This is part 2 of 3 in the Predictable Future Series on key insights for successfully navigating today’s economic climate.
If you missed it here is the first article in this series discussed the foundation of Business Growth: creating Predictable Profits and Cash Flow.
This is Part 2 – the Second Element of Business Growth.
Once you have built the foundation of your business and can more reliably predict profits and cash flow, it will be easier to move to the next stage – creating Sustainable Growth.
At the heart of Predictable Profits and Cash Flow & Sustainable Growth is Confidence.
In the first part of the series, we introduced the 18 Drivers of Growth and Equity Value and went deeper on the 8 with the largest impact on Predictable Profits and Cash Flow.
As we work with clients through this process, we end up scoring them on each of the value drives. This score effectively shows them the level of confidence that someone objectively viewing the company would have in that specific part of their business.
When you examine your business and score yourself on each of these value drivers you will be able to effectively predict the performance of your business. The more confident you can be on future cash flows and profits (by having more of your revenue coming from recurring sources), the more predictable it can be.
This is what creates the foundation for Sustainable Growth.
Creating Sustainable Growth
What does it mean to have Sustainable Growth? Simply, it is the ability to grow without chaos.
In Part 1, we identified that more than 75% of business owners are looking to grow. Within this framework, there are two tracks for building sustainable growth within a business.
Track 1: Value Capture
The first track we call “Value Capture” through risk mitigation. In this process, we are capturing latent value in the company through risk mitigation.
The business itself may not necessarily be growing per se, rather the business removes issues of concern to allow the capture of potential value that could not be monetized previously due to company specific risk.
Much of this Value Capture happens during the process of creating Predictable Profits and Cash Flow. In this foundational step, the business may not have any net new profits and cash flow, however, by eliminating risk, there would be increased Confidence in the business, which will allow the business to unlock that latent value.
If the numbers of a business currently generating $4 million in EBITDA (profit), lead to a low level of Confidence from an outside buyer or investor, they may be on the lower end of the valuation range for that industry and business size.
To better visualize this, I have included a chart below.
The value of a private business will be there EBIDTA x a Multiple. The less confidence in the business the lower the multiple will be. By removing the risk and increasing the Confidence in the business, in this example, the busines would move to a 6 multiple from a 5 multiple. This would Capture an additional $4 million in value in the business.
Lifting the Multiple from 5x to 6x creates $4 million in value!
While this is a great opportunity for business owners to build value in their business, it has limits.
There is only so much risk that can be taken out of the business to lead to a higher multiple. The ultimate equity value is limited to whatever the top end of the industry’s normalized trading range is.
Track 2: Value Creation
For the 75% of owners that truly want to grow the business, not just capture latent value, the focus would be on Track 2 – Delivering Aspirational Revenue and Value.
If we combine the process of Mitigating Risk (Track 1 – Value Capture) with Growing Profits, now the business is generating true net value growth.
Think of your business like an engine. We previously discussed that cash flow was the fuel to get business moving. To hit your aspirational revenue and value goals, or simply to grow the business because you are having fun, you need to create a process where you can step on the accelerator (bring in marketing leads) in and know the car will run smoothly (predictably get cash out of the other end).
Equity Value can be the result, and the growing cash flow and equity value connection is clear. If you drive Predictable Profits and Cash Flow, you will increase the Confidence in the business which increases the EBITDA Multiple applied to calculate the value of the business.
To then know how much you need to grow the Profits, you have to understand what value you would must get out of the business to achieve your financial goals. This process will then identify which Growth & Equity Value Drivers the business will need to focus on to deliver on those goals.
Here are the Value Drivers that require a high level of Confidence to support Sustainable Growth.
There will be some crossover with the 8 Value Drivers discussed in Part 1, but the sub-category within that Value Driver will be more applicable to Value Creation.
- Company Profile (Strategic Direction):
Does the business have a strategic plan that supports your personal goals?
This plan would include a vision and mission, business model, business goals, objectives, and executable tactics.
- Large Potential Market:
Does your market support significant growth of the business? Do you have the data to back this up?
- Product Differentiation:
Does your company have a product/service with unique characteristics that provide a competitive advantage? If not, what changes would be required to create differentiation?
Does your company have a recognizable brand that reinforces the business’ presence in the marketplace and supports the company’s objectives?
- Customer Diversification:
Does your company have a well-diversified customer base? If 1 or 2 of your customers were to leave, would it significantly impact the business?
- Sales and Marketing (Marketing Plan and Process):
Do you have a clear marketing plan? Do you routinely engage in specific and organized actions to interest potential customers in your products or services?
- Financial (Budgets and Forecasting):
Do you forecast both future revenue and future expenses? Do you compare actuals to your forecast on a regular basis?
- Human Resources (Recruitment and Performance):
Does your business have a process to identify, screen, and select new employees? Do you set quantifiable objectives for employees? Do you have a process to manage employee performance including creating objectives, sharing objectives with employees, evaluating performance against objectives, and revising objectives as necessary?
Just like with creating a foundation for Predictable Profits and Cash Flow, you need a process to evaluate how your business is doing on the key value drivers.
We like using a car engine as a good visual for how a business runs.
There are so many components that have to be firing on all cylinders to allow the business to run smoothly and allow for the type of Value Capture and Creation discussed above.
The key is having a process in place to evaluate your business objectively and move through the 3 Dimensions of Growth in a systematic way.
The first step is to review how your business stacks up in the 8 Value Drivers. They are the key to creating Predictable Cash Flow and Profits and creating a plan of action on how to fill in the gaps, make your business easier to run, and be in an even better position to focus on building value in the business.
Step 2 is developing a plan to increase the Confidence in the 8 Value Drivers that are critical to creating Sustainable Growth.
At Konvergent Wealth Partners we have developed the process that streamlines these steps to allow you to get to this point quicker and more effectively. Over the last 10 years, from working with my top business owner clients and partnering with some of the best partners in the growth planning industry, we have developed this step by step process to analyze your entire busines, starting with the 8 Value Drivers that have the most impact on the foundation of creating Predicable Cash Flow and Profits. From there we help map out the plan for the business to create the value needed to achieve our business owners’ aspirational goals that get them to achieve their amazing life of significance.
Whenever you are ready fill in the gaps and focus on building value in your business, please email us at firstname.lastname@example.org or give us a call at 253-236-7000.
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