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Wednesday
Apr172013

Asset extension brings faster equity growth

By Darren Shirlaw Founder of Shirlaws

Many companies have tried to increase equity, but failed because they attempted what we call "a logical extension" path.  Instead, we advocate "asset extension", an approach that accounts for Shirlaws' successes with clients wanting to grow.

Our start point uses the concept of "valuation = profit x multiple".  We explain this equation to clients by having "profit" equate to income and "multiple" equate to growth.

Stimulate plans for faster growth

When working with clients we help them consider two alternatives.  Would they increase equity quickly through a logical 'next step' extension?  Or is it faster to understand their fundamental assets and extend in this direction instead?

In the first example we worked with a medical supplies company with £12.8m of revenue and £2m of profit.  The management team wanted to reach £24m of revenue to double its profit, so we aske them to consider two alternatives: 

  1. Instead of a medical supplies company, think about yourselves as a supplies company with one business in the medical space.  What other business lines could you develop, which relate to being really good at supplies?
  2. Now imagine you are running a medical company.  All your assets - knowledge and contacts - relate to the medical industry, rather than being good at supplies.  If you are now a medical company, with one business in medical supplies, what else could you do?

We showed them how focusing on the business assets stimulates new ideas for extension.  Once the management team recognised themselves as a medical business, rather than a supplies business, they began to create innovative possibilities - medical recruitment, for example.

When we asked whether it would be faster to build a supplies business from £12m to £24m or a medical business, their answer was immediate.  Asset extension of a medical business would be faster than developing along logical supplies business lines.

Understand the businesses' fundamental assets

Most property sales and brokering businesses run letting agencies alongside the main business.  While addressing some 350 people from this sector recently, an audience member asked, "Why does nobody in our industry ever make money from lettings?"

I explained that most property companies go for logical extension, rather than asset extension.  Because their clients often buy to let, property companies logically create a lettings division.

If we look closely at property brokering businesses, they are actually sales businesses.  Lettings businesses, on the other hand, are administration businesses.  The staff in property businesses are sales and marketing people, whose chief skill set is not administration.  This means that property businesses unwittingly set sales people, with very poor administration skills, to run an administration business.  They make less money than they expect because sales and administration skills are diametrically opposed.

It might be logical, but it doesn't generate growth

Although the business extension is logical, these property companies failed to realise their asset is sales and not administration.  If we were advising a property business about extending, we would help them understand this hidden asset.  We would ask, "What else can you sell?" rather than, "What else could you do in terms of property?".

Sometimes assets are not obvious or found by repositioning the business line.  Rather, the question becomes, "Who do you know?" or "What do you know?".

What do you know?

In a further example, we asked a foreign exchange business about its assets.  At first they were unclear, so we asked the owner "What are you really good at?"  He replied, "I know a lot about tax and international business structures.  It's what I use to win foreign exchange business".

Instead of foreign exchange, we suggested he thought about the business as an international company where one arm offered foreign exchange.  What else could it now offer by way of services?

He realised the extended business could offer tax and international structuring.  "The next thing would be trade advice," he said.  "We have so many cross-border clients it would be easy to refer people and set up trade."  Within an hour he had considered six viable business lines.  While they were not all possible short term, these ideas helped him create a new three-year business plan.

Re-energise the senior team

Taking an asset approach to increasing equity comes with an added bonus.  Owners and management teams become immediately energised by new possibilities.  For example, the medical supplies business told us, "We never saw our business in this way before.  We feel completely re-energised about this new asset approach".

 

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References (2)

References allow you to track sources for this article, as well as articles that were written in response to this article.
  • Response
    Asset extension brings faster equity growth - Shirlaws Business Performance Blog - Business Coaching for Entrepreneurs Shirlaws UK
  • Response
    Response: Kratom Capsules UK
    Asset extension brings faster equity growth - Shirlaws Business Performance Blog - Business Coaching for Entrepreneurs Shirlaws UK

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