Answer this question… ‘why are you in business for yourself?’
If you’re like the majority of business owners asked this questions, your answer would be… ‘to make money’.
Few business owners would ever consider going back to working for someone else, especially if they’ve been in business for a number of years. (It can be tempting in the first few years when you realise how hard it really can be to run your own business, grow it and have a normal life).
If you’re intending to be in business for the rest of your life – then have you considered how your business relates to wealth creation, capital gain and your financial retirement plan?
Look at the difference this business owner made to his business and the extra cash in the bank he had from his business, not property, not shares, (where a LOT of people make over $100,000 a year in profit) – but his own business.
Hear how he made $120,000 more CASH from his business?
He didn’t have to risk a lot of capital as he would in property or for shares. It cost him time but his return came about in six months, not years.
We’ve found few business owners look five to ten years into their future or stay focused on that length of time in the future. Business owners commonly focus on ‘what do I need to do today and the rest of this week?’ and not on long term goals. (See Newsletter 1 – Building Your Vision for more on this subject).
In this article I want to share with you the power and enormous benefits of building your business and what the personal financial rewards can be. This newsletter is therefore about entrepreneurialism.
The capital value of a business is an interesting figure to know. It’s the figure your business is valued at so that if you were to sell it that would be the amount you would (theoretically) be paid.
Very few business owners think much about this very interesting topic.
First of all, a business is valued based on multiple components that are analysed. Some of these components are very specific and are readily available and some are not.
Business Valuers can be accountants, consultants or business brokers and all valuers determine the value of a business in their unique way as there is no exact agreed upon “paper” value of a business and there is therefore variance to the value of the business based on the individual.
That’s not important here in this article for the points about to be made, but it is important for consideration if you want to act on what is being discussed in this article to value or sell your business.
Let’s simplify the valuation process and say it is calculated on a common method of net profit (not including owner’s salary) times a “Multiplier”.
The method of valuing any business is a very big subject that is not part of this newsletter. The relevant information here is that ‘apples are compared with apples’. If we value business a specific way, then use the same way to value it again (after improving it) then the business will have increased in value. That’s all that is important here for the sake of this newsletter.
The ‘multiplier’ is a very interesting figure.
This figure varies significantly based on a lot of variables and the more attractive the business the higher the figure. Some industries may be as high as six and others as low as two.
If the net profit in a given business was $100,000 and let’s say the business attracted a multiplier of two the value would be $200,000.
If the business grew 50% in profit in a year then the new value of the business would be two x $150,000 or $300,000. So an increase of 50% in profit increases the financial (and sale) value by $100,000.
Now, this is where things get interesting.
The multiplier of a business is a figure that is determined by multiple factors including…
- The dependence of the business on the business owner
- The level of insurance cover against loss
- The amount of documented systems in the business
- The Net Profit of the business
- The previous couple of years of Net Profit
- Possible threats to the industry
- Industry type
- Consistency of regular customers coming in the door
The good news is you can improve on the majority if not all of these factors.
When you improve on these factors – you increase the multiplier of the business.
Let’s just say you get involved with The Business Certainty Training Course and build your business using all the content.
Let’s see what affect it can have on the value of your business.
Using our previous numbers where the business operates with a $100,000 net profit, increasing the net profit by 50% is (believe it or not) relatively easy (as demonstrated with facts and figures in Workshop four and seen by results of many clients over thirteen years).
In that case a 50% increase means the net profit would increase to $150,000.
In this case the valuation formula for the business would have been…
$100,000 x 2 = $200,000
Now it would be…
$150,000 x 3 = $450,000!
As a result of this conservative example the capital value of the business had increased $250,000, an excellent outcome on a small business with a seven month business management training investment!
In quite a few cases the net profit increase in clients’ businesses has been over 1,000% but keep in mind this isn’t a turnover increase, it is net profit, something much easier to increase by 50% in six to twelve months.
A plastering business who attended Business Certainty at the end wrote down in the Survey his turnover increased from $1.7 Million to $3.2 Million and his net profit margin increased from 1.6% to 11.5%, which is HUGE.
The business’s net profit was 1.6% x $1.7 Million – i.e. $27,200 and it increased to 11.5% x $3.2 Million – i.e. $368,000. A MASSIVE $341,000 in pure profit.
The business owner also reduced his time at work, put better systems in place, reduced the business’s dependence on him being there and so the multiplier would have increased in this circumstance quite significantly. He was still working in the business fifty hours (down from eighty) (after seven months) but his business’s dependence on him had reduced, which is great progress, financial value speaking.
In this business the multiplier might be two but with all the Business Certainty content and suggestions applied it could quite easily have increased to three or more.
Using the plasterer’s business numbers, it can be a different story when it comes to the value increase of the business (do it yourself to see), but let’s use another client’s of Business Certainty instead… a bathroom renovator business owner who was working eighty hours a week.
In this business the owner used subcontractors to do the bathroom work, which he supervised. He had no other staff and answered the phone, did quotes and organised materials himself.
In 2009 he had the following financial year numbers…
Net Profit Margin 17%
Net Profit $136,000
Time in business 80 hours
As a result of Business Certainty and by following his Business Growth Plan (Workshop 4 content) he implemented a series of strategies to grow the business.
First of all he developed and put a better sales system in place and stopped spending a lot of time with people who wanted a rough price or who weren’t ready to buy for months. This saved a lot of his time and increased his conversion rate.
Then he raised his prices to increase his net profit margins, even at the expense of winning jobs. Next he put in place a great advertising strategy – a bigger Yellow Pages ad to bring in a lot more leads. This took a number of months before the ad hit the streets.
Meanwhile he hired a Production Manager to free up his time in supervising subcontractors. Next he took his business out of his home office and rented a high exposure premises, which he used to his advantage with good signage to bring in more leads. At that time he hired an admin lady who took all incoming phone calls and coordinated with the Production Manager. This freed up the owner to concentrate on sales, management and lead generation.
Notice each step either made him money or freed up his time.
Next he built and optimised his website to bring in more traffic using SEO.
After Business Certainty the following financial year these were his figures…
Turnover $1.4 Million
Net Profit Margin 22%
Net Profit $308,000
Time in business 40 hours
Soon after completing the Workshop Series he hired a salesperson to take over selling, which then began to replace his last active role in the business, which freed up nearly all of his time.
At this stage the business operated virtually 100% without him.
He still turns up for work to manage the business, to improve the systems and to concentrate on building the business bigger by expansion into another office and region, but his business can operate without him and he can go on two month holidays anytime he chooses.
If you look at the value of this business using the formula here’s where it was…
$136,000 x 2 = $272,000
With his new business model, where he doesn’t have to work in it, comprehensive systems are in place and there is a constant flow of customers coming in the door from multiple forms of lead generation, this means his multiplier is now much higher, possibly as high as 3.5.
So let’s look at the value of the business now…
$308,000 x 3.5 = $1,078,000!
In other words he made a financial net asset gain of $806,000 in one financial year!
This business looks on track to reach $2.8 Million turnover in 2011 with the same net profit margin, so he is creating wealth at a very rapid rate, through his own business.
What’s interesting about this business is; he was a client of mine in Sydney where a similar outcome was achieved. He bought a business for $70,000, which he paid $35,000 for and the rest with profit from its operation. He then built it up using our training and set it up to operate 100% without him, taking a two month round the world holiday in the middle of the year as it had a great manager running it.
He sold the business about one year later for – $350,000 – as a passive income generating asset. He started his new business in Brisbane and using what he had learned from the training and with his own experience, was at $500,000 turnover in the first year, (prior to attending the newer, more refined training), which then accelerated his success, by a strong focus on net profit margins, not just turnover and growth for growth’s sake.
Can you see the extraordinary value and wealth to be made from business ownership by getting a great management education?
People look at property and share trading, but how can that match these remarkable figures of wealth creation in less than twelve months?
These results may not be the real wealth figures, as the valuation process used here is very simplistic (as stated at the beginning of this article), but the principles are very valid and so is the contrast of financial gain from building your business.
These outcomes here aren’t uncommon. In fact, they are happening more and more regularly.
Check out these real world business growth results on video to see what we mean.
YOU can make a massive financial difference to your personal life by attending the Academy of Business Mastery small business course and applying what you learn.
There is much to learn about better business management and remember management as a subject isn’t something you have previously learned relating to your industry.
Management is about improving all functions in the business to make it operate smoothly and more profitably – without you.
If you haven’t been trained in management, is it any wonder why these kind of fantastic growth outcomes aren’t part of your reality?
All it takes is learning, following instructions and implementing what you are given, step by step over seven months from attending Business Certainty Training.
You too could easily be the proud owner of a business that creates wealth for you at a rapid rate in twelve months time.
No matter what your challenge is… lack of time, too busy, not busy enough, not enough clients, not being able to find good staff, can’t find good customers, wasting time with people who don’t buy, clients who owe you money and don’t pay on time… all these situations are signs your management skills can be greatly improved, as that is exactly what challenges business owners face, who haven’t been through the Business Certainty Training.
Think about the benefits, not the cost because that’s what entrepreneurs do. They see benefits first and the value of the outcome and then are very willing to pay to get a great return on their capital because it’s an investment in their future.
To be an entrepreneur strive to act like one.
As the CEO of Profit Transformations I’ve succeeded by personally investing the high side of $100,000 in my own education about business and it’s paid off very handsomely. Every super successful person I meet says they invested a similar amount.
It just comes down to people appreciating experience and investing in it to shortcut the massive learning curve necessary to be super successful.
Education isn’t expensive, but ignorance sure is.
Get started on your own entrepreneurial education now. Subscribe to the 7 free newsletters on the “7 Steps of the Academy of Business Mastery” and put an end to “hope“.