Creating ValueAug 14, 2023
During the last few weeks, we have talked about understanding the value of our business. Many times, this is an eye-opening exercise. Afterall, we see people like Jeff Bezos and those in the tech world selling their businesses for incredible multiples, based on little more than a dream that their company will one day be profitable.
But in most industries, this isn’t the case. The valuation calculation can sometimes feel as if it isn’t generating a value that shows the true worth of the business.
Based on our exercise, we found out that our business that generates $100,000 net income each year is worth $250,000. This isn’t enough for the super yacht!
Which is why as accelerators, it is critical that understanding the value of your business isn’t a one-time thing. This is our starting point. As accelerators we must have the understanding that we are CREATING value every day.
This shift in mindset is not a wish. It is a requirement if you are going to build the business you know is possible.
But how do we shift our mindset to drive us to create value every day? The truth is that to increase value in your business requires several key elements.
Focus on Profitability: As accelerators, we must commit to no longer FEARING our financials. The most common valuations are based on a multiple of our BOTTOM LINE, not our top line. So while we feel much more comfortable evaluating revenue and sales, to add value we must see these sales adding to our bottom line.
As accelerators, there are two key shifts that will enable us to focus on profitability:
- Evaluate all operating locations based on ONLY the expenses of the four walls. Too many times we allow our accounting teams to wreck havoc on our P&L’s by ‘allocating’ expenses among several operating units or locations. This is hurting our business in two ways.
- By allocating expenses we no longer see the true profits each location generates on its own.
- By allocating expenses over several locations, we no longer can budget for the true cost of our corporate overhead.
Accelerator tip: Do you have a budget for your corporate overhead? Start this week with creating a budget for your corporate overhead based on a % of your sales. We recommend that this corporate overhead, including all ownership/leadership pay, should not be more than 5% gross sales.
- Weekly accountability - it is critical that we evaluate the overall profitability on a WEEKLY basis. The truth is that a period is simply too long to wait for results. With technology, we are now able to give results to our team in real time, allowing for feedback in the key areas of sales, labor and cost of goods on a weekly basis.
Accelerator tip: Perfection is the enemy of weekly accountability. We are not calling our weekly numbers FINAL, but the only way to drive a focus on profitability is to make sure we are giving feedback to our team WEEKLY. The accounting ‘close’ and final numbers are important, but our team cannot focus on profitability if they aren’t aware of trends that are happening today!
Build a Strong Management Team: A strong management team creates additional value in our business in two ways.
- Additional value in sales process - many times businesses listed for sale will include management team as part of selling point. If you are looking to sell in the near future, it is critical to discuss this openly with management team, as their buy-in to assist with a new owner can add dollars to the overall value of your business.
- Buy-in to focus on improvement and overall profitability - A management team that is committed to driving profitability will help the business create additional value every day.
Accelerator tip: How much are you spending on your management team? Are they generating value for your business? The structure of management teams has changed over the last 5 years with the overall changes in technology and customer behavior. We recommend evaluating your management team in terms of cost and overall ROI, to make sure it is in line with your overall profitability targets.
Adding Revenue Channels - To create value, we must open ourselves to more than the same customer base that we have marketed to in the past. In order to create additional value, we must find the areas of expansion that exists in our current business model. This isn’t necessarily a new location. The key is to first see our revenue as revenue categories, rather than one number.
For example, if we are a restaurant group with five locations. Each location isn’t just one revenue number, but rather revenue segments.
Location 1 generates $1,000,000 in sales in the following revenue areas:
In store dining - $600,000
Catering - $200,000
By looking at our revenue as categories, we are able to see growth within each location, and ultimately drive growth targets based on these categories. While it may cause our team to have a panic attack if we told them our goal for this location was a growth of 20%, what if we had a target of 20% catering growth? This would be an additional $40,000 over the course of the year, or $770 in additional catering sales over the course of a week!
Accelerator tip: Sales growth IS possible in any business. You ultimately control the growth in your top line numbers. Let's start today with breaking out our revenue by category and setting a target for THIS WEEK for each category.
To be accelerators, it is critical that we know the value of our business today and commit to CREATING value in our business every day.
For more information on our ‘What is my business really worth’ mini course please click here.
Are you ready to accelerate your business valuation? Click here to learn more about our VALUATION accelerator package, which includes the following:
*Valuation analysis of your business including what your business is really worth today
*Action plan to create value in your business in the next 12 months
Check out our latest podcast episode here