When you think about the big picture of your business (thinking strategically rather than tactically) are you focusing on the right things? Are you focusing on growth when you should be focusing on increasing value? That’s what most business owners tend to do.
We spend a lot of time at Aspire Business Development talking about business growth—and for good reason. Growth is the most obvious, visible sign that your business is doing well. Given a choice, almost everyone would choose to grow versus choosing to get smaller. Business owners and clients also bring up the topic of growth a lot—usually in the mistaken context of money: “I need to make more money so I need to grow (i.e. grow revenue).” Unfortunately, more revenue doesn’t always mean more money to the business owner.
In fact, a lot of times, business growth can be bad. Here are a few examples:
You bring on a major new client that ends up doubling your revenue, but also now represents 65 percent of your total revenue base. Best case, that’s a huge risk. Worst case, you’ve now sold yourself to a really bad client who’s going to take advantage of you because you can’t afford to lose them.
You have a great year and grow really, really fast – and in order to take advantage of the opportunities in front of you, you cut a few corners. You hire the first person you can find, rather than the right person. You take on some opportunities that don’t really fit your long-term model, which creates a lot of “special” processing, and because you’re desperate, you cut some deals with vendors who can react quickly but end up costing you more—cutting into your profit margins. The end result? You had a great year from a top-line perspective, but your profits were about the same, and next year is going to be a real challenge.
You decide to acquire a smaller player in your area or industry. They seem like a perfect fit, but months after the deal goes through, you uncover accounting problems, and the best half of their employees and customers bail on you. That’s an expensive way to grow!
Don’t get me wrong. Growth is definitely something you should be looking at, but a much better strategic goal is to focus on increasing the value of your business.
Business value is usually associated with selling a business, but even if you’re not thinking about selling anytime soon, it still makes sense to focus on building value. Why? Because the healthiest businesses are also the most valuable, and if you’re focusing on building a healthy business, you really can’t go wrong.
Top-line revenue growth doesn’t necessarily lead to value—so the question is “what does?” Here are four things to focus on:
1. Profitability
Probably the best indicator of overall business health is your profitability. How profitable you should be varies with the size of the business (and the industry), but you should definitely be paying yourself a good salary and also be well in the black. There are several ways to improve your profitability—what could you do next year to be more profitable?
2. Create Recurring Revenue and Predictability
When you’re thinking about the value (and long-term health) of a business, one of the key drivers is the ability to clearly predict what you’re going to do next year. If a good chunk of your revenue is recurring in some fashion, then it’s much easier to predict. That’s also true if you have a repeatable system for driving new and additional revenue (i.e. “every time we run this campaign, we land 10 new customers” or “I know my sales team and processes will bring in at least $X next year”). However, if you are guessing every year on what you’ll make, and you tend to fluctuate wildly, then your value drops (a lot), and you’re not a very healthy business. What can you do to become more predictable?
3. Be Significantly Different
If you took the logos and names away from your business and your top three or four competitors, could customers really tell the difference between you? If so, what is that difference? (Hint: It’s not that you have great people. Everyone says that.) Is your solution or product different in a meaningful and positive way? Have you built from the bottom up to provide a better experience to customers? (Think Nordstrom or QuikTrip.) If you’re not clearly different, then your value drops a lot.
4. Be Clean and Stable
Do you know what’s going on in your business every day? Are your financials clean, up to date and transparent? Is the operational foundation of the business stable in the sense that it’s clear to everyone how the work gets done and it’s done the same way pretty much every time regardless of who’s doing the work? The quickest thing to kill a deal is when the buyer can’t trust the accounting and financials of your business, and even if you’re not going to sell today, it’s a habit that you must get into if you’re going to have a healthy business.
There are other things that definitely contribute to adding value to your business—having the right people on the team, having a great mix of happy customers who rave about you, having a great brand and reputation—but if you can focus on the four listed above, you’ll definitely be off to a great start.
