Wednesday, June 07, 2017

Driving Value with Growth

To increase the value of your business an understanding of the 8 key value drivers is essential.  The first key value driver, Financial Performance, was discussed previously.  Now we address the second key value driver, Growth

Increasing the likelihood for growth and the anticipated growth rate will increase the value of your business.  It will also attract a greater number of potential purchasers for your business.

It is one thing to say that your business has growth opportunities.  It is another thing to actually demonstrate that your business is scalable.  Showing that you had a growth plan in place and that you successfully implemented that growth plan gives your current growth plans more credibility.  This adds tremendous value in the eyes of a potential purchaser.

The Takeaway 

If you want to increase the value of your business and have never prepared a written growth plan, do one today!  Prepare a written growth plan for the coming 1, 3 year and 5 year periods.  If you want your future growth plans to be credible, you must document your current growth plan, the implementation strategy and the results.  You should also obtain an independent business valuation today so you can benchmark the future value enhancement results. 

Growth = Size and Scalability

Larger businesses are perceived to be more substantial and stable organizations than smaller companies.  These businesses have found a way to grow beyond the efforts of the owner(s) and become less reliant on the owner(s). 

Investors consider smaller companies to be riskier than larger organizations and this additional risk manifests itself as a lower valuation multiple being applied to the company's annual cash flows/earnings. 

A company with a scalable business model is much more valuable.  But, does your business have the infrastructure necessary to scale its operations?  What are your company's options?  Consider the following:

1. Geographic Scalability - applying your business model in another city
2. Cultural Scalability - applyling your business concept in another culture
3. Horizontal Scalability - selling new products/services to existing customers
4. Vertical Scalability - providing existing products/services to new customers

Or, you can turn to The Ansoff Matrix which considers the following four growth strategies:

1. Market Penetration - selling existing products to existing customers
2. Product Development - selling new products to existing customers
3. Market Development - selling existing products to new markets
4. Diversification - selling new products to new markets

The first two items are lower risk options given that existing customers are generally the ones who know and like the business the most and are often pleased to find out that the business offers something else they need.  Let's take a closer look at these two options:

Existing Products to Existing Customers (Market Penetration)

Consider a hardware store with a key cutter hidden off in the corner.  Despite the huge mark-up on cutting keys, sales are very low because nobody can see the key cutter.   By moving the key cutter up front beside the cash register customers begin to see the cutter and realize that the hardware store cuts keys.  Not surprisingly, many more keys are sold to existing customers, which increases the overall revenue per customer.

New Products to Existing Customers (Product Development)

Consider a BMW dealership whose typical client is an affluent family man in his forties.  After saturating the market for wealthy forty-something men, the dealership decided to think of the customer as the financially successful family rather than only the patriarch.  Instead of trying to sell more BMWs into a market of diminishing returns, the owner bought a Chrysler dealership so he could sell minivans to the spouses of his BMW buyers - a new product to the existing customer. 

Existing and loyal customers trust and respect the business and its representatives.  Identifying and meeting a separate or supplemental need for those customers will result in sales growth and value enhancement.  

Would you like to know where your company ranks under the Growth value driver?  That's where the Value Builder Score comes in where business owners complete a 13-minute questionnaire to receive their Value Builder Score out of 100. http://score.valuebuildersystem.com/en#started  

Empirical evidence shows that companies with a Value Builder Score of 80 or more receive offers that are 71% higher than the average business!   Simply put, improving your company's Growth Potential will increase the value of your business.

Wednesday, January 18, 2017

Driving Value with Financial Performance

Do you want to increase the value of your business?  Are you focused specifically on increasing the value of your business or are you simply hoping that its value will increase as a by-product of focusing on increasing sales or providing 5 star customer service?

A recent client was focused on just that - increasing sales and providing 5 star customer service. Sales did increase but at the expense of margin reductions.  Our client was accepting lower prices to attract new customers and increase sales volumes to existing customers.  Over a three year period, there were no significant changes to the bottom line.  As a result, the company's value did not increase. 

Value is ultimately driven by a company's future income or cash flow expectations.  Increasing your operating cash flows and minimizing the risk associated with achieving and/or exceeding the anticipated cash flows will increase the price an acquirer is willing to pay for your business. 

I recently introduced you to the Value Builder SystemTM, a statistically proven coaching program to help you increase the value of your business that starts with obtaining your Value Builder Score. 
 
The first value driver addressed in determining your company's Value Builder Score is Financial Performance.  Your company's financial performance includes its history of producing revenue and operating cash flows combined with the professionalism of your record keeping. 
 
Increasing your company's annual operating cash flows can be achieved by increasing revenues and/or decreasing costs. 
 
To increase revenues you can increase your prices or increase volumes. Some strategies to consider to increase sales volumes include:

1. Selling more existing products to existing customers (market penetration);
2. Selling new products to existing customers (product development);
3. Selling existing products to new markets (market development); and
4. Selling new products to new markets (diversification).

To decrease costs you can look at ways to reduce direct material and direct labour costs which will help increase your gross margins.  You could also focus on reducing other operating expenses and overheads to improve your net profit margins.  Various outside consultants can assist in this area. Companies like Salvis Group can help improve operating systems/processes to improve efficiency and reduce costs.  Companies like Expense Reduction Analysts can identify general and administrative cost savings to improve your bottom line.  There are also companies that specialize in providing research and development tax credit recoveries to increase your company's operating cash flows.

Improving the quality and integrity of your financial reporting (e.g. monthly, quarterly or year-end financial statements) can also help increase your company's value.  This can be accomplished by improving your accounting information system or upgrading to a review engagement or audit.  Potential purchasers may be willing to pay more for a company with a quality financial reporting system that produces accurate and reliable financial statements and other financial reports.

Wouldn't you like to know where your company ranks under the Financial Performance value driver?   That's where the Value Builder Score comes in where business owners complete a 13-minute questionnaire to receive their Value Builder Score out of 100.

Empirical evidence shows that companies with a Value Builder Score of 80 or more receive offers that are 71% higher than the average business!  Simply put, improving your company's Financial Performance will increase the value of your business.

Over the coming months I will continue to expand upon how the other key value drivers can increase the value of your business.  I will provide examples for each and discuss what you can do to improve your company's ranking in each of the 8 key value drivers.

Tuesday, January 10, 2017

Summarizing the 8 Key Value Drivers

You may not be looking to sell your business any time soon.  You may not have started planning for the departure from your business despite the fact that all business owners will one day exit their business (voluntarily or involuntarily due to death, disability, disaster, divorce or dispute).

Are you, however, looking to increase the value of your business and continue to build your wealth?

Value is ultimately driven by a company's future income or cash flow expectations, and the future is inherently uncertain.  Increasing your operating cash flows and minimizing the risk associated with achieving and/or exceeding the projected operating cash flows will increase the price an acquirer is willing to pay for your business. 

I recently introduced you to the Value Builder System(TM), a statistically proven methodology for increasing the value of your business.   Business owners can complete a 13-minute questionnaire and receive their Value Builder Score out of 100. 

In order to truly understand your Value Builder Score you need to appreciate where your company stands in each of the following 8 key value drivers:

1. Financial Performance - your history of producing revenue and profits combined with the professionalism of your record keeping.  Greater revenues and profit margins lead to higher value.

2. Growth Potential - your likelihood to grow your business in the future and at what rate.  A proven track record of meeting and/or exceeding prior growth targets (revenue and profits) and a solid business plan with future growth projections will increase value.

3. Switzerland Structure - how dependent your business is on any one employee, customer or supplier.  Minimize your company's dependence on a key employee, customer or supplier to lower your risk profile and maximize value.

4. Valuation Teeter Totter - your ability to manage working capital and continue to generate positive cash flow.  A strong balance sheet with excess working capital and positive cash flow from operations on a monthly basis will increase value.

5. Recurring Revenue - the proportion and quality of automatic, annuity-based revenue you collect each month.  The more revenues you have locked up under long-term contracts or under an automatic subscription basis, the higher the value.

6. Monopoly Control - how well differentiated your business is from competitors in your industry.  A strong niche and/or competitive advantage in your marketplace will increase value.

7. Customer Satisfaction - the likelihood that your customers will re-purchase and also refer you.  Increase your number of satisfied and loyal customers that refer you to others and you will increase your company's value. 

8. Hub & Spoke - how your business would perform if you were unexpectedly unable to work for a period of three months.  Minimize or eliminate your company's dependence on you, the owner, and you lower your risk profile and increase your company's value.

Wouldn't you like to know where your company ranks in each of these key value driver areas?  Armed with this information you can zero in on the value drivers that need improvement and identify where to focus your efforts and attention to increase the value of your business.  That's where the Value Builder Score comes in. www.valuebuildersystem.com  

Empirical evidence shows that companies with a Value Builder Score of 80 or more receive offers that are 71% higher than the average business!  Simply put, improving your company's performance on these 8 key value drivers will increase the value of your business.

Join me over the coming months as I expand upon how each of these key value drivers will serve to increase the value of your business.  I will provide examples for each and discuss what you can do to improve your company's ranking in each of the 8 key value drivers.