support. This was a gravy business for us. Peachtree sold someone the software and then turned the customer over to us. We didn't even need a stool to pick this low hanging fruit. In the nineties, accounting software services accounted for about forty percent of our revenue. That is really an understatement in that we also built a nice tax and audit practice on the referrals that came from accounting software services.
We were living the high life until Sage Software bought Peachtree. Some genius at Sage, and I mean that sincerely, realized that ongoing customer support could be a valuable revenue stream if managed properly, and not just an unwanted cost. If you envision the revenue from the accounting software business divided into two pie slices, Sage was coming to eat our slice.
When someone bought Peachtree accounting software, we no longer got a referral from Peachtree. We had to hunt down new Peachtree customers instead of having them warmly introduced to us. Getting a new customer went from being free to costing real money, and since Sage was competing with us for the support revenue stream, the probable lifetime value of each new customer was reduced as well.
Sage still pretended, somewhat convincingly at times, to want a relationship with us. In return we pretended to want a relationship with them. Sage now wanted us to find new customers, bring them to Sage mother ship, make the initial sale, and then give Sage the revenue stream from the ongoing support. Then go find another new customer. Shampoo, rinse, repeat.
This wasn't such a good deal for us. Before Sage, the lifetime value of a Peachtree customer could be $10K or more. After Sage bought Peachtree, we were supposed to be delighted with a small markup on the software sale, maybe $2K on the very high end. In addition, they expected us to spend significantly more on marketing to find new customers for them.
Grab an eighth grade math student, not in a Jerry Sandusky way, and do a little math. We were supposed to spend a lot more to find customers, who were worth a lot less in lifetime revenue. No one from Sage would ever admit to that strategy, and I'm not certain any of the managers, with whom we dealt, would be capable of the above analysis. Apparently you can get a job at Sage with less than an eighth grade math education.
Obviously, the Sage business model wasn't going to work for us. The bear was eating our sammich, and there wasn't much we could do about it. So we changed. We put a lot less emphasis on accounting software and more on growing our tax and accounting business. Tax and accounting clients are an annuity revenue stream. The lifetime value of these clients can run beyond $20K each and they are much easier and less expensive to find than new accounting software clients. We are back living the high life again. We pitched a new campsite and are looking out for bears.
How do you keep the bear from eating your sammich? If you are a franchisee, you are in a tough position. You may rely almost entirely on your franchisor to drive business to you. There are two preventative measures you can use to keep the bear from your campsite.
First, do some initial investigation before you choose a franchise. Does the franchisor own its own stores? Do they have a history of buying out franchisees? Franchisee buy-outs aren't necessarily bad if they are done fairly, but keep in mind the franchisee rarely has much leverage in the negotiations. If the bear wants your cheese sammich, the negotiations are brief and usually include running the hell away. A history of buy-outs or company-owned stores definitely tells you the franchisor covets your sammich.
Second, when you are evaluating the return on your investment in potential franchise opportunities, take into account that you may only get to eat your sammich for a limited period of time. If the return isn't compelling over a short time horizon, don't pitch your tent there. Move on to another opportunity.
If you are a value added reseller (VAR) for a large vendor, you are in better position than a franchisee. You have alternatives. You can represent another vendor either in place of or in addition to the original. This is happening in the accounting software business. Many of Sage's major VAR's are leaving the Sage mother ship in search of more profitable opportunities. Barely a week passes without another major Sage VAR signing up with someone else.
In our accounting software business, we rejected the VAR model entirely. We are focusing on client industries. We are experts in government contract accounting. So instead of picking a software package and trying to find customers for it, we are looking for government contractor clients and then matching them with the right software package. We are brand agnostic, maybe even atheistic. We know we won't make much money selling the software, but we know that services are the really profitable end of the business anyway. We're making a sammich the bear won't eat. We hope.
When the bear comes to eat your sammich, the only real solution is finding a new campsite and making a new sammich. You can't beat the bear, but you can avoid his bite.
Don't forget the “Free Frank Stitely from Censorship Rally” at Lost Rhino Brewery (www.lostrhino.com) at 5:30PM on Wednesday, September 5th . The rally is generously sponsored by the Richard Nixon / J. Edgar Hoover Foundation for the Prevention of Free Speech. My wife, Laura, is their executive director. I should have asked her position on the first amendment before we got married. Her position is that free speech is fine as long as she is the only one allowed to talk.
Thanks for reading. Please visit our main S&K web site at www.skcpas.comfor real tax and accounting advice. See you soon at the Lost Rhino.
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