Your business: a great wealth creator
As Sam Morgan recently demonstrated with the sale of TradeMe, building a business can be a very effective way to build wealth! While not all of us are creating the next TradeMe, there are still several things we can do in our businesses to increase our wealth.
The double power of business
Like all good investments, business offers two ways to build wealth. The first is by providing an income to the owners. This is the profit the business earns from its day to day operations after everyone else has been paid. The second is by increasing the value of the business that is the price someone would be prepared to pay, to own your business. Profit and value are related. The price someone is prepared to pay (value) is largely, but not solely, influenced by the profit earned.
Part 1: Establishing yourself as a profitable business
Many people mistakenly believe they have a business when in fact they really have a job. A simple way to determine what you have, is ask "what would happen if I couldn’t work in my business for 3 months?"
If your answer is:
a) I would lose a lot of money and potentially my business,
then you have a job
b) I would lose some money but we could recover,
then you are starting to build a business
c) Nothing much, things can carry on well without me,
then congratulations you have a business!
Many of us have heard and understand this, so what can we do to build a profitable business? Here are some basic guidelines:
1. Establish a real profit
Even if you can’t afford to pay yourself a physical dollar, you must cost in a marketable wage for all work you do in your business. An easy way is to base costs as if you had to pay someone else to do it for you. T his ensures you are pricing your products or services accurately and you will be able to see which ones are truly profitable.
Too often business owners undervalue their time and therefore under price. There is no point pursuing something that is inherently unprofitable. It is acceptable to not pay yourself because you are re-investing your profits into developing your business. It is unacceptable to not pay yourself because your products or services are making a loss. The key difference is identifying what is a set-up or development cost and what are ‘business as usual’ costs. Business as usual should be profitable.
2. Protect your profit
As soon as practical or possible, arrange for appropriate insurance. This may involve business overhead, key person and/or income protection. The objective is to have some financial back up available should something unforeseen occur.
3. Cement your profit
The next step is to look at what is necessary for the business to be able to make a profit without you. This means having others that could do your role, if necessary. From Step 2, you know you could afford it if you had to, but do you have the capability within your business? This is an important issue you must address.
4. Grow your profit
One thing we notice in many businesses is the lack of growth or development systems. To grow your profit you need to implement systems that will continue developing and improving the business. From product development to ongoing process improvement to new market identification to up-skilling, there are many initiatives to continually improve the profits of your business.
These four steps will not only build your wealth by increasing your profits, they also contribute to building the saleable value of your business.
Part 2: Establishing yourself as a saleable business
As mentioned before, not all of us are creating TradeMe’s. While we may like to think we are building a saleable business, our experience is not all businesses are created equal when it comes to selling. Here are some things to think about.
1. Identify your potential buyers
Who might want to buy your business? There are a number of things to consider. What knowledge, skills and experience would they need? What funds would they need? What are they looking for from their business investment?
In general, the larger sale prices are when big business is involved, for example TradeMe and HireAHubby. This is because big business has the money and often grows their business through acquisition of synergistic or competing businesses.
Hands-off investors looking for a steady income stream will be looking for something that can be managed by someone other than themselves and still deliver an acceptable profit. Owner-operators may be looking for something with potential that matches their skill set and budget.
Identifying your potential market is essential as it determines how much effort is worth putting into the next two steps.
2. Establish proven profit performance
In Part One (establishing a profitable business) we discussed how to build a growing profit history, independent of you. This is what prospective buyers will want to review to calculate their potential return on investment (ROI). ROI is typically the annual net profit divided by the purchase price (excluding stock). They will compare this percentage to other investments such as property, shares, term deposits and other businesses.
Historical profit is not the only thing considered though, profit potential is also important. That is how businesses such as TradeMe can fetch mind-blowing prices. The price relates to the potential earnings when expanding their services to other markets. For example, in the New Zealand market we have recently seen TradeMe Jobs and TradeMe Property launched. There is also the enormous potential of establishing TradeMe in Australia.
This leads us to our next important step.
3. Capture and protect your intellectual property
When you sell your business you are selling a wide range of things. Your customers, suppliers, employees, processes, expertise, culture, identity, brands, market share… Any new owner will need to be assured that all of this will stay in the business and continue to operate effectively without you.
The more you can capture this in written format the more confident prospective buyers will feel. You are also likely to maximise your sell price as you are in effect selling more. Some examples of how to capture your business intellectual property are: written contract agreements for supply, licence, employment or engagement, trademarks for brands, patents if appropriate, and documented processes and systems.
By doing all of the above you can ensure that you will be maximising the saleable value of your business for when you decide to join Sam Morgan on that beach in Fiji!
For personalised assistance to make the most of your business see our REL Results Consulting Programme.
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