The Value of Your Business
I got some encouraging responses (from many of you) for last week’s post, “The CGCSE Board.” I ended this post with a question… By the way, do you even know the value of your business? To this, I add the following question – If you indeed do, what is the value of your business?
Since it’s a week now, I believe many of you must have at least started thinking about an answer.
While I would certainly love to know your answers, the reality is most business owners do not know the enterprise value of their business. The situation is even worse in our industry/profession. Rarely does someone know the real value of their business. We know our AUM, Revenue, Cost and Profitability numbers. We even do some guess work on the value of our company based on how much Prudent, IIFL Wealth, Groww and other companies are valued. Can you believe this? I am sure you can because chances are even you do not track or know the value of your company.
But isn’t this shocking given that we invest so much of ourselves (beyond time, energy, attention and money) in building this company. As ironic as this may seem, this is nonetheless true. And we have no one else but ourselves to blame. But we are not here to blame or shame; we are here to learn together.
At this point, I imagine (pardon me if I am wrong) some of you saying, “Amar, but this isn’t rocket science. We know how much Prudent is valued in the public markets or for that matter the valuation of Groww in the private markets.”
I know what you are saying, and I even agree with the first part of the statement that this isn’t rocket science…I can tell you though that there is some science, some art and a lot of mathematics involved in knowing how to value a business. And more importantly knowing the key drivers of value of your business. Whatever science this may be, the truth is most business owners in our industry/profession and outside of it don’t calculate or track their value on an annual basis.
Imagine not sending a portfolio report to a client for a year or sending a report that has no investment values in it. And then repeating the same every year. Which of us in our right mind will attempt to do something like this (even though it would actually help some people stick with their investments or behave well in frothy and scary markets)?
I bet no one would, but each one of us does this to the only client in the world who we take for granted (does this make sense – I am going with the flow anyway). In case you are wondering who this only client is – it’s you…it’s me…it’s us. We do this to ourselves. And this happens because there is no real financial professional to represent you …There is no one to play the role for you/me/us – one that you/me/us play for your/my/our esteemed and cherished clients.
If someone other than you were to do this to you, how would you react? If your financial professional did not send you the investment value of your investments year after year, what would you do? Chances are you might not be as forgiving to her/him as you are to yourself. But we keep forgiving ourselves for this blunder.
Why is knowing your business value important? I believe I certainly don’t need to address this question to the most accomplished financial professionals of this country. You would know the answer already – opportunity cost. Knowing your business value or enterprise value and the annual return you earn on your business will help you clearly compare the return on your business versus other investment options. Are you better off investing in your business or should you be keeping money in fixed deposits/real estate/stocks/other private companies or a combination of all?
This brings me to the most important thing – the drivers of value of your business. While there are different methods to value companies such as the Discounted Cash Flow method (popularly known as DCF), the all-time favourite Capital Market Multiples method (Earnings, Revenue, Book, Enterprise), Comparable Transactions method and the Percentage of AUM (unique to our industry/profession), there are various factors qualitative as well as quantitative that will significantly impact the value of your business.
Quantitative factors include AUM, AUM growth, revenue, revenue growth, earnings, earnings growth, organic growth rate (and potential future rate of growth), margins, operating expenses, revenue yield, number of clients, wallet share of clients, various revenue productivity metrics and many others.
Qualitative factors include things such as client demographics (age, income and so on), type of customer relationships, customer experience and delight, specialization, management team (and skills), brand awareness, thought leadership, customer delight (and ability to generate referrals), connections with strategic partners (Chartered Accountants, Lawyers …) and many others.
Many tend to focus on a multiple of earnings or revenue to arrive at a value. While the industry average might be x…yours could be 3x or 0.5x. Your value is your value because you and your business are unique. These quantitative and qualitative factors play a major role in not only determining your true value but in also helping you build and maximize the value of your business starting now. And a thing to note, there are more than 50+ variables that drive the value of your business. One (variable) that I had shared earlier with you was an increase in the growth rate of your firm…For every 1% increase in growth rate, the value of your firm increases more than 7%.
Will you now at least like to find out the value of your business?
If you still are not ready to move forward, then your future self is likely to tell you today – you are fired.