Tips for Navigating the Exit of Long-time Entrepreneurs

In recent months, I have had the pleasure of working with two lifelong entrepreneurs on the sales of their businesses.  Each of the entrepreneurs had decades of deep business experience, but that experience did not include buying or selling other companies.  Counseling them through the sale process, it was evident to me that we, as deal professionals (including attorneys as well as investment bankers, accountants, etc.), sometimes forget that M&A is not something that many business owners experience on a routine basis.  That being the case, I offer these five basic tips for entrepreneurs preparing to start down this path:

1. Get your legal and financial advisors involved in your potential transaction as soon as you either decide you want to sell or receive an offer or inquiry from a party interested in purchasing your business. Many key deal points are raised by buyers early on, and while you may not be technically committing to completing a transaction on those terms, it can be difficult, time-consuming and expensive to try to change those terms later.

2. If you have not bought or sold a business recently, ask your attorneys, accountants, or other advisors for a roadmap of the process. It will help you feel more comfortable if you have a better idea of what issues and questions to anticipate from the buyer and have realistic expectations regarding timing and transaction costs.

3. You will feel frustrated, angry, impatient, thrilled, and excited at various stages in the process.  Decide whether or not getting your deal done is worth enduring those stages and, if so, know and accept ahead of time that these things are going to happen.  Keep in mind that the deal process is a means to an end that is profitable for you.

4. Share your concerns and questions about the transaction with your attorneys.  Remember that they are on your team and they can only help address issues that they are aware of.  An experienced M&A attorney I know routinely asks sellers before a deal is signed or closed, “Is there anything that keeps you awake at night?”  That is a good way to gauge your comfort level with the transaction and whether or not you have raised every issue you should raise with your advisors.

5. Once you’re in serious discussions with a potential buyer, do not try to hide your business’s weak points.  Buyers understand that every business has “warts” and the earlier in the negotiations that these are discussed and understood by both parties, the smoother the process is likely to go, and the more trust that will develop between buyer and seller.

A Post by Alyssa Hirschfeld, Guest Blogger

Let’s Call it “Days of Our Entrepreneurial Lives”

Now that the election is over and watching television is actually bearable again, you might want to check out Bravo’s “Start-Ups: Silicon Valley.”  One fun fact about this show: the executive producer is Randi Zuckerberg, sister of some other guy you may have heard of who has built a mildly successful tech company over the past few years.  I must admit, it is pretty nice to be able to watch Bravo and call it “research.”

I watched the first episode of the show, which premiered on Monday, November 5, and so far it looks to me to be about 75% personal drama (dating (mis)adventures, friendships gone bad, etc.) and 25% entrepreneurship (fundraising, investor pitches, coding).  While the people featured on the show are universally young, good-looking, and tech-focused, the issues they face in their business are not unique to that subset of entrepreneurs.  We are only one episode in and already the show has touched on themes we have previously explored in this blog or have discussed with many of our clients, in many industries, and many locations, including:

• Entrepreneurs are often the CEO, CFO, maid, and plumber all rolled into one in the early stages of a business.  Entrepreneurs who are passionate about their businesses are usually willing to get their hands dirty to get the job done and are not above doing menial tasks that will save the company precious cash.

• Connections are invaluable, irreplaceable, and can lead to some key ingredients to a company’s long-term success – money, customers and talent.  It’s also a good reminder for all of us that businesses are fundamentally run by people who sometimes hold grudges, and that we should remember to treat anyone we meet like s/he might be the CEO of our next customer. It’s just good business.

• Not everything about Silicon Valley or entrepreneurship in general is glamorous or exciting. As one of the personalities on the show commented, watching people write software code for hours on end in a bare apartment with a mattress on the floor probably would not be very entertaining. Nonetheless, for a start-up trying to get off the ground, those behind-the-scenes hours certainly consume more time and effort than a television show like this would ever display.

• Make sure you spray tan before attending a toga party. (Okay, we might not have discussed that one before.)

Let’s keep our eyes open in case our own Frank Vargas makes a cameo while he’s in the neighborhood.  You never know!

A Post by Alyssa Hirschfeld, Guest Blogger

An Upate on Lot18: Too Much of a Good Thing?

Some of you may have read my post about Lot18 back in November, wherein I extolled its virtues and hypothesized as to why the New York startup was so phenomenally successful at raising money from venture capitalists.  Since that post, tech news outlets have reported two rounds of layoffs at the company and the closing of its short-lived UK operations.  Lot18 also stopped offering food and travel products for sale, which it had recently been doing in addition to its primary business of selling wine.

When I was reading about the company to write my previous post, Lot18 reportedly had about 500,000 members; now there are almost 1,000,000, according to online reports!  Things seemed to be going so well!  As it turns out, the wealth of cash the company was able to raise might have also made it easier to lose sight of its core business.  As founder Philip James told Betabeat, “One of the perils of having a lot of money is, it’s easy to launch a lot of things.”  We can all understand how a company flush with cash might be more apt to take risks on premature expansion than one that needs to watch every dollar just to keep the lights on.  

While the decision to wind down the company’s short-lived food and travel businesses is unfortunate for the employees who lost their jobs, it should help Lot18 refocus on building its wine business for long-term sustainability.  Luckily for Lot18, the nature of its business is such that its investment in those complementary businesses probably was “just” those people and maybe a few other ancillary services, marketing expenses, etc.  One can imagine many other types of businesses where expansion into ancillary businesses would require huge capital outlays at the beginning for things like equipment and regulatory approvals, which are not easily recouped.  This reminds us of the important life lessons we can take from Lot18 so far:

1. Drink good wine.
2. Do not expand so quickly into new businesses that doing so jeopardizes the long-term success of your core business.

A Post by Alyssa Hirschfeld, Guest Blogger

Advisory Boards: An Underutilized Entrepreneurial Weapon

Not to generalize (okay maybe just a little bit), but the entrepreneurs I know can be a pretty headstrong and opinionated bunch. Maybe this is part of the reason I don’t know many who have engaged an advisory board to help them develop and grow their businesses. While I’m not an entrepreneur myself (still waiting for that million dollar idea), advisory boards can add a lot of potential value for a new company.

An advisory board is similar in some ways to a corporate board of directors, but without the legal risks; there is also often less formality around them, too. The role of a corporate board of directors is to act as a fiduciary for the corporation’s shareholders and to oversee the executive officers of the corporation. An advisory board typically does not hold any official corporate power (or liability) and literally functions only in an advisory capacity. To be clear, an advisory board does not replace a board of directors, it’s just another tool in an entrepreneur’s arsenal of expertise.

Entrepreneurs, like everyone else, can use an occasional reminder of their own strengths and weaknesses. None of us are experts in everything. I have often observed that some of the most successful people are those who are not afraid to admit this and to ask for help in areas in which they may not excel.

You should consider an advisory board as an opportunity to augment the skills, networks, and relationships that you already have and seek advisory board members who have specific skills (e.g., finance, marketing, operations, or human resources) that are otherwise lacking in your business. Also, consider the professional connections that advisory board members may be able to bring to your businesses.

Creating a formal advisory board, rather than a loose set of advisors, can have other benefits. Being part of an advisory board tends to help an individual feel more invested in the success of the business. This could lead to additional sources of financing, contacts for potential customers or suppliers, or simply the benefit of lessons learned by another business owner.

It may be easier to attract quality people to serve on your advisory board than on a board of directors, because they do not have the same fiduciary obligations (and liability exposure) as members of a board of directors. Using an advisory board, you can tap into complementary skills and experience of members, without subjecting the individuals to the same level of risk or the same expected time commitment. Also, never underestimate the appeal to a person’s ego when they are asked to serve as an “expert.”

You’ll need to decide whether and what to compensate members of your advisory board. Many entrepreneurs do not provide more than a lively conversation with some adult beverages and food. Others do provide some sort of compensation, although usually stock options (rather than cash) to align interests in creating value. If a potential advisory board member is more concerned about the compensatory arrangement than how he or she can add value, you may be talking with the wrong person.

There is no one-size-fits-all recipe for an ideal advisory board. Still, an advisory board that has clear expectations as to its role and operating procedures is likely to provide more value to the business owner. When forming an advisory board, an entrepreneur should consider other issues such as: (1) whether the advisory board should have regularly scheduled meetings, or just be convened as particular questions arise; (2) what would be a reasonable time commitment to expect from advisory board members; and (3) whether there are current specific challenges in the business that the advisory board is expected to help solve. Communicating these expectations to your prospective advisory board members will help them take their role seriously and help you get the most value out of their generous support.

A Post by Alyssa Hirschfeld, Guest Blogger

Taking the Grape for a Test Drive

For anyone who has read some of my previous posts, it won’t come as a surprise that I have more bottles of wine at home than I can comfortably store or, frankly, than I can even really drink and enjoy during their optimal drinking windows. Since I am generally a pretty practical shopper, I’ve been trying to figure out what in the world possesses me to buy so much wine.

As I thought about it, I realized there are a couple of features unique to wine that I’m sure have influenced my buying habits more than I realized at the time I was making these purchases.

1. Vintage Scarcity

Unlike most other consumer products (cars were the obvious exception I thought of), most wine is labeled with a vintage year, which denotes the year in which the grapes used to make the wine were grown and harvested. This means that, now in 2012, we can never reproduce a 2001 Napa Valley cabernet sauvignon. All of the 2001 Napa Valley cabernets that will ever exist have already been made and bottled. Knowing that there is a finite amount of that particular wine out there, even if the amount is huge, still makes it seem a little more precious. Even when I try to talk myself out of it, I tend to feel like if I really like a particular vintage of a particular wine, I need to make sure I stock up before it’s gone because the producer can’t just turn around and make more of it.

2. Wine Tastings

Like many products, one of the most effective ways to sell wine is to allow people to try it out (taste it) before buying it. Wine lends itself better than many products to this type of sales strategy, but the wine industry also does it better than most industries. What sets wine tastings apart from other “try before you buy” marketing is that the industry has managed to turn wine tastings into activities in and of themselves, rather than just a means to the end of buying wines a person likes. I don’t test drive cars for fun when I am not actually in the market to purchase one, but I attend wine tasting regularly, even when I need more wine like I need a hole in my head. Why? Because wine tastings are fun! I see them at area wine markets and plan to meet my friends there as a social activity. Inevitably, there are one or two wines I really enjoy that I end up bringing home with me. Nothing helps encourage purchases like (a) absolute certainty that I’m going to enjoy it because I’ve already tried it, and (b) enjoying the company of my friends while shopping.

How can these methods translate to other industries?

·       For products or services that are not completely commoditized, conveying a message of scarcity for a particular reason that applies to your business (but only if the message is a credible one)

·       More demonstration or sampling of products to a wider audience and/or an ability for the ultimate consumer to try things without cost

·       Events including those demonstrations or samplings that people actually want to attend, whether or not they think they are planning to purchase your product

·       Substantial personal interaction between the seller and the potential buyer in discussing the product

No comment on the impact of wine consumption on wine buying.

A Post by Alyssa Hirschfeld, Guest Blogger

Thinking About Selling in 2012? Be Prepared to Show Buyer Why your Business is Worth What You’re Asking

For many of our entrepreneurial clients, the sale of the business he or she founded is the most obvious exit strategy when the entrepreneur no longer wants or is able to continue actively running the business and the entrepreneur’s children have not inherited his or her “entrepreneurial spirit.”

While a few of those entrepreneurs have been through a sale transaction before with other businesses they owned or when employed in other capacities before becoming an entrepreneur, for most of them a sale of the business he or she founded is a once-in-a-lifetime event. Having never participated in an M&A transaction before, it is hard to know what to expect or what is “normal.” 

One way we help entrepreneurs evaluate what is “normal” in their negotiations is by reviewing the results of various published studies, including the Mergers & Acquisitions Committee of the American Bar Association Business Law Section’s Private Target Mergers & Acquisitions Deal Points Study. The most recent iteration of this study was released in December 2011 and analyzes the frequency of certain material legal terms in 100 acquisitions of private companies completed in 2010. Of the transactions reviewed by this committee in 2011, almost half involved entrepreneurial sellers, so we know these results are relevant to what our entrepreneurial clients can expect in sales of their businesses.

I thought it would be interesting to compare the results of the 2011 study with those of the 2007 study, which analyzed acquisitions of private companies completed in 2006, well before most of us knew that we would soon be facing an economic crisis. 

When comparing the results, I expected that certain deal terms reflecting heightened buyer apprehension would be more common in the 2011 study than the 2007 study. Specifically, I expected that buyers would be demanding more post-closing remedies against sellers in the event of breaches of purchase agreements by the sellers. Certainly, it has felt to me that buyers have been more conservative than they used to be and less willing to take the risks that are inherent in any acquisition. What I found was that some of the most highly-negotiated indemnification provisions were almost the same in the two studies, but that there was a substantial increase in the use of certain provisions that arguably bear a more direct relationship to the bottom line.

Buyers in the 2011 study certainly seemed to be more concerned about overpaying for the target company than they were in the 2007 study. Post-closing working capital adjustments (usually requiring a target company to have some minimum amount of working capital delivered to the buyer at closing) were included in 68% of the transactions in the 2007 study and 82% of the transactions in the 2011 study. Additionally, the use of earnouts (additional purchase price to be paid to the seller upon the business achieving certain performance goals after the closing) to bridge a valuation gap between what buyers were willing to pay and sellers were willing to accept for their businesses increased from 19% of transactions in the 2007 study to 38% of transactions in the 2011 study.

By contrast, the primary contractual provisions that provide remedies to the buyer after closing were almost unchanged between the 2007 study and the 2011 study. There was no significant change in the period of time after closing during which a buyer was entitled to assert indemnification claims against the seller for breaches of the seller’s representations and warranties. In both the 2007 and 2011 studies, the most common survival period was 18 months, followed by 12 months and then 24 months (each appearing with similar frequency in both studies).   

Similarly, there was no significant change in (a) the amount of the purchase price held in escrow or held back by the buyer for some period after closing, (b) the percentage of transactions for which the escrow or holdback was the buyer’s exclusive remedy after closing, or (c) the cap amount for the seller’s general indemnification obligations as a percentage of transaction value. In both studies, more than half of the transactions had an escrow or holdback amount in the range of 7-15% of the transaction value and just over half of the transactions had the escrow or holdback as the buyer’s exclusive remedy. In the 2011 study there were actually a higher percentage of transactions in the lowest category of cap amounts, but overall the cap values were similarly distributed in both studies.

These few data points are, of course, just a small sample of the results of these studies, but they serve as a good reminder of something attorneys are prone to forget: the dollars and cents of a transaction matter most. Legal points and risk management are important, certainly, but favorable indemnification terms alone don’t make a financially unsound transaction suddenly attractive. My advice to entrepreneurs looking to sell their businesses is this: be prepared to show your buyer why your business is worth the price you are asking—whether it’s based on current financials or future potential. If you’ve done that, negotiating the legal and risk allocation points is likely to lead to similar results in any economic environment.

A Post by Alyssa Hirschfeld, Guest Blogger

Why VCs Are Attracted To Online Wine Retailer Lot18

I was happy to receive an email this week from Lot18, my favorite online wine marketplace, announcing that the company had raised an additional $30 million in Series C venture capital financing led by Accel Partners.

For those who aren’t familiar with it, Lot18 runs “flash” short-term (sometimes lasting only a couple of hours) sales on premium wine and wine-related products, and recently added travel, food and wine experiences, and gourmet foods to its offerings. Since I’m a big fan of the site from the consumer perspective, the news of investors wanting to put their money at risk to grow this business was good news to me. Lot18.com has only been around since last November and has reportedly raised a total of nearly $50 million in investments, has 500,000 members, and did $1 million of sales in one month earlier this year.

With new flash sale sites popping up all over the place in a number of categories (clothing, accessories, food, wine, travel), this category already seems saturated with a lot of sites that will eventually be faced with an inventory scarcity or less price advantages as the economy recovers and wineries (and other sellers of products and services) no longer need to liquidate inventory at below-retail prices.

With this in mind, I looked at this most recent substantial investment as an opportunity for me to research the short history of Lot18 to examine some of the factors that might make this an attractive investment for the VCs. When I really started looking, I realized this company is getting a lot of attention from bloggers, as well as VCs, and I think these are some of the reasons why:

(1) Founders with a Track Record.

Co-founder of Lot18, Philip James, was previously the founding CEO of snooth.com, a wine-focused web site with over 805,000 members that offers extensive wine reviews, online price comparisons between wine merchants, and many other wine-related products and services. Kevin Fortuna, Lot18’s other founder, was formerly the CEO of Quigo, an advertising technology company that was sold to AOL Time Warner for $360 million in 2007. Combined, those two look to possess a very relevant set of skills and experience for this type of venture, and they are a good reminder that, when looking for investment in a yet-unproven company, proven people are very compelling. 

(2) Gradual Loosening of Regulations in a High Value Industry

Gomberg, Fredrikson & Associates, a wine industry consulting firm, reported earlier this year that the United States has just eclipsed France as the largest wine-consuming nation, and that the retail value of United States wine sales in 2010 topped $30 billion. This was a luxury industry that actually grew in the United States even during a recession, which, for a non-investing expert like me, seems like as good a place to put money to work as any.  Further brightening the future for online wine sales, states are continuing to loosen their regulations regarding interstate shipments of wine. Most recently, Maryland passed legislation allowing residents to have wine shipped directly from wineries to their homes. As these shipping regulations continue to change, investors can see an obvious path towards future growth without having to be too imaginative. As we often tell our clients who are looking for outside investment, a simpler story about the path to success is usually a better story.

(3) Differentiation from Competitors

Despite flash sales being a fairly young category of sales vehicle, there already seems to be more flash sale sites than even I can keep track of (and let’s face it, I love wine). In the wine category alone, Wines ‘Til Sold Out, wineaccess, wine.woot, and Gilt Taste are obvious competitors. I admittedly know more about Lot18 than I do about any of these competitors, but from a purely consumer perspective, I prefer Lot18 because of the excellent customer service I have received there and because it offers what appears to be a small and carefully chosen selection. Thus, the appeal of Lot18 specifically lies well beyond just discounts on the wine, which means I am likely to continue shopping there even if the discounts dwindle as the economy recovers in future years. When there are reasons a company should succeed in a bad economy as well as a good economy, any time seems like the right time to invest.

A Post by Alyssa Hirschfeld, Guest Blogger

Curbside Dining Thrives as Economy Sags

Like thousands of other downtown Minneapolis workers, I continue to be surprised and delighted by the proliferation and popularity of food trucks on our downtown streets during the busy lunch hour. Besides the tasty food many of them are serving, I love how the food trucks bring office workers out of our skyways and back down to the street for at least a few months out of the year. Some, like the Smack Shack, have even garnered national acclaim for their dishes.

This trend has recently taken off in Minneapolis, just as it has in many other parts of the country where food trucks have not been part of the traditional cityscape. In April of this year, the Minneapolis City Council voted to increase the number of food trucks allowed in the city (after issuing just 10 licenses in 2010), as well as to allow food trucks to operate in neighborhoods of the city beyond downtown. Restaurant industry associations have taken note. The National Restaurant Association cited an increase in mobile food trucks as one of its highlighted findings in a recent study of industry trends. A couple of months ago, Entrepreneur Magazine also published an article describing to entrepreneurs how they might go about starting a food truck.

I have a personal interest in the hospitality industry, so I read blogs and other local and national media about restaurants and hotels. With food trucks being such a dominant national trend over the past couple of years, I have read many articles that, not surprisingly, assert a correlation between our economic downturn and the marked increase in food trucks. The vast majority of the articles I’ve read focus on this correlation from the consumer’s side—essentially, that food trucks have grown and prospered during this time of economic hardship because consumers have less disposable income and/or are more reluctant to spend money on luxuries like dining out.

While I’m certain that consumers’ financial stability (or lack thereof) has played a role, in my mind it is only part of the story. To me, the lack of access to lending and investment capital is just as important a factor. These are two sides of the same coin. The food truck is where a chef’s inability to raise the several hundred thousand dollars it costs to launch a new restaurant meets diners who are unwilling to spend the $20 they used to spend on lunch and want to spend $10 instead for comparable food. Diners needed ways to satisfy their desires for restaurant-quality food, and chefs and restaurateurs needed a way to start their restaurant businesses with less capital required up front.

If there is such a thing as a silver lining in the context of the global recession that has taken a serious toll on our wealth and psyche, it’s innovation inspired by changing conditions. Entrepreneurs are forced to adapt, just as consumers are. If there aren’t investors or banks willing to lend as much capital as is necessary for an aspiring restaurant owner to lease a space, furnish and decorate it, to hire several cooks and front of the house staff, and to develop a complete menu, maybe the entrepreneur can scrape together just enough to buy or rent a food truck, hire one or two additional staff, and make a limited menu of high-quality specialties. When would-be entrepreneurs in an industry are feeling more risk averse than they might in times of economic growth, food trucks are a great example of how they figure out a way to dip their toes in the water without diving into the deep end head first. The result is a greater diversity of products and services that satisfies more diverse consumer needs.

A Post by Alyssa Hirschfeld, Guest Blogger

Start-Up Wineries Prove There’s No Such Thing as a Typical Entrepreneur

The conventional saying goes something like, “If you want to make a million dollars making wine, start with ten million dollars.” Barriers to entry, including huge up-front capital investments and specialized knowledge required, are high. And yet, according to the Wine Institute, between 2000 and 2010, the number of bonded wineries licensed by the Alcohol and Tobacco Tax and Trade Bureau in the United States more than doubled, from 2,904, to 7,626. Certainly, some of these new wineries are the result of new brand concepts from large corporations operating in the industry, such as E&J Gallo and Constellation Brands, but plenty more are like HammerSky Vineyards in Paso Robles, California.

Lately, it seems like every time I learn of a new winery, it’s marketed as the long-held dream of an ex-Wall Street investment banker or lawyer or physician come to fruition. Not that I blame them. Seeing pictures of Napa or Sonoma Valley vineyards, with their rows of green vines surrounded by mountains, is enough to make anyone want to dump the briefcase in favor of grapes and oak barrels. There is even a new annual Wine Entrepreneur Conference held in Washington, DC, that began in 2010, which suggests to me that the number of entrepreneurs in this industry continues to grow. What is it about the wine industry that appeals so much to people’s entrepreneurial spirit?

The industries that first come to my mind as being dominated by entrepreneurs are software, medical devices, and other technology-based industries that grow and change through ideas of brand-new or improved products and services for an entrepreneur to provide to the marketplace. These are not the characteristics of the wine industry. In fact, producing wine could not be more traditional, having been invented literally thousands of years ago. The processes and technology related to winemaking have evolved over time and will continue to do so, but the wine itself is still just, well, wine.

Still, wine excites people. The idea of owning, running, or investing in a winery feels glamorous and romantic, whether or not it is financially successful. Given the same facts as to capital required, industry prospects, and projected margins and revenues, who wouldn’t choose to invest in a winery (or, for that matter, a Broadway Musical) instead of, say, a real estate investment trust or an oil company?

What is motivating entrepreneurs to take big financial risks with discouraging odds in the winemaking business? Given the differences in the industries, particularly in the pace of change within the industries, I think there must be some different qualities than those that motivate entrepreneurs in the technology space. Where a new invention in software could lead to explosive growth in sales or licensing and could change the way entire industries conduct their business in a matter of a year or two, a new winery will almost never have that kind of acute impact so quickly. Even a successful new winery’s growth in its production is highly dependent on the vineyard’s yield of grapes, costly oak barrels for aging, and other physical limitations.

Thus, a winemaking entrepreneur has to be looking for something other than overnight success and exerting influence on an industry, which is why winemaking looks to me like a personal endeavor that happens to also be a business. It must be fulfilling something in the people who do it other than (or at least in addition to) their financial goals.

While I assume that most new winemakers hope to at least be able to support their families with money earned from their businesses, I doubt they are planning on five years of start-up operations before being sold for millions of dollars to a larger competitor or a private equity firm in an M&A transaction. Instead, I think their aspirations tend to be more along the lines of long-term family operations and driven more by creating a product that they personally enjoy consuming (and making) than one that will sell the most.

This demonstrates that entrepreneurs are people first and their personal goals, interests, tastes, and sometimes unrealistic dreams are often far more motivating than financial projections and the latest scientific studies. Entrepreneurs cannot be studied or quantified, and this is why there is no such thing as a “typical” entrepreneur.

A Post by Alyssa Hirschfeld, Guest Blogger

For Love or Miles

Did you know off the top of your head that seat E on a Delta MD-90 airplane is a window seat, but seat E on a Delta A320 is a middle seat? I did. I am a flyer. More specifically, a loyal Delta Airlines flyer. My elite or “medallion” status on Delta means I am frequently upgraded to the first class cabin at no cost, earn double miles for all of my flights and am able to utilize priority boarding and security privileges at most major airports. To be honest, it’s nice, but it’s not all that great. I have serious doubts that these privileges are worth the cost of allowing Delta to monopolize my frequent air travel. Yet year after year, I monitor my mileage balance and travel plans and work my way towards re-qualifying for medallion status. I’m certain our lasting relationship is better for Delta than it is for me, but somehow they’ve hooked me.

Entire Web sites such as WebFlyer are devoted to the analysis and strategic exploitation of frequent flyer programs. I am not aware of anything similar relating to any other industry and have often wondered why the travel industry’s loyalty programs (particularly airlines, hotels and rental cars) are different.

Businesses in many, if not most, industries do things to reward their best customers; they just approach it differently. Some wait for specific customers to demand special treatment—be it a discount on the products/services being purchased or some other incentive to keep the customers loyal to that particular business. Why does Delta tell me up front that if I fly 50,000 miles in a year I will achieve gold medallion status and be entitled to its specific benefits, but my local grocery store doesn’t say “if you buy $X of groceries in a year, you are entitled to a discount next year and special checkout line?” The travel industry is unique in its willingness to publicize precisely what it takes to become “special” and exactly which benefits “special” customers receive. For me, having that specific goal to reach each year probably adds one or two more roundtrips to my schedule than I might otherwise take, which means an extra several hundred dollars to Delta each year. Multiply those incremental extra dollars times tens of thousands of medallion status customers, and we’re talking about meaningful money to Delta.

If I were an entrepreneur in a business that relied upon loyal, repeat customers for a large portion of its profits, I would think hard about how some of the characteristics of the travel industry loyalty programs might work in my business. Of course, many aspects of these programs are not easily transferable to other businesses, but here are some notable common principles:

• Levels of loyalty/spending/use by the customer and resulting benefits to which the customer is entitled from the company are clearly communicated to the customer up front



• Loyalty benefits are not discretionary and are distributed fairly and equally to every customer falling within certain specific parameters



• Benefits are given by the company without being asked for by the customer (helpful for the Midwesterners among us who are afraid of being called “pushy”)



• Loyal customers receive some meaningful benefit(s) at a minimal cost to the company

In addition to these principles (and maybe the most important point of all), the most successful loyalty programs never forget that they are dealing with people. People who want to feel important and special. Smart businesses remember that a simple note or comment of appreciation for a customer’s loyalty goes far and doesn’t cost a thing.

A Post by Alyssa Hirschfeld, Guest Blogger