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The Third Component Of Value – Growth (Part 4 of 7)

3 March 2008 No Comment

The Third Component Of Value – Growth

Every business must grow – must add new customers and increase revenue – just to offset natural attrition and rising costs. That type of growth doesn’t get you anywhere though. There is also a ‘default’ growth rate. If you do good work and don’t screw anything up you will naturally get more business by repeat customers, referrals and overall market and industry expansion. Good, although not outstanding – nobody will pay you any extra for that type of growth. Truly valuable growth is significantly higher than the ‘default’ rate, and is sustainable. A buyer knows that a growing business is worth more than one that isn’t. If the growth rate exceeds the buyer’s cost of capital, opportunity cost, and risk premium then, all else being equal, the buyer will pay more, and do it gladly.

While the evidence of growth, i.e. yearly increases in customers, revenue, profitability, and the like are seen on the financial statements, the valuation of the growth itself doesn’t show up anywhere. The proof of that value is not in those numbers either. Where will the buyer look to verify that the growth is valuable – and worth paying a premium to acquire? They’ll look to the management, operations, strategy, planning, marketing, innovation, and a host of other factors. Growth is truly a measure of how well the business is run. Going back to the basic business principles, a well run business will naturally grow at an accelerated rate, and do so without undue stress.

What to do now:

  1. Update your plans – strategic, business, marketing.
  2. Assess your management team for the capability to grow to the next level.
  3. Document your entire sales / implementation / delivery / referral cycle.
  4. Plan for scaling and understand required investment – people, money, space, time, and expertise.
  5. Understand changes in the economy, industry, and market and how they affect your company now and in the future.

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