IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Jack Gruber of Ja-Mar Analytics (www.ja-maranalytics.com):
Business Growth Strategies That Can Enhance Profitability & Company Value
Today, many small business owners in America are asking, ‘what is my business worth?
Why is there currently such interest in the business community? The answer is simple demographics. In 2022 the front edge of the Baby Boom generation turns 76 years old. The back edge is 58 years old.
Today the business community finds itself in the middle of the largest transfer of wealth the world has ever experienced. Much of that transfer will take place through the sale of small retail and service businesses, professional practices, and small manufacturing enterprises.
A small business, measured by Standard Poor’s, Moody’s, and other rating agencies, is one generating $250,000. to $9,000,000. in top live annual revenue.
Business research shows that two-thirds of all small businesses have a market value below what the business owner hopes to sell for. So, what is causing this disparity in perceived value vs. market value?
The answer has many faces. Today, the most common reason given is two-plus years of COVID Pandemic. There is no question that COVID has taken a toll on the business community. However, some businesses in every sector, adjusted to the environment, established new procedures, and maintained profitability, and even expanded in many cases.
Sometimes changing consumer demands, or advances in technology resulted in declining valuation. Sometimes the business owner simply stays too long, passing up their prime selling opportunity. In many cases, an over-dependence on the owner’s involvement in the enterprise decreases the value.
However, the laundry list of reasons for undervaluation is all overshadowed by the primary villain, LACK OF PLANNING. Common sense tells us that we are not going to work forever. There will come a time when we want to move on to new experiences or retire and reap the rewards of our efforts. So, if this common sense is so obvious, why do we continually fail at it? The answer seems to be built into our human DNA. We are procrastinators. Parkinson’s law, ‘Work expands to fill the time allotted’ is a perfect summation. We see this procrastination in every walk of life.
The Government passes an appropriations bill moments before the midnight expiration. Burning the midnight oil to finish the project we have had for three months, and due tomorrow. Going back downstairs at midnight to take the garbage out for the morning pickup. We have known for ten years that the garbage pickup is always Tuesday morning.
You can find comic relief in our procrastination dependability. However, when it comes to preparing to sell your business the humor is quickly lost when measured in dollars you could have made if only you had taken some basic planning steps. As every businessperson knows, there is a long list of things that must be accomplished in running a successful business. And that is before you are buried in the daily fire drills brought on by clients, sales, service, and the unexpected.
However, this endless list of activities often becomes an emotional crutch and distraction. The lack of planning can begin with the fear of not knowing where to start. The key to business planning starts with basic math and business principles. Revenue is driven by a small number of specific activities. It is the 80/20 Pareto Principle. It is important to remember that these activities are universal. Whether you are a thoracic surgeon, running a family bakery, manufacturing widgets, or selling scented holiday candles, success and profitability is the result of five key activities.
The math you need to understand is the principle of Kizan. Improvements are achieved when you make small incremental improvements. These improvements introduced in the correct order will result in compounded financial growth. It is the basic power of compounding. Albert Einstein once said that the greatest invention of man was the creation of compound interest. The same principle of compounding value is a powerful tool for a business focused on growth.
When you implement the five revenue-driving activities in sequential order, their value compounds with each additional step. While this may sound like a theory of smoke and mirrors it is the value of math and compounding. To understand the power of this process, let’s put it into practice. Let’s start with the five revenue-driving steps in sequential order. Leads, Conversions, Transactions, Pricing, and Profitability.
If you implement business strategies focused on growing the number of Leads, the growing number of leads compound into increased Conversions (customers). The increased number of customers compounds into more Transactions. Then we implement business strategies targeted to improve value of the product or service to the consumer. The increased value allows you to increase Pricing. Remember that people do not buy price, they buy value for the dollars they spend. These first four steps result in ever-increasing Profitability.
We can test the process to determine its validity. The question is determining if small incremental changes result in compounding financial gain. We will start by establishing a baseline company and a value for each of the five basic steps.
We will then increase each of the five steps by 10%. These increases are the result of implementation of some of the twelve fundamental business strategies. We will then measure any improvement in the financial profitability.
Profit Growth Calculation: Compound Growth
Baseline 10% Increase Each
Leads 1,000 1,100
Conversions 25% 27.5%
Sales Total 250 303
Transactions 10 11
Prices $100 $110
Revenue $250,000 $366,025
Profit Margins 25% 27.5%
Total Profits $62,500 $100,657 (61% Increase)
For this example, we created a short-term, 3-month coaching program. The focus was on implementing business strategies designed to improve each of the five core areas. By increasing each area by just 10% The compounding effect resulted in a 61% increase in the owner’s profits. In a similar program, we designed a twelve-month coaching program. The focus was on utilizing more of the twelve key business strategies to improve each of the five core areas by 50%. This program increased the owner’s profit margin from $62,500 per year, to $474,609. A 760% increase.
Doubling or tripling the revenue for a business is very doable. The key is the human commitment to the goal. It is not a question of cost. Note that we did not spend a single dollar on marketing or advertising in the previous examples. The profit growth was the result of implementing business strategies in an effective manner.
The human commitment will be measured by focus and tenacity. Simply talking and hoping to grow revenue will not accomplish the goal. It takes focus and real commitment. The business owner must dedicate themselves to working ‘ON’ the business and not just ‘IN’ the business. It is this commitment that will measure the success of the effort.
If you have questions relating to the content of this article, business growth strategies, IRS Code 453(A), or the services provided by Ja-Mar Analytics, Jack Gruber would welcome the opportunity to talk with you. Mr. Gruber can be reached at (425) 365-7160 or jack.gruber@ja-maranalytics.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.