For many Wealthpreneurs, the value of their business is 80% or more of their personal financial net worth. Thinking about your business as an asset rather than a business is essential to growing your business value. But if your business is an asset, what makes a business valuable?
Wealthpreneur Lesson
Chris Snider Explains Intangible Assets
Chris Snider, CEO of the Exit Planning Institute (EPI), writes in Walking to Destiny, “In the past, wealth was created from physical assets: land, natural resources, and human and machine labor. But technology has disrupted that entire system. Today, wealth is created by your ability to create, transfer, assemble, integrate, protect, and exploit knowledge assets. These are intangible assets.”
Just because you can’t see it doesn’t mean it’s not there
Below are the 15 largest public companies ranked by market capitalization as of mid-June 2024.
Each of the above companies owns significant tangible assets. These assets’ original costs (adjusted for depreciation and amortization as applicable) will be reported on their respective balance sheets. They also own significant intangible capital, which is notreported on their financial statements. However, this intangible capital is reflected in their business value.
This intangible value is the combined value of a company’s intellectual capital, which can be divided into four categories. Chris Snider calls these intangible assets the Four Capitals or Four C’s.
- Human
- Customer
- Structural
- Social
Fighting a war for talent
When recruiting and retaining talented employees, Wealthpreneurs face an increasingly competitive landscape. Human capital is the value of the hard working talent in your business. If your team has a strong mixture of talent, experience, resilience, and motivation, the value of your business increases.
Regarding top talent, Verne Harnish says, “The #1 de-motivator for talented people is having to put up with bozos, as Steve Jobs would call them. Nothing is more frustrating for A Players than having to work with B and C Players who slow them down and suck their energy. In that sense, the best thing you can do for employees — a perk better than foosball or free sushi — is hire only A Players to work alongside them. Excellent colleagues trump everything else.”
Build Your Dream Team
- Determine which characteristics you are looking for in a key employee.
- Take action to encourage and show appreciation to current employees.
- Create opportunities for promotions and individual professional development.
- Set up appropriate rewards and incentives to keep your top talent motivated.
- Tie your employee incentives to growth in the value of your business, not just business income.
- Implement a vesting process that incentivizes key people to stay with your business.
Elvis is not the only king
“The customer is king!” How a business interacts with its customers is often more important than what it sells. Customer capital measures the strength of your relationships with your best customers. Deep relationships, recurring revenue, contractual partnerships, and diversified customer bases all contribute to strong customer capital. Best-in-class companies regularly analyze profitability by customer and product.
Increase Your Customers’ Value
- Strive for deep, long-term, and contractual customer relationships.
- Position your business as a key resource for your customers’ success.
- Offer unique products and/or services that your customers cannot find anywhere else.
- Serve your customers consistently, reliably, and recurrently.
- Build your customer relationships with transferability to a new owner in mind.
- Diversify your customer base if a single customer accounts for more than 25% of your total revenue to avoid customer concentration.
Football and fundamentals
Vince Lombardi, legendary head coach of the Green Bay Packers, started each season from scratch. He assumed the players were blank slates who carried over no knowledge from the year before. “Gentlemen,” he said, holding a football in his right hand, “this is a football.” For Lombardi, the fundamentals of the game must always be remembered and executed flawlessly.
Structural capital is the back-end infrastructure of your company. It includes your processes, financials, strategies, information technology, patents, and other intellectual property (IP). Documenting this know-how and know-what positions you to be fast and flexible. Structural capital connects people to knowledge so your business can scale.
Block and Tackle
- Document your company processes and keep them transferable.
- Build a strategy to optimize capital and financial structure.
- Utilize your equipment and facilities as efficiently as possible.
- Thoroughly document and legally protect your IP assets.
- Convert your knowledge of key operational elements into a transferable resource.
Control this controllable
Much about business is unpredictable. Forecasting profits and losses is an inexact science. But one thing you can control is your company culture. If you nourish your culture and your people now, you will reap the benefits in the future. As David Cummings explains, “Corporate culture is the only sustainable competitive advantage that is completely within the control of the entrepreneur.”
Social capital is a key element of every best-in-class company. It is the optimization of the other three capitals. How your people communicate, what they believe in, how they operate internally and externally, and how they contribute to the community are key components of your company culture. This social intelligence is a great predictor of business success.
Feed Your Culture
- Consider what your social capital says about your business.
- Aim to create a company culture that draws in ideal employees and customers.
- Designing company culture may not be a science, but strive to make it transferable to a new owner
It’s all about value
Have you identified what factors you need to focus on to increase your business value? Conducting an annual business valuation will help you with this process. Valuations highlight risk areas, show business improvements, and help ensure your goals are met. Even if you are not planning to exit your business soon, knowing what your business is worth is a crucial next step.
