Where does growth in your business come from, and how does this impact on whether you are adding value to your business?
Businesses can grow in two different ways:
1. By selling a wider range of products or services to existing customers
2. By selling existing products and services to new customers
You may focus on one of these, or you may have a mix of both, but the dominant growth strategy can have a substantial impact on the value of your business.
If you want to develop a business that you can scale back your involvement in, or eventually sell, then looking at how to add value to your business is important.
How to put a value on a business
Our BizSmart Value Builder Score questionnaire is the first step in looking at the value in your business – you can answer the questions here. Analysing the results from more than 18,000 businesses that have completed the Value Builder, we found that businesses that had received an offer were offered, on average, 3.5 times their gross profit.
Business growth adds value to your business
However, when we looked at the companies who had grown at a rate of 20% or higher, they had been offered 4.3 times their gross profit i.e. 20 percent more than slower growing businesses.
Adding value to your business via a niche
What was striking though, was that the multiple shot up even higher when we looked at those companies who dominate their niche with a unique product or service. Those businesses with a unique position in the market were offered on average 5.4 times their gross profit, or approximately 50 percent more than the average business and 20 percent more than the fastest growth businesses.
What NOT to do to
Going after the wrong kind of business growth – by offering a wider range of products and services – doesn’t result in you adding value to your business. It’s a simple way to grow and you are less reliant on finding new customers, but unfortunately it makes your business more complex. This means that someone looking to acquire your business will find it more challenging to replicate what you offer your customers.
In this scenario, where you have a wide range of products and services, a large company looking to acquire you will place little value on the revenue you’re earning as a result of products and services that they already offer themselves.
How to add value to a business
But if you have a niche product or service that this larger company can sell to their current customers – something they don’t offer already – they will pay a greater premium for this.
Effective business planning will help to ensure you grow your business in the right way for long term growth and value rather than short term profit.
To see how your business measures up right now you can use one of our business tools to get your Value Builder Score. Simply answer a few questions here. It only takes around 13 minutes to complete and gives you a chance to find out where your business is in terms of value.