The 8 Factors driving value in your business

Are you looking to grow your business and ultimately increase its value up to 71%?

In this series we share with you the 8 factors that if improved, increases the value of your business. The series is co-authored by John Worrillow and based on the study of 16000 businesses surveyed as part of a global initiative to improve business performance.

Is your business your largest asset? Achieve a Value Builder Score of 80+ and based on research from thousands of test cases – your company will be worth 71% more than the average business.

Be Sure to work through the entire series and remember it’s better to do this if you know your score before you start!

Below is a link to the Value Builder score as well as links to the details behind the 8 Factors: 

1. The valuation technique used by professional business buyers;
2. The three attributes of a scalable business model;
3. How to bulletproof your business from demanding employees, overbearing customers, and suppliers who hold you hostage;
4. One simple technique for eliminating cash flow worries;
5. The one kind of revenue that can triple the value of your business;
6. The two essential elements of your marketing plan you need in order to avoid commoditisation and costly price wars;
7. The one question you need to ask your customers to predict the likelihood that they will buy again in the future and refer you to others.
8. Are you working IN or ON your business

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The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business.

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Business Doctors is a business support network dedicated to helping small and medium sized businesses achieve their vision. We are experienced business people, passionate about sharing our skills and experiences. Our aim is to offer hands-on support, dedicated to getting you back on track to growing a profitable and more valuable business. 

Value Builder Factor 1 - Financial Evaluation

How to Value Your Business

Business valuation is a complex discipline, but there are some rules of thumb you can use to help you come up with an estimate of what your business is worth today.

Your business is likely your largest asset so it's normal to want to know what it is worth. The problem is, business valuation is what I would call a "subjective science."

The science part is what people go to school to learn: you can get an MBA or a degree in finance, or earn professional credentials as a business valuation professional and learn the theory behind business valuation.

The subjective part is that every buyer's circumstances are different and therefore two buyers could see the same set of company financials and offer vastly different amounts to buy the business.

This article is intended to give you the basic science and math behind the most common business valuation techniques, but keep in mind that there will always be outliers that fall well outside of these frameworks. They are the strategic sales where a business is valued based on what it is worth in the acquirer's hands. Strategic acquisitions, however, represent the minority of acquisitions, so use the three methods below to triangulate around a realistic value for your company:

Assets-based

The most basic way to value a business is to consider the value of its hard assets minus its debts. Imagine a landscaping company with trucks and gardening equipment. These hard assets have value, which can be calculated by estimating the resale value of your equipment.

This valuation method often renders the lowest value for your company because it assumes your company does not have any "Good Will." In accountant speak, "Good Will" has nothing to do with how much people like your company; Good Will is defined as the difference between your company's market value (what someone is willing to pay for it) and the value of your net assets (assets minus liabilities).

Typically, companies have at least some Good Will, so in most cases you get a higher valuation by using one of the other two methods as described below.

Discounted Cash Flow

In this method, the acquirer is estimating what your future stream of cash flow is worth to them today. They start by trying to figure out how much profit you expect to make in the next few years. The more stable and predictable your cash flows, the more years of future cash they will consider.

Once the buyer has an estimate of how much profit you're likely to make in the foreseeable future, and what your business will be worth when they want to sell it in the future, the buyer will apply a "discount rate" that takes into consideration the time value of money. The discount rate is determined by the acquirer's cost of capital and how risky they perceive your business to be.

Rather than getting hung up on the math behind the discounted cash flow valuation technique, it's better to understand the drivers of your value when using this method, which are: 1) how much profit your business is expected to make in the future and 2) how reliable those estimates are.

Note that business valuation techniques are either/or and not a combination. For example, if you are using Discounted Cash Flow, the hard assets of the company are assumed to be integral to the generation of the profit the acquirer is buying and therefore not included in the calculation of your company's value.

A money-losing bed and breakfast sitting on a $2 million piece of land is going to be better off using the Asset-based valuation method, whereas a professional services firm that expects to earn $500,000 in profit next year, but has little in the way of hard assets, will garner a higher valuation using the Discounted Cash Flow method or the Comparables technique described below.

Comparables

Another common valuation technique is to look at the value of comparable companies that have sold recently or for whom their value is public. For example, accounting firms typically trade at one times gross recurring fees. Home and office security companies trade at about two times monitoring revenue, and most security company owners know the Comparables technique because they are often getting approached to sell by private equity firms rolling up small security firms. You can typically find out what companies in your industry are selling for by asking around at your annual industry conference.

The problem with using the Comparables methodology is that it often leads owners to make an apples-to-bananas comparison. For example, a small medical device manufacturer might think that, because GE is trading for 20 times last year's earnings on the New York Stock Exchange, they too are worth 20 times last year's profit. However, I can tell you, after analyzing more than 13,000 businesses that use The Value Builder System that a small medical device manufacturer is likely to trade closer to five times pre-tax profit.

Small companies are deeply discounted when compared to their Fortune 500 counterparts, so comparing your company with a Fortune 500 giant will typically lead to disappointment.

Finally, the worst part about selling your business is that you don't get to decide which methodology the acquirer chooses. An acquirer will do the math on what your business is worth to them behind closed doors. They may decide your business is strategic, in which case back up the Brinks truck because you're about to get handsomely rewarded for your company. But in most cases, an acquirer will use one of the three techniques described here to come up with an offer to buy your business.

Click  here to get your score now.

The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business. Business Doctors are certified Value Builders combining elements of the system created BY JOHN WARRILLOW with 10 years of hands on experience in helping businesses grow.

Images Courtesy of Getty  Images
Articles Courtesy of John Warrillow and Inc.com

Value Builder Factor 2 - Growth

Do You Pass The 5 x Test?

A simple test allows you to compare the value of your company with your industry competitors.

Imagine you wake up one morning to find your business is receiving five times the amount of demand that it usually does:

• Five times the number of phone calls.
• Five times the inbound leads.
• Five times the website traffic.
• Fives times the number of customers.

Would you be able to handle it? Would it cripple your business and your people or would your company absorb the spike seamlessly?

The answers to those questions have a big impact on how attractive your business will be to an acquirer when you're ready to sell.

An Analysis of 14,000 Businesses

I can say this with confidence because we've just finished analyzing our pool of Sellability Score users for the quarter ending December 31, 2014.

To give you some background, we offer The Sellability Score questionnaire as the first of twelve steps in The Value Builder System, a statistically proven methodology for increasing the value of a business.

We asked 14,000 business owners 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. We then compared the offer made to the following question:

If customers were lined up at your door to buy, would you find delivering FIVE times the current volume of what you sell:

• Impossible
• Very difficult
• Fairly difficult
• Fairly easy
• Very easy

2.88 vs. 4.65 Times

The average offer received among all of the businesses we analyzed was 3.7 times pre-tax profit. However, when we isolated just those businesses that could easily handle five times more customers, the offer multiple went up to 4.65.

Companies that would find it impossible to serve five times more customers got offers of just 2.88 times pre-tax profit--a steep a hair cut off the average.

Rethinking Your Industry

The natural inclination is to look at these numbers and come to the conclusion that the difference can be chalked up to the industry you're in. For example, a law firm is going to have more trouble taking five times the number of cases than a software company would have accommodating five times more users.

There is some truth to that, but you can find companies operating in a traditionally unscalable industry that have bucked convention and become scalable.

The Scalable Law Firm

For example, take a look at the story of Brian Lee. Lee was an attorney with New York-based Skadden, Arps, Slate, Meagher & Flom, LLP, where they charged hundreds of dollars an hour for their time. Realizing good quality legal advice was out of reach for most consumers and small businesses, Lee started LegalZoom.

Now you can login to LegalZoom and get basic legal documents (e.g., a will, business incorporation or lease) for a fraction of the cost of hiring a lawyer. LegalZoom can accommodate five times the demand because they are relying largely on boilerplate documents rather than high-priced lawyers to prepare your papers.

Not surprisingly, LegalZoom caught the attention of investors who would never consider investing in a traditional, bill-by-the-hour law firm. In 2011 LegalZoom received $66 million in a venture round of financing from the darlings of Sand Hill Road, Kleiner Perkins Caufield & Byers and Institutional Venture Partners. Then last year, European private equity firm Permira acquired close to half of the business at an implied valuation of approximate $425 million.

The secret to making your business worth more than those of your industry peers and competitors may not be what you do, but how you go about doing it.

Click  here to get your score now.

The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business. Business Doctors are certified Value Builders combining elements of the system created BY JOHN WARRILLOW with 10 years of hands on experience in helping businesses grow.

Images Courtesy of Getty  Images
Articles Courtesy of John Warrillow and Inc.com

Value Builder Factor 3 - Independence (Switzerland Structure)

A Lesson From the World's Richest People

What strategies can you learn about running your business from Switzerland?

Exclusive: People shopping at the famous Bahnhofstrasse in Zurich. The street is the third most expensive for retail property in Europe, and the fifth most expensive in the world. IMAGE:
One of the most fascinating elements of Switzerland's success is its determination to remain neutral under unimaginable pressure to pick sides. The country has not declared a state of war since 1847 (it never entered the World Wars or the Iraq war) and opted out of joining the European Union. They didn't even join the United Nations until 2002 and that was only after a country wide referendum.

Despite what you may think of Switzerland's neutral geopolitical stance, it is hard to argue with the economic results of neutrality:
•    The World Economic Forum's Global Competitiveness Report currently ranks Switzerland's economy as the most competitive in the world.
•    In 2010, the Global Wealth Report by Credit Suisse Research Institute found that Switzerland has the highest average wealth per adult at $372,692, with wealth defined by the value of financial and nonfinancial (such as real estate) assets.
•    According to Trading Economics, the worst the Swiss unemployment rate ever got during the recent worldwide financial crisis was 4.2 percent in January 2010; today the unemployment rate is around 3.4 percent.
•    According to Mercer Consulting, in 2010, Zurich and Geneva were respectively ranked as the cities with the second- and third-highest quality of life in the world (behind Vienna).

The Switzerland Structure

The Swiss obsession with neutrality inspired the name of one of my core ideas for creating a valuable company. "The Switzerland Structure" is a way of evaluating your business to ensure that neutrality allows you to minimize your dependence on any one company or individual. I'd recommend you consider the Switzerland Structure in all areas of your business:

Suppliers

If your business is dependent on one or two key suppliers (companies or independent consultants), you are at their mercy. Cultivating a bench of suppliers, on the other hand, means you will never feel beholden to anyone. Spread your business around – even if you lose some special pricing discounts. Neutrality is worth more than a few dollars in savings.

Employees

If you're too reliant on any one employee, you are at a significant risk if that employee chooses to leave and at a disadvantage when it comes to negotiating his or her salary. To avoid this situation, nurture a pool of people you want to hire. Toronto-based executive search firm IQ Partners offers a bench-building service: it proactively recruits a short list of candidates who could fill your key roles so that you have a bench of people to go to in the event of an employee defection.

Customers

If you're too dependent on any one customer, your business will be highly unstable. It will be stressful to run in the short term and virtually worthless if you ever want to sell it. Try to work your customer concentration down to a point where your largest customer represents no more than 15 percent of your revenue. You'll sleep better at night and have a more valuable company when it comes time to sell.

Click  here to get your score now.

The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business. Business Doctors are certified Value Builders combining elements of the system created BY JOHN WARRILLOW with 10 years of hands on experience in helping businesses grow.

Images Courtesy of Getty  Images
Articles Courtesy of John Warrillow and Inc.com

Value Builder Factor 4 - Cash Flow

Here's how to turn the traditional cash flow cycle on its head.

So far, in this eight-part series titled "8 Reasons Subscribers Are Better Than Customers," we've seen how subscribers boost the value of your company, increase the lifetime value of a customer, smooth out demand, and provide free market research. Today, we look at how the subscription business model helps you get paid on time.

In a traditional business, customers buy and then you must often wait 30, 60 or 90 days to get paid. The more you sell, the more cash you deplete. In a subscription business, you carve up one big purchase into many smaller transactions that can often be processed on a credit card, meaning you get paid the day you're supposed to--automatically.

Stuart Hunt & Associates is an Edmonton-based company that safely disposes of radioactive waste. Part of its business comes from doing large cleanup jobs for massive nuclear plants and mining operations. The cash flow cycle of these large projects is horrendous. Stuart Hunt & Associates gets a purchase order from a large mining company, which allows it to start work on a project. Once it completes the job, it sends an invoice and must typically wait 120 days to get paid. In the meantime, the company still has to make payroll and keep the lights on, etc., causing cash flow stress for the owner.

The other part of the business comes from servicing the radioactive sources in small, everyday devices that are used by all kinds of organizations. You know that little wand the airport security guy assaults you with when you forget to take your belt off as you go through the X-ray machine? That has a small radioactive source inside, and to make sure it is not leaking radioactivity into unsuspecting travelers, it needs to be tested by a company like Stuart Hunt & Associates once each year.

Stuart Hunt & Associates tests thousands of radioactive devices per year. Until recently, it would send a small invoice--usually around $100--for each job. Some customers would pay on time, but most would require a follow-up phone call at the 30-day mark. Some would need a second nudge at 60 days, and each year Stuart Hunt & Associates would have to write off a few deadbeats who never paid. Given the volume of small jobs, this $6-million-per-year company employed two full-time bookkeepers, one of whom spent most of her time just collecting receivables.

Then Sean Hunt, the current president and son of founder Stuart Hunt, had an idea: Why don't we charge small customers on a recurring subscription model that bills a credit card once a year? All customers need to have their radioactive sources checked annually, so by offering a subscription service reminding customers to send in their devices, Stuart Hunt & Associates was actually simplifying the lives of its customers and getting paid much faster. Now customers are charged annually before their devices are checked, improving the company's cash flow and eliminating the need to chase deadbeats for $100.

In a traditional business, you buy the raw materials, make your widget, sell it, and then collect your money. It can take months--even years--between buying the stuff you need to make your product and actually getting paid. In the subscription business, the old model is reversed.

Now your customer subscribes and pays automatically and sometimes --such as in the case of a service like Amazon Prime-- for a full year of service in advance.

Click  here to get your score now.

The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business. Business Doctors are certified Value Builders combining elements of the system created BY JOHN WARRILLOW with 10 years of hands on experience in helping businesses grow.

Images Courtesy of Getty  Images
Articles Courtesy of John Warrillow and Inc.com

This article is adapted from the new book The Automatic Customer by John Warrillow. The book is published by Portfolio, an imprint of Penguin Random House, and is available wherever books are sold. Copyright John Warrillow, 2015.

Value Builder Factor 6 - Monopoly Control

7 Reasons Not To Diversify Your Business

Diversification is a sound financial planning strategy, but does it work for company building?

This year, I bought my wife a Vitamix for Christmas. You may think buying your wife a blender is relationship suicide, but she was delighted. It's arguably the best blender in the world, and apparently it has the same horsepower as a lawn mower. Not that I would know--she won't let me near it.

How does Vitamix get away with charging $700 for a blender when reputable companies like Cuisinart and Breville make blenders for less than half the price?

It's because Vitamix does just one thing, and they do it better than anyone else.

And it's not just consumer products that win by focusing. We're currently having an explainer video produced for The Value Builder System and we just engaged a company called Flikli to create the video. We could have chosen a local video producer or the cheapest video production company on Elance, but we paid a premium to work with Flikli for one reason: they specialize in explainer videos and it's the only thing they do.

Start looking around at the companies you admire and refer, and I'll bet they started by offering only one or two things. What's Ap was just a messaging platform before Facebook acquired them for $19 billion. Go Pro makes the best helmet mounted video cameras in the world. These companies stand out because they poured all of their limited resources into one big bet.

The typical business school of thought is to diversify and cross sell your way to a "safe" business with a balanced portfolio of products--so when one product category tanks, another line of your business will hopefully boom. But the problem with selling too many things--especially for a young company--is that you water down everything you do to the point of mediocrity.

Here are seven reasons to stop being a jack-of-all-trades and start specializing in doing one thing better than anyone else.

1. It will increase the value of your business

When you sell one thing, you can differentiate yourself by pouring all of your marketing dollars into setting your one product apart, which will boost your company's value. How do we know? After analyzing more than 13,000 businesses using The Value Builder System , we found companies that have a monopoly on what they sell get acquisition offers that are 42% higher than the average business.

2. It will make you referable

It's easy to refer a company that does one thing better than anyone else. If someone asks me who does explainer videos, Flikli is easy to refer. All I need to say is "explainer videos is all they do" and the person asking for the referral knows they will be good; whereas with a generic supplier, you end up groping for squishy descriptors like "she's really nice" or "they are really good," which are vague and utterly forgettable endorsements.

3. You can create a brand

Big, sloppy multinationals can dump millions into each of their brands, which enable them to sell more than one thing. Kellogg can own the Corn Flakes brand and also peddle Pringles because they have enough cash to support both brands independently, but with every new product comes a dilution of your marketing dollars. It's hard enough for a start-up to build one household name and virtually impossible to create two without gobs of equity-diluting outside money.

4. You'll be findable on Google

When you Google "helmet camera," Go Pro is featured in just about every listing, despite the fact that there are hundreds of video camera manufacturers. It's easy for Go Pro to optimize their website for the keywords that matter when they are focused on selling only one product.

5. Nobody cheered for Goliath

Small companies with the courage to make a single bet get a bump in popularity because we're naturally inclined to want the underdog--willing to bet it all--to win. When Google launched its simple search engine with its endearing two search choices "I'm feeling lucky" vs. "Google search," we all kicked Yahoo to the curb. Now that Google is all grown up and offering all sorts of stuff, we respect them as a company but do we love them quite as much?

6. Every staff member will be able to deliver

When you do one thing, you can train your staff to execute, unlike when you offer dozens or hundreds of products and services that go well beyond the competence level of your junior staff. Having employees who can deliver means you can let them get on with their work, freeing up your time to think more about the big picture.

7. It will make you irresistible to an acquirer

The more you specialize in a single product, the more you will be attractive to an acquirer when the time comes to sell your business. Acquirers buy things they cannot easily replicate themselves. My guess is that Go Pro (NASDAQ: GPRO) will get acquired by a consumer electronics manufacturer or a content company that wants a beachhead in the action sports video market. Most consumer electronics companies could manufacturer their own helmet mounted cameras, but Go Pro is so far out in front of their competitors--they are the #1 brand channel on You Tube--that it would be easier to just buy the company rather than trying to claw market share away from a leader with such a dominant head start.

Diversification is a great approach for your stock portfolio but when it comes to your business, it's a sure-fire road to mediocrity.

Click  here to get your score now.

The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business. Business Doctors are certified Value Builders combining elements of the system created BY JOHN WARRILLOW with 10 years of hands on experience in helping businesses grow.

Images Courtesy of Getty  Images
Articles Courtesy of John Warrillow and Inc.com

Value Builder Factor 7 - Customer Service

One Question Can Predict the Future of Your Company

Are your customers likely to recommend your business to their friends? The answer can make or break your business.

"On a scale of zero to 10, how likely are you to refer to a friend or colleague?" -Reichheld IMAGE: Corbis
Most start-ups know whether their customers are satisfied. But once you build your business to the point of having more than a handful of customers and just a couple of customer-facing employees, how do you monitor your customer satisfaction levels?

Many business owners solve the problem by launching some sort of customer satisfaction survey, but the problem with typical surveys is that, according to Fred Reichheld, author of The Ultimate Question, most customer satisfaction surveys do a poor job of predicting the likelihood of a customer either repurchasing from you or referring your company to a friend.

Determined to find a better way to quantify how well a company is serving its customers, Reichheld developed the Net Promoter Score methodology, which is based around asking customers a single question that is predictive of both repurchase and referral: "On a scale of zero to 10, how likely are you to refer to a friend or colleague?"

Reichheld discovered that when customers answered this question with a nine or 10, they were statistically more likely to repurchase from the company and/or refer it—so much so that Reichheld found that the companies that score well on this measure were more likely to grow than were lower-scoring companies.

Not surprisingly, the news that a researcher had actually discovered a way to predict growth triggered Fortune 500 companies around the globe to latch on to the methodology. Today, companies such as Intuit and Southwest Airlines use the Net Promoter Score methodology as a way to quantify their customer experience.

How does your company measure up?

To see how your company measures up, survey a group of your customers by asking the question above. Those who rate you a nine or a 10 are your "Promoters" in Reichheld's lingo. Your "Passives" are the customers who give you a seven or eight—they are satisfied but not likely to repurchase from you or refer your company anytime soon. Your "Detractors" are the angry customers who score you between zero and six.

To calculate your Net Promoter Score, take the percentage of your customers who are "Promoters" and subtract the percentage of Detractors. For example, if 45 percent of your customers are Promoters, 20 percent are Passives and 35 percent are Detractors, then your Net Promoter Score would be 10 percent (45-35=10).

Reichheld found the average Net Promoter Score among the companies he surveyed was 10 to 15 percent, so by definition, if your score is north of 15 percent, you're above average, and you can expect your company to grow at a rate faster than the economy. A small handful of companies have achieved a Net Promoter Score of at least 50 percent, which Reichheld defines as "World Class." Not surprisingly, companies with a World Class Net Promoter Score are the growth stories of the economy: Apple, Google and Harley-Davidson.  

As popular as the Net Promoter Score methodology is among the Fortune 500, I think it is even better suited for use among smaller companies for a number of reasons:

1. It's easy. You can deploy the questionnaire in five minutes using a survey tool like Survey Monkey and enjoy a very high response rate because answering it is not a burden on respondents.

2. It gives you a common language with investors. If you're planning to sell all or part of your company in the future, tracking your customer satisfaction using a well-established, recognized tool allows potential acquirers and investors to quickly gauge how satisfied your customers are relative to those of other companies they have invested in. Many private equity firms and venture capitalists will insist on performing a Net Promoter Score survey with your customers before they invest in your business.

3. It's cheap. The survey can be deployed and the data analyzed easily in house.

4. It's predictive. Unlike most surveys, which ask respondents a litany of time-consuming questions that render interesting but often irrelevant data, the Net Promoter Score methodology asks the only question that has been proven to predict the likelihood a customer will repurchase or refer you—the two things that fuel growth of any business.

If you're starting to lose the pulse of how satisfied your customers are, consider asking the one question you really need the answer to.

Click  here to get your score now.

The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business. Business Doctors are certified Value Builders combining elements of the system created BY JOHN WARRILLOW with 10 years of hands on experience in helping businesses grow.

Images Courtesy of Getty  Images
Articles Courtesy of John Warrillow and Inc.com

BY JOHN WARRILLOW

Founder, The Value Builder System@JohnWarrillow