This is the first of our new guest blogs.
We are delighted that Fergus King of Shirlaws will be writing a series of business blogs for us over the coming months.
Over the last 14 years and now in 11 countries, Shirlaws has helped more than 3,000 business owners build more profitable, more valuable and more enjoyable businesses. Fergus is our Business Coach.
What is the value of your business?
Do you know what your business is worth? Is it enough? What could it be worth? How do you increase its value? Does it matter to you?
I observe that most entrepreneurs wake up each day and think “How can I sell more stuff to more people?” And why not, profitable income growth is very important. Yet, it is only one side of the coin. If you owned a buy-to-let flat you would know the rental income for sure, but I bet you’d also know the flat’s value too. Most business owners are not so conscious of the value of their business. At least not until they are thinking about some form of transaction/exit, at which point it is generally too late to affect its value.
Imagine you had a two-bedroom home in a sea of other two-bedroom homes and they go for £300,000. Trouble is your retirement wellbeing needs £500,000. The estate agent can tell you various tricks: repaint the walls neutral colours, de-clutter the place, do up the garden etc. and you might get £320,000 with a bit of luck, but never £500,000. But what if you had spoken to an architect and built an extension with two more bedrooms? Suddenly your home is repositioned as a “family home” in a sea of two bed “starter” or “retirement homes”. Family homes due to their rarity in your neighbourhood go for £500,000 and the extension only cost you £50,000. You have created additional value of £150,000. What is the equivalent of this for your business? Are you an estate agent or an architect?
So how do you know what your business is worth? There are different ways to value a business, of course, but the usual formula is Value = Profit x Multiple.
As a Business Coach, I always ask business owners: Who determines your profit? and they say “Us”. Then I ask: Who determines the multiple? and they say “The buyer/market”. Of course this is true at some level as anything is only worth what someone is willing to pay. But the question is: Can you influence their willingness to pay? Most will doubt it. But the answer is yes you can and in our experience more than most business owners realize.
A multiple is just an expression of anticipated future profitability. The starting point is to understand your current industry benchmark multiple – what a normal business in your sector might get. The process is then exploring the things that enhance that industry benchmark and eliminating things that discount it. There are broadly six things that can enhance the multiple/value and six things that can discount it. SK Chase has, among other things, taken two key steps in this regard.
If the business is dependent on it owners, then the multiple and hence the value of the business is reduced by around 50%. In devolving responsibility and setting their management team free within a Functionality framework, Steph and Kaye have eliminated this dependency. One of the other areas they have also done extremely well is developing their Talent & Culture. This alone can enhance the value by 20%. The whole team don’t just understand their culture they live and breathe it day to day and use it to guide the development of their strategies, plans and behaviours.
To some this whole topic will sound very commercial and money isn’t everything some will say. So let’s look at the personal impact of it too. Let me illustrate that personal element with this question: If you doubled the value of your business and sold it for that amount, what could you then do differently in your life?
Fergus King is a Partner in Shirlaws. Over the last 14 years and now in 11 countries, Shirlaws has helped more than 3,000 business owners build more profitable, more valuable and more enjoyable businesses.
Follow Fergus on Twitter @Fergus_King