Build your business into a valuable asset

Part One: What determines the value of your business?

What is the real value of your business? How do you determine that value? How can you build your business into a valuable asset? Over the next ten weeks, this series of articles cover all the essentials you need to know in order to answer these questions, starting in this article.

Facebook, the popular social media firm, is set to be floated on the NASDAQ stock exchange in the United States next week. Founded only eight years ago, Facebook’s value at its initial public offering is estimated at US$90 billion. The co-founder and Chief Executive Officer, Mark Zuckerberg, is set to be one of the youngest billionaire entrepreneurs in the world.

The value of Facebook, like that of any listed company, is determined by what the market is willing to pay for its shares. For example, we know that local mobile giant, Econet Wireless, is worth US$677 million, Zambia’s Celtel is worth US$715 and South African is worth US$29 billion, because that is how the open market is valuing the businesses. The price that investors are willing to pay for a company’s shares is largely determined by the profit making ability in both the short and medium term. Loss making company will quickly see its share prices fall, like the prices of poorly performing companies such as ZECO, currently trading at 0.25 cents, Rio Zim 55 cents, and RTG 1.80 cents: valuing the businesses at tiny fractions of the value of their assets. So, the value of your buildings, computers, motor vehicles etc do not matter to investors, who are looking for good return on their investments in the form of dividends or capital gains.

Profit, or earnings, is the major determinant of a business’ value. The second determinant is the business’ sustainability and growth prospects.

Your business may not be listed on the stock exchange, but when you decide to sell it, the potential buyer will look at the same fundamentals; future earnings, sustainability and growth prospects. A person buying a business will not care too much about the physical assets, but will look at these fundamentals.

So, when building your business, like Dr. Anthony Robbins said in his book the 7 Habits of Highly Successful People, start with the end in mind. Define what you want to get from the business. The most ideal end for many people would be to build an asset that will produce a passive income for a long time. That is the main reason why most people invest in property. So you need to define the amount of income you expect to get, say each month. Then build the business to ensure that it produces that amount in net profit, after all expenses and taxes.

Your financial goals will define the business model you will develop for your enterprise. I will give you an example to show the importance of a well thought out business model. I am a consultant. Most consultants charge clients either per job complete or per hourly rate. The maximum income I can generate from consulting is the sum of hours I can work per month multiplied by the hourly rate. If I charge $25 per hour and can work a maximum of 180 hours per month, my maximum income cannot exceed $9,000 each month. That is the weakness with most businesses that rely on the owner’s skills or that require the owners’ continuous presence in the production process. Such enterprises are no different from a self-employed person. Because they cannot be scaled, such businesses cannot grow as much other business models which do not require the owners’ continuous presence.

This means you need to design your business model to fit your overall goal and mission. First analyze if your financial goals can be met from the current business model, and if not, then change the model to fit you goal.

Next week, I will look at business models that allow scalability and significant growth.

What is the real value of your business? How do you determine that value? How can you build your business into a valuable asset? Over the next ten weeks, this series of articles cover all the essentials you need to know in order to answer these questions, starting in this article.

Facebook, the popular social media firm, is set to be floated on the NASDAQ stock exchange in the United States next week. Founded only eight years ago, Facebook’s value at its initial public offering is estimated at US$90 billion. The co-founder and Chief Executive Officer, Mark Zuckerberg, is set to be one of the youngest billionaire entrepreneurs in the world.

The value of Facebook, like that of any listed company, is determined by what the market is willing to pay for its shares. For example, we know that local mobile giant, Econet Wireless, is worth US$677 million, Zambia’s Celtel is worth US$715 and South African is worth US$29 billion, because that is how the open market is valuing the businesses. The price that investors are willing to pay for a company’s shares is largely determined by the profit making ability in both the short and medium term. Loss making company will quickly see its share prices fall, like the prices of poorly performing companies such as ZECO, currently trading at 0.25 cents, Rio Zim 55 cents, and RTG 1.80 cents: valuing the businesses at tiny fractions of the value of their assets. So, the value of your buildings, computers, motor vehicles etc do not matter to investors, who are looking for good return on their investments in the form of dividends or capital gains.

Profit, or earnings, is the major determinant of a business’ value. The second determinant is the business’ sustainability and growth prospects.

Your business may not be listed on the stock exchange, but when you decide to sell it, the potential buyer will look at the same fundamentals; future earnings, sustainability and growth prospects. A person buying a business will not care too much about the physical assets, but will look at these fundamentals.

So, when building your business, like Dr. Anthony Robbins said in his book the 7 Habits of Highly Successful People, start with the end in mind. Define what you want to get from the business. The most ideal end for many people would be to build an asset that will produce a passive income for a long time. That is the main reason why most people invest in property. So you need to define the amount of income you expect to get, say each month. Then build the business to ensure that it produces that amount in net profit, after all expenses and taxes.

Your financial goals will define the business model you will develop for your enterprise. I will give you an example to show the importance of a well thought out business model. I am a consultant. Most consultants charge clients either per job complete or per hourly rate. The maximum income I can generate from consulting is the sum of hours I can work per month multiplied by the hourly rate. If I charge $25 per hour and can work a maximum of 180 hours per month, my maximum income cannot exceed $9,000 each month. That is the weakness with most businesses that rely on the owner’s skills or that require the owners’ continuous presence in the production process. Such enterprises are no different from a self-employed person. Because they cannot be scaled, such businesses cannot grow as much other business models which do not require the owners’ continuous presence.

This means you need to design your business model to fit your overall goal and mission. First analyze if your financial goals can be met from the current business model, and if not, then change the model to fit you goal.

Next week, I will look at business models that allow scalability and significant growth.

Phillip Chichoni is a strategic business planning asnd financial management expert who works with entrepreneurs and SMEs who want to accelerate their growth. To receive my free weekly newsletter, please send me an email with SUBSCRIBE on the subject line, to chichonip@ssmebusinessslink.com.

 

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