If you are a small or mid-size business owner, I have a question for you? What is more important to your business? Is it how many dollars in service product that it sells? Is it your Margin? Or, is it the value of your business? The answer should be yes. But which question(s) depends on what your long-term plans for your business are.
Depending on those plans each of those areas of focus have a different meaning. In some instances they should mean everything; in others, they may mean little. Regardless, all are important. How important, again, depends on your plan for the business.
If your only goal is to provide you with a means of supporting your current lifestyle, putting a roof over your head, food on the table, clothes on your back and paying the bills and you have little thought about your eventual retirement years and what that will look like, then a revenue or sales focus is all you need. How much money will you need to make to pay for those needs, after Cost of Goods Sold (COGS), business expenses and taxes? Yeah, you have to consider each of those as well. So while revenue or sales may be all you think you need to think about, other things are also worthy of your attention.
If all you want from your business is the financial means to live your current lifestyle then how you go about having the revenue from the business has limited importance. You can be the principal sales person and also the key provider of product or service. You in effect can be the business. Many small business owners rely on the owner themselves to generate sales, and others do the work. This is common in expert type service businesses from skilled trades to skilled professions. Customers are frequently from a single group such as homeowners or very specific niche type businesses. All that matters in these types of business is the money to meet lifestyle needs.
If your business was designed to perhaps pass on to someone, sell and provide you with a comfortable retirement, develop a legacy, or the money to do those adventurous things you always wanted, then you’ll need a focus that includes revenue but equally, and perhaps more importantly, it must also focus on the true value of your business. This type of value creation goes well beyond simply generating revenue, margin, and profit. I have first-hand experience with business owners who had significantly increased revenue through a process of sales blitzes and buying the business from competitors only to discover that their doubling, tripling or in one case quadrupling their revenue did little to improve the actual value of their business when they wanted to sell it. Further, realizing that only around 20% of businesses that go to the market to be sold result in a sale, the true value of your business becomes even more important.
What impacts your business’s value? Lets first define what business value is – a measure of value used to determine the business’s worth. There are three common ways of determining that:
Fair Market – a monetary amount that a buyer may reasonably offer, and a seller accept, in exchange for the business.
Investment – the value to the business person with specific business objectives.
Intrinsic – Factors such as Business earnings potential, potential business growth, and the Company’s financial and operational strength.
While that may be confusing to some the simple explanation for all three is that your business more than likely isn’t worth what you think it is and it takes a lot of work to achieve the value you have in mind. This work doesn’t happen fast, takes time, and if done correctly can be sustained. Sustainability brings additional value.
What impacts on business value? Some things are:
- Commoditization – how interchangeable what you sell or produce is with what others sell or produce.
- Assets – The land or buildings, etc. that your business owns.
- Workforce – Your employees, how well they produce, how much they cost compared to the revenue they create.
- Customer Base – Is your typical customer from a diverse group or are they a single type consumer from a single industry or group.
- Intellectual Property – Copyrights, trademarks and so forth that your business owns.
- Competitive Advantage – What your business does that uniquely distinguishes itself from your competitors in a revenue or reputation way.
Focusing on these drivers of business value and developing efficiencies for them will help improve the value of your business.
Having a business with a high value not only can help you possibly sell it for more money, maybe even what you think it’s worth or more, but it can also give you the financial means if retirement is not part of your goal and you want to achieve other things. Further, whether your goal is to simply live off of the revenue from your business or use that business and its revenue for other things, the outcome becomes more predictable and greater.