There are six steps to significantly increasing the value of your business.
So, without further ado, what are the six areas to focus on to grow the value of your business.
Firstly, let’s define value.
Again, we went to corporate financiers to get this definition and have made it as clear as possible:
VALUE = Profit x Multiple
Valuing a business is a bit like valuing a house. You need to see what other similar businesses have sold for AND the value ultimately depends on what people are prepared to pay, taking into account market conditions. It’s not an exact science.
We all understand profit. At Tricres we recommend you get the best possible strategic financial advice you can afford. An FD is very different to a financial controller or finance manager – an FD looks to the future and helps you shape your strategy using financial projections and data). Your FD will help you understand which key figures to focus on to maximise profit.
This is where most small businesses stop. They believe that getting maximum profit will increase the value of their business. This is not necessarily true. Maximised profit will simply enable your business to reach the average market valuation for your industry and not much more.
The multiple is the number times which a purchaser or valuer of your business will multiply your profit by to get a figure. For example, the traditional multiple for a recruitment company is around 3 times profit so a recruitment company making £500k profit p.a. would be valued at 3 x 500k = £1.5m which is a nice figure, but could be a whole lot bigger without having to increase revenues or profit by focusing on six things.
This is why we encourage our clients to focus on is the stuff we call ‘above the line’.
These are the six steps to increasing the value of your business;
- Your senior management team, culture, strategies and talent pipeline
- Innovation
- Product and or service extension
- New channels to market/partnerships or JV’s
- Brand
- Scalability
What’s really interesting about these six things is that you have to complete them in order. You cannot possibly scale a business successfully without the talented management team or additional products and services. Neither can you have an awesome brand without a fantastic culture.
Scalability stems from having all five elements functioning well so that scaling becomes easier and profitable.
We have seen many businesses scale without having the first five elements in place and it causes havoc and often reduces profit or indeed, starts producing losses. At which point, the owner usually retreats back to where they were feeling disappointed, bruised and decidedly unsure about attempting to scale again.
As with all these things, this stuff takes time. Building a strong senior team can take years. You can innovate and create new products or services whilst you build a great team, but attempting to scale without one would be a disaster.
Finally, what attracts great people to a business? A great culture. More of that another time. For now, take advantage of getting started on your journey for FREE using Fuel My Business today.
