Partner Gerry O’Reilly has begun an informative series of e-zines aimed at helping you increase the value of your business. These regular emails discuss a range of topics and learnings from business-owners who, through applying some simple principles, have achieved lasting value for themselves and their businesses.
Gerry begins by asking what goals you have set for your business? Many business owners fail to maximise their business value because their focus is placed too heavily on growth. Entrepreneur Michael Arrington learnt that the hard way with two very contrasting returns from selling two businesses. While growth will have a positive impact on your company’s value, your growth rate is only one of the eight drivers that impact what your company is worth.
Also, if you are like the many business owners who remain at the centre of the business, where the valuable relationships and decisions are dependent on you, you may be caught in the owner’s trap. You may actually be damaging the long term value of your business. In a US study of 14,000 businesses that looked at the relationship between owner day-to-day involvement versus the average value of a business, the results, outlined below, were eye-opening.
If any of these issues describes you and your business, come talk to us. Gerry can outline a simple yet comprehensive methodology that aims to unlock that value to bring freedom and rewards to you, the owner.
Learn more about how Crowe Horwath can help you build lasting value in your business:
Rich vs. Famous – Have you set a goal for your company this year?
If you’re like most business owners, you’re striving for an increase in your annual sales. It’s natural to want your company to be bigger because that’s what everyone around us seems to celebrate.
Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone.
But growth can come at a steep price and can even detract from your ability to build your personal wealth.
The Contrasting Exits of Michael Arrington
Arrington started Achex in 1999. It helped facilitate payments in the early days of the internet, and Arrington was focused on growing it. He accepted two rounds of outside capital to fund the company’s expansion and ultimately sold the company to First Data Corporation for $32 million in 2001.
Unfortunately, because Arrington had been focused on growth above all else, he had not only raised two rounds of financing but also reduced his personal stake in the company down to next to nothing. As he told Business Insider, “When I started my first company, Achex, we raised $18 million in venture capital in 2000 from DFJ. The company later sold for $32 million, but due to a 2x liquidity preference (common in those days), the founders essentially got nothing, just a few hundred thousand dollars to not block the deal.”
Arrington then went on to start the technology blogging website TechCrunch in 2005. This time Arrington wanted to grow the business, but not at the expense of his equity. Instead, they grew the company within their means and funded the business largely out of cash flow. Arrington still owned 80% of the company, according to Business Insider, when he sold it for approximately $30 million.
Apparently Arrington had learned his lesson—growth is good, but not at the expense of all else.
The Alternative to Growth at All Costs
The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company’s value, but your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company’s value, and your personal wealth. For example:
- You may have to dilute your personal stake in the company by taking on outside capital. Depending on the return your investors are looking for, and the performance of your company after you take on outside investors, your smaller slice of the larger pie may be worth less than a larger slice of a smaller pie.
- Cross selling your largest customer more products and services may be a relatively easy way to grow your top line, but if they already represent more than 15% of your sales, the extra revenue may dilute the value of your company because acquirers discount companies with too much customer concentration.
- Giving lazy customers 90 days to pay may keep them buying, but those charitable payment terms may detract from the value of your business because an acquirer will have to fund your working capital.
- You could choose to invest your sales and marketing resources into winning a big, one-time project that would boost your sales but this may not boost the value of your business, which may be more positively impacted by a smaller amount of recurring revenue.
The Lesson: Growth is important and how big your company can get is one of the eight drivers of your company’s value. But you need to look at all aspects.
US study reveals where owners should spend their time
In an analysis of more than 14,000 businesses, a new study finds the most valuable companies take a contrarian approach to the boss doing the selling.
Most business owners are personally involved in doing the selling – which makes sense because you’re likely the most passionate, have the most industry knowledge and the widest network of industry connections. In fact, when you are not selling you probably see a dip in profits.
However, if your goal is to build a valuable company – one you can sell down the road – you can’t be your company’s number one salesperson. In fact, the less you know your customers personally, the more valuable your business.
The study focused on owners who had received an offer to buy their business in the last 12 months and found that the owners who were not involved day-to-day in selling and did not know his/her customers personally received an offer that was equivalent to 4.49 times pre-tax profits. This contrasts to the founder who knows each of his/her customers by first name getting offers of just 2.93 times profit.
The lesson: Who you get to do the selling in your company is just one of many examples where the actions you take to build a valuable company are different than what you do to maximise your profit. How much money you make each year is important, but how you earn that profit will have a greater impact on the value of your company in the long run.