When you're running a business, it's easy to get sidelined, focusing on short-term goals, like this month's, quarter's, or year's profits. As a business owner, it's only natural that you would be concerned with your company's profits above everything else. However, in the eyes of Scott Barth, founder and CEO of business consulting company, ascendBIZ2, business owners with a myopic focus on profits miss out on a key part of running a business: building value in the business itself.
In a recent episode of Put Your Numbers to Work with GrowthForce President and CEO, Stephen King, Barth said his primary focus in his consulting business is to help owners start, "thinking about the exit plan that is inevitable." He continued to explain that often in the end, "what happens is [business owners who focus on profits instead of value] don't have the right kind of resources in the business, or the business is not sellable or transferable." He advises all business owners — no matter how near or far they are from exiting their companies — to focus on their business value. "Profits will come," he says, "if you work on the value drivers."
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What Makes a Business Valuable?
"[I]f your business isn't transferable," Barth says, "it doesn't matter how much income you're taking out of the business, you're never going to be able to sell it." One measure of whether your business is transferable is how much you have to work within it.
If your business does not and cannot operate without you and you don't have a well-trained successor waiting to take the reins, then your business is not worth much more than its tangible assets (equipment, inventory, real estate, and cash on hand) which it has accumulated.
Aside from the question of transferability, business valuation is a complex venture. There's math, accounting, algorithms, and industry and market adjustments that exist to help owners place a value on their businesses, but it's still a highly nuanced endeavor.
To create transferable value in a business, Barth says that owners need to focus on three basic management principles, which are the pillars of The Rockefeller Habits:
- Priorities - Limit the number of priorities you have and execute them exceptionally well.
- Data - Run your business by its numbers — make data-driven decisions.
- Rhythm - Create a rhythm or pattern of communication within your organization. In other words, it's important to communicate with your people on a regular basis so that they can be aligned around common goals and focused on the right tasks.
With these three pillars built into your company's policies, procedures, and daily operations, you'll create a business that retains its value in your absence and is easily transferable — even without you at the helm.
What Are the Key Value Drivers in a Business?
The second pillar revolves around data. When properly organized, you can use your data to drive your business's value. Studies and algorithms originally developed at MIT identified 18 core value drivers in business. Nine of these are internal (related to business operations), and the other nine are external (based on the market).
Over 30 years of evaluating the data from countless businesses, these algorithms and value drivers have been tested and improved. They're now a standard for measuring and learning how to increase value in your business.
Market-Based Value Drivers (External)
- Large Market Potential
- Dominant Market Share
- Recurring Revenue
- Barriers to Entry
- Margin Advantage
- Customer Diversification
Operations-Based Value Drivers (Internal)
- Company Overview
- Sales and Marketing
- Customer Satisfaction
- Senior Management
- Human Resources
In his conversation with King, Barth emphasizes the areas where business owners will really see the biggest results of their efforts. In his opinion, these are gross profit margin, revenue trends, continuing growth, recurring (predictable) revenue, revenue per employee, and the strength of middle management. And, of course, one of the best ways to ensure you get these results is by finding relevant leads, for example, real estate leads for a real estate business.
Another important indicator of the business's value is how much you, the owner, have to work in it. The more time you spend at work and the more tasks only you complete, the lower your business's actual value will be.
Focusing on these drivers will result in a more sale-able business with a much higher valuation. By focusing on these value drivers, you'll not only grow your business value, you'll also drive profits, meaning you can benefit from your business before and after you sell it.
Aligning People Around Common Goals
How Sound Financial Management Can't Exist without a Human Capital Management Strategy
Barth points out that another essential component to creating transferable value in a business is having a human capital management strategy which is strongly aligned around your financial management strategy and goals. This type of business strategy will not only help you attract top talent while, as Barth says, "the war for talent is extraordinary," but it'll also help you retain employees by, “engaging employees at a deeper level."
Barth says it's all about creating the right culture and incentive system. For example, Barth has, "been implementing a profit share program that is a self-funding program." He says, "It's extraordinary how that engages the employees, and they know how they are contributing to the success of the business." They have a better understanding and appreciation for an owner whose mindset says, "You helped me grow; I'll share with you."
A business plan can bring all of these ideas on one page. Plus, a business plan can help you raise capital, align your goals, and create an effective strategy for growth. With that said, your business plan should be made with your industry in mind. A real estate business plan and a clothing retailer business plan will look completely different because each industry (and the business owners within them) have incompatible goals, values, and needs.
Simplify KPI Measurement and Trend Tracking
Barth says, "Beyond complexity lies simplicity," and that's exactly what the GrowthForce KPI Scorecard achieves for management accounting. It takes complex ideas and demonstrates them in a simple, easy to understand manner, so that business owners can understand their numbers and business trends at a glance.
"I had been searching for a long time for an easy, high-quality graphic dashboard that I could have every client use," says Barth. "What I love about GrowthForce . . . [is] the fantastic free tool. I downloaded it, and I started using it with . . . [my] clients. [It] did exactly what I was looking for."
The ease of use GrowthForce's KPI scorecard presents business owners makes it simple to share performance results with the entire team. With this kind of tool, business owners can ensure employees are on-board and fully aware of the impact their work performance makes on the business's overall performance. As a result, it's simple to motivate employees and also easy to present employees with recognition and rewards when appropriate.
With regular meetings, employees feel like a part of something bigger than themselves and the business will see increased value, as it continues to approach, meet, and exceed the goals you set for the key drivers in your business.