How to Create Long-Term Value in Your Business
Making a business more valuable can increase your attractiveness to investors, buyers and finance providers. Read on to find out how
When running a business, it can often feel like you spend all of your time on day-to-day tasks, focusing on making instant decisions to deal with problems as they arise.
However, to truly add value in your business, you need to take a step back, look at the bigger picture, and assess what you can do to achieve real growth. Of course, this is easier said than done; but this article should give you an idea of where to start.
What is a valuable business?
A truly valuable business is normally a perfect combination of three elements;
To achieve this ‘holy trinity’, it is normally necessary to plan a medium- or long-term strategy; creating value in the short term will usually need outside investment.
However, despite these three elements providing the cornerstone of a valuable businesses, various stakeholders in your company might weigh up each element differently; some might wish to grow profit over a longer period of time, with financial security paramount, whilst others will see aggressive growth and expansion as the main goal.
In addition, some within your company will see a business’ value more in terms of what it can offer them, such as pay or job security, and outside stakeholders such as residents of the local area might see a valuable business as one that contributes to the community.
When planning a strategy to add value to your business, it will have a greater chance of success if you have easily measurable objectives. Find indicators that measure the overall value of your business and set targets to improve upon them, making sure your timescale for completing these is realistic.
How do I add instant value to my business?
Tying in and consolidating some of the existing value of your business is one way to add value straight away.
Use contracts to consolidate value, you can put caveats in employees’ contracts preventing them from revealing your secrets, stealing your clients or setting up in competition with you. In addition, try and negotiate long-term supply contracts to secure the provision of vital materials.
Maximise the potential of your order book with ‘differential pricing’ techniques (pricing tailored to different customers, products, and quantity of orders). They can bring in a wider range of orders straight away.
Build good relationships. When it comes to enduring benefit to your business, a good working relationship is infinitely more valuable than any contract.
How do I achieve growth for my business?
Perhaps the most striking indicator of a business’ value, strong growth can bring everything else with it and is crucial for a successful enterprise.
When looking to achieve growth, ask yourself what kind of market are you in.
New sectors or expanding markets provide much more potential for small businesses to achieve growth. Mature markets dominated by large firms, such as soft drinks, are much harder to crack – so in this case you might want to consider changing sector, or selling to a larger competitor.
Consider whether or not your business model is scalable. Scaling up a business can involve expanding into other areas or markets, purchasing competitors, or growing the business on a franchise model.
Work out what your business’ focus is. Too broad a focus will see your business struggle for direction and hence you will find it difficult to achieve growth – but too narrow a focus, and you are more at risk of failure. Outsourcing some elements of your business might provide you with a narrower focus, but be wary of ceding too much control.
If you lack the resources to achieve your goals by yourself, consider partnering up with someone – perhaps you could sign a deal with a nationwide distributor rather than setting up your own sales channels, or sell or license intellectual property (IP) rights you own.
How do I make my business more stable?
Whilst growth is useful, it is nothing unless underpinned by a certain level of stability – a business with fluctuating profits is generally considered less valuable than a business that delivers predictable year-on-year growth.
When looking at the stability of a business, assets – tangible elements of value in your company – are absolutely key. Some examples:
- Intellectual property such as rights to content, designs and inventions can be an important part of value, especially in industries such as IT where rights to software are a key issue.
- Property you own or have on a long-term let can underpin the value of your business, providing security and potential capital growth.
- Customer data and mailing lists belonging to your business might carry more value than you think – although you should tread carefully around this area. Remember that assets need to be protected; the more secure an asset is, the more it adds to your business. Some tips:
- IP rights you own should be patented, copyrighted or trademarked, depending on what form it takes.
- Maintain and look after your assets this adds value to your company in the long term.
- Protect intangible value this is especially important if you have a business whose value largely relies on the skills of its employees. Loyalty bonuses and incentives are a good starting point.
- Create back-up copies valuable lists and records such as customer databases should always have duplicates off-site or in a fire-proof safe. Use a cloud-based or remote backup system for digital files.
In addition to protecting assets, the ability to anticipate change is key in protecting the value of your business. Set up systems to monitor the industry you work in, paying close attention to impending economic, social and political changes as well as changes in the market generally.
How do I take a greater share of the market to add value?
Taking a greater share of the market is essential when adding real value to your business. Increasing market share will increase turnover, make your brand more visible, and attract better talent into your business.
Remember that even if you are a small business, you can still achieve market leadership with a smart strategy. Try and define yourself as the leader of a niche, which could well grow into a new market entirely.
A good brand is instantly recognisable, and captures what your business is all about. Think about how your product or service differs from the competition, and use that to develop a strong brand identity. A good brand has multi-faceted benefits; it maintains the identity of the business through growth and pivoting, it interests new clients, and truly huge brands can eventually be diversified into new markets altogether (Richard Branson’s Virgin Group, for example).
Similarly, change your market positioning. Ask yourself, are you targeting the high-end or budget part of the market? Diversifying into a broader range of customer budgets – or even changing your focus completely – can reap dividends.
Remember that if you are successful in your strategy and growth begins to snowball, you will start to attract fierce competition. Guard against this by developing strong customer relationships, protecting your IP, and above all avoiding complacency.
How do add value to my business through employees?
Especially in service-based businesses, the people in your company can represent a large part of its value. Here are some tips to add and increase value through personnel:
- Recruiting. Make your firm an attractive place to work by offering good working conditions, and competitive pay terms compared to others in your sector.
- Incentivising. Make sure your staff want to increase the value of your business by incentivising them to do so. More generally, you should get your workforce to buy into your value-adding strategy.
- Protecting value. A risk when creating value through employees is they end up owning too much of it, such as through customer relationships or specialist knowledge. Include clauses – known as ‘covenants’ – in your employment contracts to prevent ex-members of staff setting up on their own and competing with you. In addition, make sure you set up a company culture that encourages the sharing of knowledge – this way you won’t be left high and dry when a specialist employee leaves.
- Retaining. Some members of staff are instrumental in creating value themselves, so use everything at your disposal to keep these people in the company. Provide meaningful opportunities for promotion and career progression, and give them a proportionate share of the value they help to create, so they have a personal stake in your business’ success.
How can my operations help in creating a valuable business?
How your business carries out its activities can often be earmarked as a key area for improvement.
Invest in new technology or processes. This can be anything from replacing an out-of-date IT system to hiring a new research and development team to come up with new products.
Streamline operations and create standard policies and procedures so you don’t have to be involved in every little business decision. If people are constantly waiting for a manager’s authority, this will slow down productivity.
Finally, implement management information systems. These are computer-based systems that help you or your managers to monitor how your business is running, identifying weaknesses and risks.
How can I protect my business’ finances?
When targeting growth as a business, it is important to make sure your financial situation isn’t holding you back.
As a lack of ready cash will, obviously, stunt the growth of the business. You must ensure you have enough working capital.
Creditworthiness will build financial standing and open up new loan and finance opportunities. Use the right mix of equity and debt to prop up the business, and make sure you pay lenders and creditors on time. If there are problems on the horizon, tell your investors and creditors in advance to avoid giving them a nasty surprise.
You should set up an emergency borrowing facility if you’re liable to be short of cash at a crucial time.
Develop a long-term cost-saving strategy to minimise debt.