All businesses need to generate value, whether that is part of an exit strategy for the entrepreneur, to hand the business to the next generation, or to simply build a legacy and leave it in the hands of the management team. Value creates resilience for the business going forward, so that it can withstand the pushes and pulls that the market will throw at it.
How do you create real value? How do businesses become worth more than just a multiple of their earnings? Let’s look at what in my opinion are five key considerations for building value in today’s age.
1. Be disruptive in your industry
Being disruptive in your industry means that you are on the front foot, thinking differently and leading the charge towards the future. If you are doing this consistently and successfully you will quickly stand out from the crowd, which generates value. Businesses which only try to follow trends—or worse still try to hang on to a world that no longer exists in which they used to be successful—may generate revenue, but they won’t stand out, won’t build a strong brand for themselves, and so will not generate much value. I’d go so far as to say that they won’t even exist in future!
Stop and reflect on the disruptions that you can think of happening right now in different industries. Some recent prominent examples include Amazon, Tesla, Airbnb, Uber and Netflix.
These are all significant new companies that have emerged over the last decade which have transformed their industries, and which in some cases have eradicated well-established historical competition.
However, there are also companies out there doing simple disruptive things: an owner-managed business may not always be the huge unicorn which takes over the industry, but it can still be a disruptor. One example is Patagonia, who don’t really try to sell to their customer, but instead try to fulfil their customers’s and clients’ requirements.
2. Intellectual property
Although many people don’t realise it, every business has intellectual property (IP). The traditional definition of IP, which many people still believe to be true, revolves around trademarks, patents and so on—something more tangible and product-based. But you don’t have to be a manufacturer to own the rights to something: service businesses, for example, still have processes, ways of thinking, specific uses of technology, brands. These are what make your business stand out, and it’s absolutely essential that they are documented and, wherever possible, protected. They are truly valuable assets.
By documenting what makes your business different and unique, what makes it successful, you are able to easily show the value that your business holds. It also makes it more difficult for anyone to take your ideas and pass them off as their own, since you have a record of the, and, ideally, protection.
3. Recurring revenue
The third path to value creation is to have a secure income stream and recurring revenues. Any business that can show it has money continually coming in, and repeat customers, is guaranteed to be worth more than a business that is only as successful as its last sale.
Whatever your industry, whatever stage your business is at, I would always encourage you to think carefully about how secure your income stream is, and how to obtain recurring revenues. This will be easier in some industries than others; in accountancy, for example, recurring income is the model, it’s fairly easy to achieve this. In some product and service industries it could be more difficult, but I’ve seen it done. Tying major customers into long-term contracts is an important goal to try and achieve—it builds real value into the business.
4. Subscription businesses
Once you’ve established a recurring revenue stream, the next objective should be turning that recurring revenue into a subscription model. Just reflect on how you and your business are now engaging with many services and buying many products. You’ll be surprised at how many of those new engagements and interactions mean that you’re now subscribing for many products and services. Changing a business from a traditional ‘invoice/get paid’ model to a subscription model can be extremely challenging, and you’ll need to ask some advice about how you can go about this.
The subscription model is the model of the future. I predict going forward that the ‘invoice/get paid’ model will be all but eradicated for all industries and businesses. If we go back and look at the disruptive businesses above, we can see that all of them, in some shape or form, have a subscription model.
So why is this? It’s because the subscription-based income stream becomes certain. And in the short term, the valuations being made on subscription-based businesses are considerably greater. Reflect on how you could evolve your business to enable it to adopt a subscription model in the future.
5. That little bit of sizzle
The final point on value creation that I have seen work extraordinarily well is that, although it is vitally important that you have the fundamentals of your business operating efficiently such that you have solid foundations, you also need an element of ‘sizzle’.
This means you should always be looking for that next opportunity, that next market to crack, the next product or service evolution that’s going to happen. This doesn’t mean that you invest all your time and energy into it, but are simply always putting a chip or two out of your large pile on a new exciting gamble. It’s these small ‘sizzle’ bets which allow you to disrupt your industry, and which give you as an entrepreneur the freedom to be a little creative and have some excitement. This creativity and excitement alone is of great value, because it keeps you engaged.
Consider what could be the next piece of sizzle in your business—what small opportunity outside of the normal running of things could you look at, which excites you, and which could potentially create great things for the business. Many of these sizzle ideas may not work out, but that’s not the point: they’re low investment with potentially high reward. And as such they are bound, over time, to add value to business.
- This is an excerpt from Warren’s book, Evolve to Succeed, which is available here.