Welcome to the second ezine in our Business Value Builder series.
The aim of this series is to help you to create a valuable business. The common mistake is to confuse profit with value whereas in many cases maximizing short term-profit can damage long term profitability.
To be clear – a valuable business is one that is focused on long-term sustainable and growing profit.
In this issue we focus on the perils of being at the centre of your business where the valuable relationships and decisions are dependent on you, the business owner.
Below we bring you a study conducted in the US by Value Builder.
The results may surprise you, particularly those who like to be working day to day in business operations. Being hands-on – the owner's trap – may help keep profit up in the short term but would someone else be able to step into your shoes without damaging the business?
If this message describes you and your business, come talk to us and see how we can increase your value. We use a simple yet comprehensive methodology that aims to unlock that value to bring freedom and rewards to the owner.
Partner, Crowe Horwath
What a study of 14,000 businesses reveals about how you should not be spending your 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.
Who does the selling in your business? My guess is that when you’re personally involved in doing the selling, your business is a whole lot more profitable than the months when you leave the selling to others.
That makes sense because you’re likely the most passionate advocate for your business. You have the most industry knowledge and the widest network of industry connections.
If your goal is to maximize your company’s profit at all costs, you may have come to the conclusion that you should spend most of your time out of the office selling, and leave the dirty work of operating your businesses to your underlings.
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 proof: a study of 14,000 businesses
In the study 14,000 business owners were asked if they had received an offer to buy their business in the last 12 months, and if so, what multiple of their pre-tax profit the offer represented. The study then compared the offer made to the following question:
Which of the following best describes your personal relationship with your company's customers?
- I know each of my customers by first name and they expect that I personally get involved when they buy from my company.
- I know most of my customers by first name and they usually want to deal with me rather than one of my employees.
- I know some of my customers by first name and a few of them prefer to deal with me rather than one of my employees.
- I don’t know my customers personally and rarely get involved in serving an individual customer.
2.93 vs. 4.49 times
The average offer received among all of the businesses analyzed was 3.7 times pre-tax profit. However, when just those businesses where the owner does not know his/her customers personally and rarely gets involved in serving an individual customer, the offer multiple went up to 4.49.
Companies where the founder knows each of his/her customers by first name get discounted, earning offers of just 2.93 times pre-tax profit.
When value is the enemy of profit
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 maximize your profit. If all you wanted was a fat bottom line, you likely wouldn’t invest in upgrading your website or spend much time thinking about the squishy business of company culture.
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.
Find out more about Building Lasting Value in your Business.