8 KEYS TO ADD VALUE TO YOUR BUSINESS
What does building a business entail? There are obvious measures of success found in turnover, profit and growth, but they don’t tell the whole story when it comes to valuing a business.
There are plenty of businesses that appear successful but aren’t underpinned by the kind of foundations that will give them enduring value. Various issues come into play here, from management structure and leadership, down to systems, procedures, and record-keeping. Value building involves looking at all the things that make up a business and working out whether they are contributing to its overall worth or, in fact, subtracting from it. Here we look at 8 key ways for a business to add value. The measures we recommend for value building have their own intrinsic value in improving how a business is structured and is run.
Show Me the Money
They say the proof of the pudding is in the eating. Except in business terms, where you want to see the actual receipt for the pudding, and some documented testimonials regarding its tastiness.
Financial Performance is a key indicator of your business’s worth, but only if you’re diligent in keeping your records up to date. Keeping these records is a legal requirement, and not doing so can result in a fine coming your way from HM Revenue and Customs (HMRC). Regardless, keeping track of your financial performance and recording it makes sound business practice.
Things to watch out for include:
- Lack of organization – if your records are a mess the chances are your business is also messy. Relieve your stress, get organized and keep onside with HMRC.
- The right records – there’s little point in keeping financial records of your performance if you’re missing the juicy bits. These include invoices, bank statements, receipts, wages and mileage records.
- How long you keep them – beware of tidying up and throwing out things you should really be holding onto. HMRC guidance is to keep records for a five-year period.
How Big is it, Really?
Growing a business is often hard work. The Growth Potential of your business is, however, a key component in adding value to it.
This isn’t about coming up with a figure off the top of your head, or even from optimistic sales projections. It’s really about structuring your business in such a way that it can grow. A good example of this is training. If your business is heavily reliant on key individuals performing certain roles, or if your clients are mainly buying into your individual expertise, how can you spread the responsibility more evenly? Train the people who work with and for you to take on different responsibilities, and document your systems. You wouldn’t consider constructing a big piece of flat-pack furniture without instructions, would you? For your business, ensure the knowledge is documented somewhere. Once you have a scaled-up structure that enables the people within it to operate and co-operate, as essential, interacting parts, you have better growth potential.
A One Man Band?
You might not think your business has any Structural Weaknesses until you or someone else is off sick and things rapidly go downhill.
If it’s a case of the weight of responsibility resting on one, narrow pair of shoulders then it might indicate that your business is rather precariously balanced. Think of it this way: you might have a triangular hierarchy with you sitting at the top, but in fact, the triangle could just as easily be inverted, with you at the bottom carrying the weight of the broad base. Similarly, if you’re heavily reliant on a single supplier you might be taking a risk because there’s an uneven distribution of responsibility there. Businesses can be outwardly successful but structurally weak and this may come to light when assessing a business’s value as a going concern. A sound structure should underpin a successful business, because the future is unpredictable and to be valuable, a business needs to be built to endure.
The Rollercoaster Ride
Cash Flow is a key consideration in valuing a business. Cash flow is different from profit and turnover because it has a marked affect on how your business runs on a day-to-day basis.
If the cash coming in and out hits massive peaks and troughs then you’re more likely to be in for a bumpy ride. This is something that won’t be lost on anyone valuing your business. For example, if your business provides a service that takes three months to deliver, the more you can charge upfront, the better off your bank balance is on an ongoing basis for funding payroll, rent and other obligations. From a value perspective, any business that is going to require a bigger injection of working capital when it comes to a prospective buyer is worthless. Things to consider are how much you spend on equipment and hardware, or other items. Can you reduce your running costs without damaging your level of service or what it is you produce? Profit is important, but so too is how much cash your business generates.
Stick With Me, Kid
We all should know the value of Recurring Revenue. Some of the most successful businesses run on a subscription model. This creates customers who agree to purchase from you on an ongoing basis, effectively automating them.
Relying on brand loyalty alone for sales is always going to be a risk. This is particularly true of consumable items where customers purchase them regularly but aren’t necessarily motivated to always buy from the same source. Renewable subscriptions go some of the ways to locking your customers in. These apply to items such as magazines. Even better are auto-renewable subscriptions, where your customer has to opt out once they’ve opted in. Insurance works on this basis, as do various services such as alarm maintenance or boiler servicing. The gold medal for recurring revenue goes to contracts. The mobile phone market largely runs on a contract basis, to the extent where companies offer free upgrades in return for customers agreeing to be locked into a two or three-year contract. The value of a business has to take the future into account. Recurring revenue is going to make the future look that much brighter.
One of a Kind
What exactly is your Unique Selling Proposition (USP)? The Value of a USP cannot be overestimated when it comes to valuing a business.
Having a USP is easier said than done, particularly if the sector you’re in is both crowded and competitive, but finding some way of differentiating yourself is the key to adding to your business’s worth. One mark of success is when your brand name becomes a verb. This is a sure mark of market leadership and distinction, as throughout our everyday language, we all “Google” and “Hoover”, to name a few. Is there an aspect of what you’re selling, product or service, that can mark it out? It might be a case of finding the right hook that sells what you do. Examples of established brands with a USP include FedEx (“When it absolutely, positively has to be there overnight”), Mr. Kipling (“Exceedingly good cakes”) and DeBeers (“A diamond is forever”). If you have an established USP it implies a high degree of control of your market setting you apart from the competition and shoring up your position within it.
We’ll Definitely Be Back
Should Customer Satisfaction be self-evident? Yes, but being able to measure it is as important. Measurable customer satisfaction is a key asset to your business and a definite value-booster.
There is danger in success because if your product or service becomes really familiar to your customers they’re not necessarily going to be giving it a lot of thought. Customer satisfaction surveys can remind them why they like your business. Certain businesses, market traders, for instance, have a daily face-to-face encounter with their customers, which makes them able to gauge customer satisfaction and work it to their advantage. Elsewhere it’s a case of using customer satisfaction as a tool to enhance your business and keep improving it. The kind of things you should be measuring include:
- overall customer satisfaction;
- how likely or unlikely the customer will be to buy from you or use your services again; and
- How likely or unlikely the customer would be to recommend you to a friend or colleague.
The View from a Distance
Even if you’re not planning to sell, understanding how Your Business without You looks is an important way of gauging its value.
This is connected to the key points of Growth Potential and Structural Weaknesses in that it’s about individual control from the top down. For many business owners, they play a central role in something they have a very personal stake in. They remain close to the action, but this closeness has disadvantages when it comes to valuing the business concerned. Often very personally directed and controlled businesses have evolved a kind of dependency culture, where the infrastructure either doesn’t exist or doesn’t function well enough in the absence of a key leadership figure. This means that instead of being able to objectively value your business, any potential buyer is really having to value you, and once you’re out of the equation what will they have left in terms of a functioning concern? So the lesson to business owners is to take a step back. See how things can be made to function independently of your involvement, and where they can’t, put measures in place to ensure that they can.
There are lots of factors coming into play when it comes to valuing your business, some you may not have considered. It is worth noting that the point of value building isn’t necessarily for preparing your business for sale. The measures you take and changes you make to add value are going to make your business run better regardless of whether you choose to sell it or not.
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