Over the years I have valued and worked with thousands of businesses, and after a while a few trends stand out. I often get asked "which business[or industry] makes the most money"? And whilst there may be some specific trends that exist at that particular point in time, there is never any one particular industry that consistently makes money.
It is true that some industries may be harder to make money than others at the moment:
Automotive-related engineering services is very hard to generate sufficient demand without established export markets or local niche markets.
Many manufacturers (small and large) are doing it tough with rising costs such as energy, wages, transport and increased import competition.
And yet there are examples of very profitable manufacturers or automotive engineering companies that are doing well.
So my answer is often a very general one - a profitable business will have:
Products and services that the market wants supported by great service and quality.
- Well established systems and processes to streamline the business and make it efficient.
A competitive advantage.
Good management and leadership.
A well developed strategy supported by market research.
Effective governance processes.
And all of these are vital in creating a sustainable growing profit.
However I have noted one very common answer to a question that is particular to businesses that are basically a well-paid job and those that make commercial returns that generate value for the owners.
One of the questions I ask of the owners when doing a valuation is "what is your vision for the business over the next 3-5 years?".
The majority of answers I get are:
To make an attractive wage.
To have a better lifestyle.
To provide a sustainable living.
To feed my family.
The vast majority (more than 80%) of the businesses that give these types of answers are not making enough of a commercial return (or in some cases no return) to justify using any income approach.
In other words, most of the business owners who have no clear vision that can be linked to the business have no goodwill and any value is basically attributed to asset value only (sometimes less than asset value).
And conversely, those business owners who can articulate a reason for the existence of their business, who can describe what they are trying to achieve for customers and stakeholders typically have a profitable business with a high valuation. In other words they have created additional intangible value in their business over and above the investment they originally made.
Now having a clear and articulated vision isn't an iron-clad guarantee of making profits. But in my experience those that have this type of vision are more likely to have substantial value in their business.
My own reasoning is that those that put the effort into articulating why they are in business and where they are heading are also likely to be doing other things such as:
Paying close attention to what the market wants and delivering it well.
Implementing management systems to streamline processes.
Reducing the reliance on key individuals (such as the owner).
Having strong governance procedures and processes in place to protect the business.
So if you are planing to exit your business soon and rely on the value of your business to retire, or are focused on creating a high value business then start with the reason you went into business in the first place. Get really clear on why you are in business, what value do you create for your customers and where is your business heading.
Mike is a small business valuation expert with ten years’ experience in valuing privately held businesses and more than 15 years management consulting experience.
See the original article here.