Building a 100m valuation company: Part 5 – Value
If you reflect on what you have built so far. A simple business, focused on solving problems for a few well-defined customer segments and retaining them by creating a great experience delivered reliably and consistently. You have a few growth strategies maturing all the time, and they are all now led and run by your team. You have time on your hands. Apply it to focusing on deepening and locking in your value.
The starting point here is to understand the basic premise of value investing. If you are investing in a share on a stock exchange, you want three outcomes:
- Income – your annual dividends.
- Capital – you want the capital value of the share to grow over time so you can sell it for more than you bought it.
- Tradability – you want to be able to sell and buy the share as you like
Value is all about behaving as a shareholder or investor in your own business. Looking at your business like you look at a share is how you lock the value into your business.
In this Podcast of the Money Show Pavlo Phitidis unpacks the final layer in building a 100million valuation company: [VALUE]
The fourth layer is all about growth.
With your time now split to only 30% on operational and management activities because of the first 3 layers, you have time to focus and lead growth. There are several different types of growth you must generate to both lift revenues and deepen profit, and one without the other is of little value.
Growing revenue is about increasing your company’s revenue, while growing profit is about increasing your company’s profitability as a percentage of your revenue. In effect, you want to increase the “gap” between your revenue and your costs to increase profitability while also increasing the quantum of revenue to increase profit.
The first three layers see you with a company that serves well-defined customer segments whose ideal customer experience you’ve determined in the Positioning layer, which is then built out in the System of Delivery layer and brought to life in the Purposeful People layer.
Locking in capital
Achieving this needs you to lock in the growth and future profits of your business. Depending on what business you are in, this can be achieved across multiple areas.
- Brand – A brand is a feeling that your stakeholders have towards hearing your company name. What you do for who, how you do it and why you do it carry all the building blocks of a brand beyond pretty logos and business cards. It’s hard to get right and costly too if you cannot answer these questions with a vision for yourself and your business. A brand is lived before it is felt and it must transcend your business into the industry and sectors you work in.
- Suppliers – any dependencies on suppliers must be locked in, contractually or otherwise. If you represent a brand in your territory, that contract must ensure longevity and cession. If you run a restaurant, you must have a long-term tenancy, etc.
- Customers—to what degree can you provide a service (and every business is a service business) over the long term for your customers? If you can move towards providing a service over time as opposed to a single project, that secures long-term customers. There are many ways to get this right. Think of a motor plan as an example.
- Team—how do you lock in your team as the drivers of your business.
Across all these areas, you need to ensure that you, your role, and your presence are minimised.
Understanding the 5 levers of valuation and exit is key for any business owner. Not knowing them means you may well build a business that does well for you over 10–20–40 years but cannot be sold or transferred when you want to exit. You’ll have earned a good income, but the capital gain will be lost, robbing you of monetising the years of investment and risk it took to get here.
Let’s end off by behaving as the buyer of your business. The promise was to create a business worth 100 million.
20 years in, you should be owning a material portion of your market. This could be as much as 2-3% in the service industry. In manufacturing, this should be around 3-5%. It varies from industry to industry, but you need to have a view on it, and you need to be in a position where you are generating at least 10-12 million in profit. After 20 years, this should be possible… right?
Valuation works as a multiple of profit. In general, multiples start at around 2-3 and move up to 5-6.
So, let’s make a deal. The 5 levers are a set of questions that cover the following areas:
- What distinguishes you in the eyes of your customers?
- How is the business operated and run?
- Who makes it all happen?
- Is there future growth?
- What happens without you there?
An Asset of Value™ is a business that answers them all. Each layer plays into the next as they couple together and demonstrate that each of these question sets can be addressed in a manner that earns an additional 5 multiples on the running industry multiple.
On a 10 million profit, a 5 multiple earns an additional 5 multiples to give you your 100 million asset.