Grasping the critical difference between profits and value is essential to unlocking your business's true potential. These two elements, though intertwined, are distinct concepts that demand their own tailored strategies and approaches. Solely fixating on one while neglecting the other, or treating them as interchangeable, undermines your ability to maximize success.
Profits, undoubtedly, are the lifeblood of daily operations and short-term gains. Value, on the other hand, transcends profits, deriving from a multiplier that ultimately shapes the long-term worth of your enterprise in the eyes of potential buyers or investors. Recognizing this fundamental distinction and strategizing accordingly is key to positioning your business for sustained growth and your own future prosperity.
– Profits –
The Immediate Focus
Profits are the net income a business earns after deducting all expenses. They are a key indicator of a company’s financial health and its ability to sustain operations, pay employees, and invest in growth opportunities. Many business owners concentrate primarily on boosting profits because they provide immediate rewards and reflect the company's performance in the moment.
Several items that influence a company’s profits are:
- Revenue Growth
- Sales and Marketing Efficiency
- Incentivizing Programs
- Diversification of Revenue Streams
- Cost Management
- Operational Efficiency
- Supply Chain Optimization
- Fixed vs. Variable Costs
- Customer Acquisition/Retention
- Customer Relationship Management
- Customer Satisfaction
- Product or Service Quality
- Innovation
- Consistency
- Market Position
- Competitive Advantages
- Brand Strength
- Scalability
- Business Model
- Technology and Automation
- Financial Health
- Positive Cash Flow Management (Short-Term)
- Profit Margins
- Reserve Funds
- Human Capital
- Talent Management
- Company Management
- Leadership
- Retention
- Risk Management
- Financial, Operational, and Strategic
- Robust Client Base
- Compliance and Legal
- Strategic Planning
- Short-Term Actions Aligned with Long-Term Vision(s)
- Ability to Adapt
While essential, profits alone do not paint the complete picture of a business's potential and long-term success. Solely focusing on profits can be myopic. Let’s take a deeper dive into value growth, or as we call it, “the overlooked and underappreciated side of the business”.
– Value –
The Long-Term Perspective
Value encompasses a broader perspective. It includes the tangible and intangible assets that make a business attractive to buyers. This can involve the company’s brand reputation, customer base, intellectual property, and the efficiency/repeatability of its operations. Critically, value is derived from the multiplier effect when selling a business, allowing owners to realize significantly higher returns when selling equity through an exit, restructuring, or stock offering.
While focusing on profits has an impact on the bottom-line in the present, there are completely distinct categories of business actions that affect themultiple of earnings that a buyer is willing to pay to acquire equity in your company. Professionalizing your business is key to increasing its value in this way. This involves implementing systems and processes that ensure consistent performance, scalability, and sustainability.
Here are some steps to enhance the value of your business:
- Diverse Customer and Vendor Base
- Ensure that your business does not rely too heavily on any single customer, employee, or vendor. Diversification reduces long-term risk and increases stability, making your business more attractive to buyers.
- Pricing Power/Monopoly Control
- If possible, aim to monopolize or dominate your industry. Being a market leader can significantly enhance your business's valueas it demonstrates strong competitive advantages.
- Future Growth Opportunities
- Identify and pursue growth opportunities, whether they are horizontal (expanding product lines), vertical (integrating supply chains), or geographical (entering new markets). Future growth potential is a key consideration for buyers.
- Independent Operations
- Develop your business so that it does not rely on the owner as the centerpiece of operations or growth. A business that can thrive independently of its owner is more valuable and easier to sell. You want to become indispensably dispensable (my last article describing why and how).
- Positive Cash Flow Management (Long-Term)
- Maintain positive cash flow to ensure that your business is a cash generator, not a cash drain. Buyers look for businesses that consistently generate more cash than they consume.Additionally, when are you fully compensated for your services? Are you optimizing when and how you are paying bills, vendors, taxes, etc.?
- Recurring Revenue
- Increase your business’s value by building a base of recurring revenue. Buyers favor companies with automatic, annuity-based revenue streams, as they provide predictable and stable income. When you win business, when are you compensated in the process and how evergreen is the structure? It is interesting to consider the different approaches to recurring revenue: Consumables, Sunk-Money Consumables, Subscriptions, Sunk-Money Subscriptions. Auto-Renewal, Contracts.
- Standardized Processes
- Develop and document standardized operating procedures. This ensures that the business can function smoothly without the constant presence of the owner. An added benefit is better efficiency when training new employees as well.
- Strong Financial Records
- Maintain accurate and transparent financial records. This not only helps in making informed decisions but also builds trust with potential buyers. This is useful for negotiations.
- Customer Loyalty
- Foster strong, long-term relationships between your customers and your business. A loyal customer base enhances the perceived stability and future earning potential. This will improve client retention during a sale/change in ownership as well.
- Experienced Management Team
- Build a competent management team that can run the business independently. Again, a business that is not overly reliant on its owner is more attractive to buyers. This will also assist with your ability to scale.
- Market Ownership
- Become a leader in your industry by building a strong brand. A well-positioned business in the marketplace commands higher value
– Driving Profits and Value –
Win-Win
Even though less than 50% of businesses ever sell, building your business from the buyer’s perspective still adds value. Hopefully you do sell one day, but even if you do not, operating your company in a more strategic and professionalized manner will still create a more profitable environment for your business in the future. In addition to the increased profitability, the likelihood of a successful sale, including a larger multiple, is much greater for business owners preparing ahead of time.
If you are like most business owners, with 70-90% of your assets baked inside your company, strategizing to improve your largest asset is an endeavor worth pursuing. Profits are certainly a vital component of a business’s short-term success. Understanding and enhancing the value of your business is essential for achieving long-term goals and securing a lucrative exit strategy. You do not want to focus on one without the other.
The purpose of this article is to identify that most business owners truly are stuck “in” their business, solely focusing on profits. This is our invitation to you, to take a step back, start growing your value more strategically, work “on” your business, and enjoy the show!
Remember, even if you do not sell in the end, this approach will organically increase profitability as well.
If it was easy, everyone would do it. At the same time, it is very achievable.
2024-178169 Exp 07/26