Harness the double wealth power of your business
Building a business is an effective way to create wealth as it offers two ways to create wealth:
1. Providing an income to you as owner. Income is the profit your business earns from its day to day operations after everyone has been paid (including you, for your work in the business).
2. Increasing the value of your business. Value is the price someone would pay, to buy your business.
Profit and value are related. Value is largely, but not solely, influenced by profit. Here are two strategies to increase the profit and value of your business.
Strategy 1: Establish yourself as a profitable business
Here are some basic guidelines:
1. Establish a real profit
In your sale price, cost in a marketable wage for the work you do in your business.
A simple way is to base costs as if you had to pay someone else to do it for you. This enables you to see which products and services are truly profitable.
Too often business owners undervalue their time and therefore under price. What is the point in pursuing something that is inherently unprofitable?
It is acceptable not to pay yourself because you are re-investing your profit into developing your business for e.g. new website or software system. It is a problem if you cannot pay yourself because your products or services are making a loss.
2. Protect your profit
As soon as practical, arrange for appropriate insurance. This may involve business overhead, key person and/or income protection. The objective is to have some financial back up available should something unforeseen occur.
3. Cement your profit
Next identify what is necessary for the business to be able to make a profit without you. This means having others who can do your role, if necessary. From step 1, you know you can afford it if you had the sales volume, but do you have the capability within your business? Growing a team who can do the work as well as, or better than you, is essential to building a business.
4. Grow your profit
Many businesses lack systems to grow their business. To grow your profit you need to implement systems that will continue to develop and improve your business. For example simple sales or proposal processes. Or, an effective job management, CRM, planning or training system.
These four steps will not only build your wealth by increasing your profits, they also contribute to building the salable value of your business.
Strategy 2: Establish yourself as a salable business
Not all businesses are created equal when it comes to selling. Here are some things to consider.
1. Identify your potential buyers
Who might want to buy your business?
Consider, what knowledge, skills and experience do they need? What funds do they need? What do they want from a business investment?
In general, larger sale prices come from bigger businesses looking for acquisition of synergistic or competing businesses. Hands-off investors want something that can be managed by someone else and still deliver an acceptable profit. Owner-operators may be looking for something with potential that matches their skill set and budget.
2. Establish proven profit performance
Strategy One was growing your profit history, independent of you. Prospective buyers want to know profit to calculate their potential return on investment (ROI). ROI is typically the annual net profit divided by the purchase price (excluding stock).
Profit potential is also important. Businesses such as TradeMe get mind-blowing prices as the price relates to the potential earnings when expanding the model to other markets. We have seen the success of TradeMe Jobs and TradeMe Property post Sam Morgan sale. This leads us to our next important step.
3. Capture and protect your intellectual property
When you sell your business you are selling everyting e.g. customers, suppliers, employees, processes, expertise, culture, identity, brands, market share.
Any new owner will need to be assured all of this will continue to operate effectively without you.
Maximise your sell price by documenting:
• contract agreements with customers
• licence or supply agreements
• staff performance agreements and plans
• trademarks for brands
• patents if appropriate
• processes and systems.
By applying these steps you are harnessing the double wealth power of your business: profit and value.
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