Most business owners and investors are back to business—but there is nothing "business as usual" about it. Now that long-term thinking has returned, what value are you building? Not simply how you generate revenue, but how do you add and grow value while you go about your business?
Worth, in many ways, is subjective. As a founder or leader, you must apply logic to achieve your full potential in business with each key constituency.
To your customers
If you do mission-critical things for clients where they place a high value or invest heavily, you are likely very valuable. Otherwise, you may be an expendable line item. See how critical you are by evaluating longevity, recurring transactions, and increasing purchase amounts.
The formulas:
- Calculate customer churn - is it shrinking?
- Average customer tenure (in months or years depending on industry) - is it expanding? Is it better or worse than your industry average?
- Average customer spend (monthly or annually) - is it growing?
To your employees
Talent is in huge demand, and people are taking time to find (or change to) the right field, the right employment model, and the right employer. How does your model, environment, or culture deliver a premium to your ideal employee? Strategically partner with your HR team on the following.
The formulas:
- Average employee turnover – These numbers change all the time. Depending on the average age of your most dominant employee base, turnover varies. It also varies by industry and by an individual's tenure with your company. No matter how you benchmarked success or failure in the past, you need a new measure of success.
- Employee growth percentage benchmarked by companies your size – since there is high talent demand, you must assess whether you're growing on par with or faster/better than companies like you (industry, geography, size).
- Employee satisfaction – the above numbers are historical. Find forward-looking measures to ensure you're adding value and engaging with employees. Whether you monitor employee engagement with a ranking in a SaaS tool or feedback from a culture consultant, understand the measures and respond in real-time.
- Professional development investment – Many companies don't have training departments or a significant line item for training in their budget. And yet, there is money to do rework or to recruit replacements. Ensure employees know you invest in them by extending the budget for formal training or the hours you enable them to devote to professional development monthly or quarterly.
To your industry
Being the best means investing in innovation. Most growing companies and their investors expect them to lead the way, not just on the financials but in the marketplace.
The formulas:
- Mature Market share vs. category leaders – If you have 1% share in an industry where three others on the other 99%, you have far to go to be an influencer or thought leader.
- New Market share vs. competitors – If you have a 1% share in an industry where hundreds of others have less than 1%, you can strategically grab share and become a dominant player.
- Setting standards & creating certifications – if your industry is regulated and you contribute to setting standards (through professional boards, lobbying groups, or direct investment in R&D), you are influential—and potentially worth more than your offerings alone. How many certifications do you not only meet but did your innovators help define?
To your community
Corporate citizenship is an old idea that will never get old. While you build a business and a team, ensure you make your community better. Your employees and peers are a part of something much bigger than commerce, and they seek purpose and meaning each day.
The formulas:
- Time volunteered by your people – time equals impact.
- Dollars donated by you in partnership with your people – are you investing where the dollars drive the most significant outcomes?
- Boards served on – is your leadership team investing time outside of their business unit?
- Philanthropic investments in education, health, and more
To investors & acquirers
Investors want to put their money into leaders with vision and those who can deliver outcomes. After analyzing their portfolios for a year or more, there is plenty of dry powder in the investment community, and it's begun to change hands. To determine your worth to investors, you should consider the following:
- Year-over-year Growth rate or CAGR - How many businesses in your space have grown at your pace? (VC-type interest)
- Profitability - How profitable have you been in the last year? (Bank and PE-type interest)
- New Innovations or R&D/IP value - Some were unable to continue during the disruptions of the last year. Have you gained ground where others lost it? What is that IP worth to investors?
- Your book of business – Do you have key accounts that acquirers need in their portfolio? Can you open the door to relationships of direct or ancillary value?
- Employee headcount – With the labor market tightening, and PEs and VCs looking at M&A, having a sizeable, well-performing team, is an asset in and of itself. What is the cost of recruitment at this moment? Add that to your loaded labor to gain perspective on what you may be worth to others.
What your company is worth to you
If you've grown something of sustainable value with above-average metrics, that's wonderful. You can use this as a scorecard to shore up any pockets of lost opportunity in your business.
The ultimate formula of company value:
- Worth – The value of everything above to the investor, plus any hard assets, less the excess cash over 60 to 90 days of operating capital, reduced by your current debt and some of your long-term debt.
There you have the business formula for worth. But it's not really that simple.
The value of all the other points of priority, the moments of meaning, the things you taught others, the things you learned, and countless intangibles that you get to keep. They are the things you remember when you look back and sometimes things you hope to replicate as you look forward.
Raise and manage your money however you want, but this investment of your time, your promise, your best years, and your dreams, in the end, is priceless.
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September 29, 2021 at 08:35AM
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20 Simple Formulas To Determine Your Company’s Worth In 2021 - Forbes
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