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Tuesday
Aug302011

Income follows Assets

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Shirlaws founding principles are based in the fund management profession. These principles enable coaches to view a business through a distinctly different lens and help clients discover unexpected ways to increase their worth. Knowing how to impact the business valuation formula has revealed faster ways for our clients to build their business equity value.

The valuation of a business 

=  profit   X   multiple

 

Focusing on the “profit” basics
All business leaders understand that profit is improved by increasing volumes and margins. As a result, they spend their careers trying to maximise the "profit" aspect of the equation above. They regularly ask themselves, "How do we sell more widgets at a higher margin?"

On their first visit, Shirlaws coaches typically ask the client, "What are you trying to do with your business right now?"

An events business MD might reply, "Our goal for the last 12 years has been delivering more conferences and making more money from each one." Back to that basic notion of increased volume and margin.

Another MD might say, "I've sold services into my markets as often as I can. The only way to do better is to deliver cheaper services." This MD might be grossing £6m and wants to increase his 5% margin of £300,000.

Trying to increase volumes, margins, or both are typical basic business strategies. Whenever we hear this strategy we generally say, "OK, so you’ve got the profit part right. But what are you doing about increasing the multiple?"

Increase your assets
Because of its fund management background, Shirlaws has a clear equity focus that provides key business benefits. 

  • First, we help you increase the number of assets in your business
  • Second, we help you bring forward the transactions to release those assets

It is this second step that converts business assets into personal lifestyle, something every entrepreneur aims to do eventually.

What do we mean by "assets"? As an example, suppose you buy a house - your "asset". You want to make money from this asset, so you decide to rent it after redecorating and fresh carpets. Then you place the house with a letting agent and draw up a legal contract before renting to a tenant.

At the end of a year's contract, you plan to increase the rent and decide to refresh the property inside and out. If this was a typical coaching conversation, we’d ask you to re-think at this point. We might say, "You're doing OK with this rent, but it's easier to increase it by buying another house – a new asset."

Your business with its products, supply channels, processes and people make up your assets. As in the house example, you can add more assets to this business. And in the same way, you must add assets first before you can increase your business profits.

Income follows assets
Our catchphrase, "Income and profit follow assets," not the other way round, often surprises clients. Most people think, "If I make more profit, I can invest it in new assets."

It’s not, "Assets follow income", because income actually follows assets. This means you must invest money to make money, which can be easier to do in business than people often think.

A business can invest in fresh assets by adding novel product streams or opening new distribution channels. Products and channels may only take a small investment, but still increase your ability to grow profits by adding new business assets.

As long as your business efficiency is at least 60% or 70%, you're close to maximising your profit. In most cases, you can increase the business's asset value to grow profits much faster than trying to squeeze that last drop of water from the towel.

Benefits for the entrepreneur
Increasing your assets will help grow the business faster, which in turn provides two further benefits.

  • First, you could bring forward your retirement age. No one has complained about this in the 12 years we've been running Shirlaws!
  • Second, you could release some of your equity by selling down some business assets

Selling down business equity releases it into investable assets to deliver personal lifestyle choices. You’ll only get the lifestyle you want by releasing equity, but you can only release the equity if it's big enough.

It's important to remember that you can only create equity if you concentrate on increasing the "multiple" part of the base equation and not just the "profits" part.

The valuation of a business 

=  profit   X   multiple

 

One way of reading this formula is that business valuation = income x assets. In other words, "profit" equates to income and "multiple" equates to assets.

The valuation of a business 

=  income   X   assets

 

Shirlaws can help you discover and build new business assets - and then demonstrate how to release your resulting equity. To learn more, sign up for our business news today, (and receive the Shirlaws book More money, More time, Less stress as our welcome gift), follow Shirlaws on Twitter, or come along to one of our introductory Starter's Gun workshops.

 

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