Measuring Value Improvement of A Business: What to Know

Over the years, I’ve spoken ad nauseam about value growth. However, I recently spoke with a business owner who asked me how to measure that improvement. In response, I thought this would be a great topic for today’s blog. Measuring value growth is a very methodical process and, therefore, deserves to have some content dedicated to it.

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TIME INDEX:

• 00:55 – How to Measure the Value Improvement of your Business
• 01:41 – What is Value Growth
• 03:21 – Determining the Current Value
• 04:59 – Intangible Capital
• 08:01 – How to Measure Improvement
• 09:22 – Seeing Improvement
• 11:34 – Summary
• 15:19 – Wrap Up

What is Value Growth?

As I said, I’ve literally dedicated hours of content to value growth and why it’s so important to business owners. If you have a business, it is worth something. Whether that value is $3MM or $3, depends on the effort you’ve put into building its value. You can find out the business’ value by having an appraisal done. This can be done by a professional, trade association, or even through a variety of software packages that allow you to take a DIY approach.

In my company, we look at 8 key areas within the business to determine its intrinsic value. Each area is assigned a specific value based on how well the business meets certain criteria. With such a detailed look at the company, we are able to accurately identify the strengths and weaknesses of the organization.

Once we have completed the assessment, we can assign a benchmark value to the business. The process of growing that value is one that addresses the weak points through planning, strategy, and a lot of hard work and determination. So, there are several ways to find your business’ value.

Four Types of Capital

Chris Snyder came up with this concept, and I’ve used it before but want to make sure to credit him because it really simplifies business. Basically, you can break any business down into four types of capital. So, what are these four types of capital and how do they affect your business’ value?

1. Human Capital

This refers to your team. The people who make your daily operations work are a valuable asset. This area adds value based on a variety of factors including, how well they can operate the company without you being present. If you have to be in the center of your business at all times, then that’s a problem. I’ve used this example in the past but it’s a great illustration of this point.

A few years ago, the Alabama Crimson Tide was playing for their 600th national championship. Their starting quarterback went down and wasn’t able to return. If this program weren’t so strong, this could have been a disaster. However, the backup quarterback came in and won the game. How is this possible? Well, he was just as good as the guy he replaced and had been so well trained that he knew the offense just as well as the starter that was injured. This is the type of human capital every business owner should strive for. Put together a team of rockstars and train them up in every aspect of the business.

2. Structural Capital

Structural capital deals with the operational efficiency of your business. If you’re a fast-food franchisee, this could mean ensuring that there are fail-safes in place to ensure that a 16-year old doesn’t burn the place down while they’re cooking french fries. I like to use that as an example because so many fast-food restaurants utilize automation to maximize consistency and efficiency.

Likewise, these businesses serve as an excellent model for scalability. They can quickly and efficiently adjust to increased or decreased demand by hiring a few extra people or cutting back on hours. So, that’s the structural capital of a business.

3. Customer Capital

We want our customers to be well-invested within our businesses. Having a strong customer capital means having not just a small but loyal group, but having a broad breadth of customers from many different geographical and social demographics. I like to look at the businesses that are known for best-in-class customer service when I’m talking about this type of capital.

These would be places like  Chick-fil-A, or Apple. They have broad and loyal followings, giving them very strong customer capital.

4. Social Capital

How is your business perceived? Does it have a good reputation? Are you known for exceptional value? Customer service? Social capital deals with this subject. How people view your business contributes to its value. If your business is the town pariah, it’s not going to help you. But if people see your company regularly participating in community outreach events and being a source of goodwill, you will reap rewards through your social capital. Now, I’m not suggesting that you engage in charity for personal gain, but sincere and genuine efforts will be noticed.

Measuring Value Improvement

Now, we get to the heart of the subject. We know how to assess the value of our business but how do we go about measuring value improvement? Simply put, we go through the entire valuation process, once again. I know, that’s not really what you were wanting to hear. But the truth is this, you went through this whole process of determining the strengths and weaknesses of your business so you could work on them. Therefore, the only way of truly measuring the value improvement of your business is to repeat the process. In theory, when you improve the weaker points of your business, you improve your business. Thus, increasing the value of your business.

The True Measure

However, the true measurement is often seen day-to-day. What do I mean by that? Well, not terribly long ago, I was absolutely running ragged in my own business. I had a few team members that didn’t see the big picture. Out of love and loyalty for these team members, I was compensating for their shortcomings. I was literally killing myself trying to make it work. My doctor even told me that I wouldn’t make it to 60-years old if I didn’t make a change in my work habits.

So, I began investing in my own company. I was pouring into my team and training them. We restructured our organization. I began to address the issues within my business, the operational issues, marketing issues, and yes, even issues in finance. It wasn’t until I went to work on these areas in my business that I began to see the fruits of my labor. Until I stopped working just to keep things afloat and began working to improve them, I was just laboring in vain.

So, the true measure of value improvement is found in your daily operation. If you’re finally able to rely on your human capital so that you can take a day off and not worry, you’ve improved the value. When you’re able to look at the systems that you’ve put into place and see real efficiency; when you begin seeing your customer capital increase and expand to new demographics, that’s where the true measure of your value improvement is found.

In Conclusion…

Friends, owning a business is one of the most difficult, complicated, frustrating, and rewarding things a person could ever do. But in order to really get all that you can out of the experience, you have to maximize its value. Start with the appraisal and work from there. It’s a difficult process but once you’ve maximized the four types of capital, you can enjoy owning your business again. Measuring true value improvement is a methodical and deliberate process. If you feel like you need help with the process or simply don’t want to do it on your own, reach out to us. We do this every single day.

Hey, life is hard. Life is complicated, but life is also good. Measuring the true value improvement of your business can be frustrating. But, it doesn’t have to be. With a little patience and, perhaps, some help from a professional, we can make measuring the value growth of your business at least financially simple.

If you have any questions about the content we’ve covered in today’s blog, or if you’re in need of professional financial services, schedule a meeting. The Financially Simple team is ready to meet with you!