Does size matter and is growth important? In this SlideShare we take a look at both these questions and then take you through a simple but effective framework for identifying opportunities for growth with the highest potential and least risk.
Learning objectives:
• Understand the impact on size and growth on the potential value of your business
• Learn how to apply a simple framework to identify opportunities and classify them according to potential and risk
How (and why) to Identify Opportunities for Growth!
1. Does size matter and is growth important? In this webinar Kevin will
take a look at both these questions and then take you through a
simple but effective framework for identifying opportunities for growth
with the highest potential and least risk.
There is a link at the end of this deck to the associated blog and
webinar recording
4. “What multiple of your earnings did the offer represent?”Q
Comparing
average
multiple
offered
3.76
2.94
3.69
3.73
3.98
4.56
0 1 2 3 4 5 6
Average multiple
Impossible
Very Difficult
Fairly Difficult
Fairly Easy
Very Easy
Sellability Tracker Q2 2015. Copyright 2015
ValueBuilderSystem.com
Presented by The Value Builder SystemTM
How Easy Would It Be To Accommodate 5 X Demand?
5. A buyer is buying your
future stream of profits
6. 1. How much profit will your
business generate in the
future?
2. How reliable are these
estimates?
7. Net Present Value – No
Growth
End of Year Pre-Tax Profit 15% Discount
1 £100,000
2 £100,000
3 £100,000
4 £100,000
5 £100,000
6 £100,000
7 £100,000
8 £100,000
9 £100,000
10 £100,000
Net Present Value
8. Net Present Value – No
Growth
End of Year Pre-Tax Profit 15% Discount
1 £100,000 £86,957
2 £100,000
3 £100,000
4 £100,000
5 £100,000
6 £100,000
7 £100,000
8 £100,000
9 £100,000
10 £100,000
Net Present Value
9. Net Present Value – No
Growth
End of Year Pre-Tax Profit 15% Discount
1 £100,000 £86,957
2 £100,000 £75,614
3 £100,000
4 £100,000
5 £100,000
6 £100,000
7 £100,000
8 £100,000
9 £100,000
10 £100,000
Net Present Value
10. Net Present Value – No
Growth
End of Year Pre-Tax Profit 15% Discount
1 £100,000 £86,957
2 £100,000 £75,614
3 £100,000 £65,752
4 £100,000 £57,175
5 £100,000 £49,718
6 £100,000 £43,233
7 £100,000 £37,594
8 £100,000 £32,690
9 £100,000 £28,426
10 £100,000 £24,719
Net Present Value
11. Net Present Value – No
Growth
End of Year Pre-Tax Profit 15% Discount
1 £100,000 £86,957
2 £100,000 £75,614
3 £100,000 £65,752
4 £100,000 £57,175
5 £100,000 £49,718
6 £100,000 £43,233
7 £100,000 £37,594
8 £100,000 £32,690
9 £100,000 £28,426
10 £100,000 £24,719
Net Present Value £501,878
12. Net Present Value –
20% Growth
End of Year Pre-Tax Profit 15% Discount
1 £120,000
2 £144,000
3 £172,800
4 £207,360
5 £248,832
6 £298,598
7 £358,318
8 £429,982
9 £515,978
10 £619,174
Net Present Value
13. Net Present Value –
20% Growth
End of Year Pre-Tax Profit 15% Discount
1 £120,000 £104,348
2 £144,000 £108,885
3 £172,800 £113,619
4 £207,360 £118,559
5 £248,832 £123,714
6 £298,598 £129,092
7 £358,318 £134,705
8 £429,982 £140,562
9 £515,978 £146,673
10 £619,174 £153,050
Net Present Value
14. Net Present Value –
20% Growth
End of Year Pre-Tax Profit 15% Discount
1 £120,000 £104,348
2 £144,000 £108,885
3 £172,800 £113,619
4 £207,360 £118,559
5 £248,832 £123,714
6 £298,598 £129,092
7 £358,318 £134,705
8 £429,982 £140,562
9 £515,978 £146,673
10 £619,174 £153,050
Net Present Value £1,273,207
33. Based on ‘Scaling Up’ by Verne Harnish
Make a list of up to 5
existing products or
services that you could sell
more of by focusing extra
energy on your existing
customers
34. Next make a list of up
to 5 new markets
that you could enter
with your existing set
of products or
services
35. Based on ‘Scaling Up’ by Verne Harnish
Now make a list of up to 5
new products or services
that you do not currently
offer
• State whether to
existing or new
markets
37. BizSmart aims to help business owners of small and medium
sized businesses to create value and scale their businesses
through sound practical business support by providing insight,
Clarity combined with a real determination to help you succeed.
You can access webinars and presentations like this and more
besides through our SmartRoom service here
You can read the associated blog and listen to a recording of this
presentation by clicking here
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38. •Need a sounding board for your ideas?
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39. BizSmart –
Where Smart people go to surround themselves with other
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Notas del editor
Does size matter and is growth important? In this webinar Kevin will take a look at both these questions and then take you through a simple but effective framework for identifying opportunities for growth with the highest potential and least risk.Learning objectives:Understand the impact on size and growth on the potential value of your business
Learn how to apply a simple framework to identify opportunities and classify them according to potential and risk
We’ve all heard quotes like this
Essentially the idea being that if you stand still, others don’t so you will end up going backwards
Don’t disagree with that – but also growth (and size) directly impact on the value of your businesss
So if you have one eye on your exit and are trying to build a business that will give you the best options, you need to think about growth
To illustrate that….
When he was putting his book ‘Built to Sell’ together John Warrillow conducted research amongst 14,000 businesses who had either sold or received an offer.
He found a number of key drivers of value – and one of those is growth - both past and future potential
He found that the average business will get offers in the order of 3.7/ 3.8 times net profits – but if we look at the ability to accommodate 5 x demand then the multiple varied depending on how easy it would be.
Imagine a firm of lawyers trying to take on 5 times as many cases – they’d need to hire 5 times as many lawyers – very difficult to scale rapidly to 5x / almost impossible
Businesses like this typically would receive a lower multiple
There is a similar correlation with size - so growth and size together have a significant impact on value
But if we look at say a software firm that easily cope with additional users, they are more likely to receive a much higher multiple.
The reason size and ability to grow have such an impact on value comes back to what a buyer is looking for when he buys your business
A buyer is buying your future stream of profits
And he (or she) is wanting to know
How much profit will your business generate in the future?
How reliable are these estimates?
Let me illustrate the impact with some numbers – firstly with a business that we are confident will deliver £100k per year in net profits.
Financial buyer will look at the rights to the future stream of profits and decide what am I willing to pay TODAY for those rights.
This is called Net Present Value
Before you think this is getting complicated let me ask Caroline to follow this through with me
If you’re not familiar with the idea, just imagine I offer you the choice £1000 in a year’s time or £1000 now – you’d take the £1000 now
But now let me offer you the choice £1000 in a year’s time or £500 now – depending on how reliable you thought me you might well elect to wait until the end of the year.
Assuming you elected to wait, what if I offered you a choice somewhere inbetween – say £850 now or £1000 in a year’s time. At some point you would do a deal on the money now and we will have found your ‘investor threshold’
Similarly if you tell an investor or potential acquirer that you are going to deliver him £100k of profit at the end of the next 12 months, he is not going to give you £100k for it now – he’ll want a discount based on his assessment of the likelihood of that £100k coming in and the return he wants to make on his money.
If their expectations for a return are 15%....
Then they’ll discount that £100k in a year’s time to a present value of around £87k – or 100/ 1.15
Each year the acquirer must wait for their money, it gets discounted by 15% again
So year 2 he will discount to a present value of £75.6k – or 100/ 1.5 twice
And similarly over the next 10 years – each year we go out dividing by another 1.15
So assuming you can give the acquirer confidence you will deliver on the £100k’s then he will discount each year and add them up – in this case adding to £500k and that is what he might be prepared to pay for your business today
Now lets look at the same business but now we have found a way to convincingly show that we will grow at 20% per year
And is able to make the case that these estimates are reliable
So we are still discounting at 15% because we have been able to convince the buyer that the estimates are reliable
Which leads to a much greater valuation/ multiple.
Both business have been able to make the case that projections are reliable but the second is a rapidly growing business whereas the 1st is stable at £100k pre-tax profit.
You can see the effect – the first is worth around £500k whereas the second 2.5 times that
So we know that size and growth are important when it comes to the value of your business.
In a moment we are going to look at a framework to help brainstorm how you can grow your business with the highest opportunity and the lowest risk
I’m going to walk you through the Ansoff Matrix – invented by the mathematician Igor Ansoff & published in the Harvard Business Review in 1959 – so it’s not new – but it is extremely useful and simple to understand
It looks at your business from the standpoint of what markets/ customer groups you are in today – Existing Markets
And what potential markets you might enter – or New Markets
And then on the horizontal axis it looks at product and service lines – that you currently offer – Existing Products/ Services
And ones you might think about offering in the future – or New Products and services
And this enables us to bring risk into our thinking because what the Ansoff Matrix tells us is that the markets we are in today with our existing products and services represent the lowest risk of failure
So essentially re-doubling your efforts with your existing customer groups and product mix is the lowest risk option for growth – and therefore where we should start looking.
Next we are going to look at entering new markets/ customer groups with our existing products and services – but know that this is going to be more risky than the first
Not surprisingly – new markets we don’t know as well so there will be things we might not be aware of and it will probably be harder to succeed
Similarly an equally risky proposition is to stay in your existing markets and create new products or services
And the most risky proposition .. Where we are going into new markets with new products and services
So as you think about your business and growing it in the lowest risk fashion we are going to focus first on existing markets/ products services, then on to the new and existing orange bubbles, and last of all we may entertain the idea of new new or red bubble!
To illustrate let’s look at a really simple business and one I did with my brother when we were growing up – and think about it in the context of the Ansoff Matrix
That of selling apples that grew on our trees at home
How could we increase sales of apples to passers by if we focussed on it?
Can we increase the average order value?
Can we increase the frequency of purchase?
Can we encourage more people down the road?
Can we encourage more people to stop and take notice?
Do we need more apples? – If so what can do about that?
Etc.
Next we might think about taking apples to different customers – in this case perhaps to the local high street and putting up a stall there where we think there might be more people
A bit more unknown and more things to think about – so more risky. Do we need a licence, will we be asked to move on, how do we make sure we have enough apples with us etc etc?
In this case the different market is geographical – an new location. But in your business it might be a different demographic – for example by age or sex. Or it could be a different psychographic segment – such as personality traits, values, interests or lifestyles – for example people who play tennis.
Similarly we could think about selling to our passers by a new product to compliment our apples – such as cider or applejuice, jam – doesn’t have to be apple related but I’ve just chosen to for consistency.
Clearly this is different from selling apples – we now have to process them in some way and work out how to produce, package and sell these new products – so more risky that sticking with apples
And lastly we may even think about taking these new products into a the high street or other locations – the most unknown and therefore the most risky of growth options
So that’s what you can do – look at your business through the lens of what are the highest opportunities for growth with the lowest risk of failure
To help you further -
Start by
Make a list of up to 5 existing products or services that you could sell more of by focusing extra energy on your existing customers
Next make a list of up to 5 new markets that you could enter with your existing set of products or services – remember markets doesn’t just mean new geographic markets
And lastly
Now make a list of up to 5 new products or services that you do not currently offer
State whether to existing or new markets
And plot them on an Ansoff Matrix for further discussion/ working up
So…We should now understand that growth (and size) really does matter
And we’ve got a framework for helping us to identify opportunities with the greatest potential and lowest risk of failure
Of course this is not the whole story – next time we’ll take a look at assessing and working up these opportunities further to make sure we are prioritising our efforts on opportunities with the greatest chance of success