The profitability of a company is not the same as the value of a company. Increasing revenue is great news for any business, but it doesn’t necessarily follow that your organization’s overall value increases. Ideally, both your revenue and your business’s value should be growing, so how do you achieve that? The first step is to understand what business growth is and how it relates to the value of your company.
Understanding Business Growth
Profit is pretty simple to understand. You know that your organization’s profit is based on your revenue minus any expenses, which could be related to materials, staffing costs, marketing, and so forth. Profit is the money your business makes each year, which either goes to owners and/or shareholders, or back into the business as further investment. Generally, business owners or investors see profitability as their number one goal.
Overall business growth goes beyond profit. Business growth is about the equity value of the business as a whole, and it will make the business more appealing to purchasers when the owner feels it’s time to exit the company. Of course, anyone buying an established business wants to know that it’s profitable. But that’s only one small part of a business’s value. The overall value is a combination of all elements of the business, which may include:
- Tangible assets — e.g., property, land, equipment.
- Intangible assets — e.g., patents, copyrights, trademarks.
- Brand reputation.
- Customer base.
- Reputation with other companies — e.g., partners you’ve worked with.
- Community initiatives.
- Environmental impact or sustainability.
This is not an exhaustive list, but it gives business owners an idea of the type of factors that could impact the overall value of their business. Growing the value of your business means focusing on these aspects or any others that are more specific to your industry. This is especially important if you’re planning to successfully exit your company. In order to monetize the business you’ve worked hard to create, three main factors need to align: your business needs to be ready, you need to be ready, and the market needs to be ready.
That’s why it’s important to have a realistic expectation of what your business is worth, and the simple fact is that many business owners overvalue their company, focusing on profits rather than business value.
Identifying the Business Value Gap
Your business value gap is the difference between what your business is worth now, and what it could be worth if owners and strategists follow best practices. The fundamentals of identifying this gap are simply a case of assessing where your business is and visualizing where you want it to be. Then it’s about planning for this in a focused and organized manner.
One way to do this is as follows:
- Identify your focus area that is falling short.
- Define your goals in this area — are they realistic? Do they align with your business values?
- Gather data about current performance in this area and devise a strategy to achieve these goals.
- Record change and growth in this area and repeat as needed for other areas of the business that require transformation.
One example could be a gap in marketing success. Targeted marketing could be boosting revenues by 5%, but you’d like to increase that to 10%. That’s your goal. Assess what you’re already doing and its effectiveness. Then you might decide to focus on social media marketing and create a campaign utilizing Instagram Reels to highlight your products or services. Once your strategy is in place, it’s about carefully collecting relevant data to assess the success and discover If you’re closing your business value gap or not.
Ultimately, a business that is run with a focused strategy that covers a variety of areas will sell for more money, but also, businesses that behave in this way tend to be more profitable too, leading to growth in revenue and value.
Driving Business Value
There are a variety of ways to drive business value, many of which focus on aspects of your company as it exists right now. Facets you could look at include:
- Margin advantage – are you consistently performing above industry norms?
- Market share – what percentage of your industry’s market do you control?
- Innovation – what makes your product stand out in the market?
- Customer diversification – are you expanding beyond your traditional demographics?
- Recurring revenue – can you offer subscriptions or licensing?
- Legal – are you assessing risk and compliance effectively?
All these aspects and more increase the effectiveness of your business and should make it more profitable. But even when profits are down through no fault of the business, such as during periods when demand for your product naturally drops, your business value can continue to grow if you focus on these areas. This allows you to build an exit strategy in the most profitable way possible, leaving behind a business model to be proud of.
The best way to discover the current value of your business and plan for increased value and revenue is to work with a business advisor and a financial advisor. Contact the Association for Enterprise Growth and find out how we can help.
Image Credits: Photo by Marvin Meyer on Unsplash
