Value Driver Series #5 – Growth Potential
How does the future of your business affect its Value?
Buyers generally pay the most for companies they know have potential to grow. This is why your growth potential is one of eight factors that drive the value of your business.
As a business owner, you’re likely proud of the results you’ve achieved in the past, but it’s important to understand when a buyer comes in – they are buying the past. They are trying to capture the value in the future – thus your future opportunity is critical to the value of your business.
To drive this value driver upward, its important to make the case on your future value, what future revenue will exist for the Buyer. Buyers typically consider the recurring revenue, long-term contracts, long standing relationships but they also use a revenue per employee metric that evaluates the business growth potential.
For example, Alphabet (Google’s parent company) generates around $1.3 million in revenue per employee. Compare that to the advertising agency WPP Group, whose average revenue per employee is around $100,000. For every dollar of revenue, WPP needs more than ten times the employees than Alphabet does. Employees take time and resources. As an employer you have to recruit, train, and motivate people. This is likely why WPP has grown more slowly and suffers much lower valuations when compared to a less people-heavy company. Some industries require people to do the work such as: retail, construction, farming, tooling, etc.
Thus, measuring your revenue per employee is just one of many ways an investor may evaluate how quickly they are likely to grow your company.
What other markets can your business operate in? What other product/services can you sell? Can you cross product/services to your existing customer base? Are there ways to?
For example, take a look at Verizon’s acquisition of Skyward. Jonathan Evans started Skyward in 2012 when he spotted companies like Amazon and Walmart using drones for package delivery. Evans was working as an air ambulance helicopter pilot and realized widespread use of drones would eventually create air safety issues.
Evans saw an opportunity where others hadn’t and launched Skyward to develop software that could safely route drone traffic. While he wasn’t a programmer, his extensive aviation experience enabled him to understand how the current airspace management guidelines could be turned into applications that created “digital train tracks” for drones. He was engaging in a new market and cross selling products.
Early adopters like utility, construction, and media companies used Skyward’s software to manage their drone fleets. Investors also came calling. Within a few years, Skyward had raised approximately $8 million.
One of those investors was Verizon. Drones would require fast and reliable Internet connectivity to operate safely, and the telecom giant wanted a piece of the future. Airbus came calling too, and when Verizon heard of the aerospace corporation’s interest, they leaped into action and offered to buy the company. Version wanted to capitalize on the growth potential. For Evans, hitching his emerging tech to one of the country’s largest telecommunications companies was an ideal match.
Within days, Evans had sold Skyward to Verizon for top dollar. Investors enjoyed returns of between 3-5x times their original investment.
Given the growth of the industrial drone market, Verizon knew Skyward had the potential to expand quickly as significant companies started to adopt drones. Verizon also understood that as Skyward grew, so too would the customer’s need for Verizon’s data because drones rely on a data connection to communicate with the ground.
No matter what business you’re in, the critical takeaway is to remember that the value of your business is determined less by what you have done in the past and more by what you will likely do in the future.
Focus on the people doing the work – your employees. Often times businesses start chasing growth in the wrong places. This usually leads to confused employees, diminished products/services, unhappy customers, and owner dependency.
Imagine a dart board with a bull’s eye and around it is a series of wider and wider circles. The bull’s eye is where the people just like your business hang out. They are the businesses who feel the problem your company set out to solve. They are usually your first customers and raving fans.
The further you go outside of your bull’s eye, the less these prospects feel your exact pain and the more likely these problems will occur.
To grow a business beyond your efforts, you need to hire employees (or build technology) that can do the work. As humans, we are usually lousy at doing something for the first time but can master most things with enough repetition.
The same is true of your employees. They need time to truly master the delivery of your product or service. Focus on what you do best and find ways to do it over and over again. Train your employees to master it. Do not fall victim to continuously tweaking or modifying your product to accommodate the customer. Every time you make a tweak outside the bull’s eye, it’s like changing the instruction manual. It’s disorienting for everyone and leads to substandard products and services, which customers receive and are less than enthusiastic about.
Having unhappy customers often leads the owner to step in and “fix” the problem. While some founders can indeed create the customized product or service for their new, outside-the-bull’s eye customer, they are making their company reliant on those customers in the process.
A business reliant on its ownership will stall out at a handful of employees when the owner runs out of hours in the day.
The secret to avoiding these issues, and continuing to grow, is to be brutally disciplined in only serving customers in your bull’s eye and training your employees to master your products and services.
This blog article is for informational purposes only. It does not create an attorney-client relationship and is not intended to be regarded as legal advice.