Rich vs. Famous – Have you set a goal for your company this year?
If you’re like most business owners, you’re striving for an increase in your annual sales. It’s natural to want your company to be bigger because that’s what everyone around us seems to celebrate.
Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone.
But growth can come at a steep price and can even detract from your ability to build your personal wealth.
The Alternative to Growth at All Costs
The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company’s value, but your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company’s value, and your personal wealth. For example:
- You may have to dilute your personal stake in the company by taking on outside capital. Depending on the return your investors are looking for, and the performance of your company after you take on outside investors, your smaller slice of the larger pie may be worth less than a larger slice of a smaller pie.
- Cross selling your largest customer more products and services may be a relatively easy way to grow your top line, but if they already represent more than 15% of your sales, the extra revenue may dilute the value of your company because acquirers discount companies with too much customer concentration.
- Giving lazy customers 90 days to pay may keep them buying, but those charitable payment terms may detract from the value of your business because an acquirer will have to fund your working capital.
- You could choose to invest your sales and marketing resources into winning a big, one-time project that would boost your sales but this may not boost the value of your business, which may be more positively impacted by a smaller amount of recurring revenue.
The Lesson: Growth is important and how big your company can get is one of the eight drivers of your company’s value. But you need to look at all aspects.
US study reveals where owners should spend their time
In an analysis of more than 14,000 businesses, a new study finds the most valuable companies take a contrarian approach to the boss doing the selling.
Most business owners are personally involved in doing the selling – which makes sense because you’re likely the most passionate, have the most industry knowledge and the widest network of industry connections. In fact, when you are not selling you probably see a dip in profits.
However, if your goal is to build a valuable company – one you can sell down the road – you can’t be your company’s number one salesperson. In fact, the less you know your customers personally, the more valuable your business.
The study focused on owners who had received an offer to buy their business in the last 12 months and found that the owners who were not involved day-to-day in selling and did not know his/her customers personally received an offer that was equivalent to 4.49 times pre-tax profits. This contrasts to the founder who knows each of his/her customers by first name getting offers of just 2.93 times profit.
The lesson: Who you get to do the selling in your company is just one of many examples where the actions you take to build a valuable company are different than what you do to maximise your profit. How much money you make each year is important, but how you earn that profit will have a greater impact on the value of your company in the long run.