What makes a business valuable?
It’s not necessarily what you think.
Ask an accountant, and they’d tell you it’s in the real property and the intellectual property. That is, real estate, productive assets (e.g. machines), copyrights, trademarks, and patents. As well as any unique products and services the business offers.
And that’s all true. To a degree.
But it’s not the real source of future value in a business.
Real estate has captive value. Unless you’re a landlord, you’re not generating income from the value you have in it. And to get value out, you’ve gotta sell. Which usually means movin’ out.
Productive assets such as machines, vehicles, computers, and more can be valuable in terms of creating and delivering products and services. But they’re called “depreciating assets” for a reason. The longer you have them, the less value they have. (I have an old DVD duplicator and printer that’s worth about $0 today — but was $500 refurbished when I bought it and once worth $2,000 or so new.)
Intellectual property can have some value. At least for a time. Your copyrights, trademarks, and patents offer minimal protection for competitive advantages. But they are fickle protection. Copyright protects against direct copying. But indirect “borrowing” and “inspiration” are impossible to stop and a bigger threat. A trademark only matters as long as the brand behind it matters. And patents are easily innovated upon, by experts at changing just enough to lock down the “new and improved” version of what you’ve been selling.
Your products and services can be somewhat of an advantage and value center. But again, they tend to be easily ripped-off, or at least innovated upon until you’re looking like yesterday’s news.
So… What is valuable in a business?
The biggest value in a business is in your relationship and reputation with your past customers…
If you have a good reputation and relationship with your past customers, they’re predisposed to doing more business with you.
Assuming you have a way to reach out to make an offer (e.g. they’re on an email or postal mailing list), your customer relationships can be a source of instant cash flow and easily-accessible value.
This is why it’s often said that it cost 10X as much to get a new customer as to do more business with a past customer.
Or, in other words, you’ll spend 1/10th as much to do business with your past customers, because of your reputation and relationship.
This is why it pays to do good business. That is, business that’s fair, ethical, and is based on providing value to your customer.
It’s a source of value in your business to actually serve your customers at the highest level. Because it will predispose them to coming back for more.
Nurture your relationships with your customers and clients. Treat them well. Continue to provide value.
The more you do so, the bigger long-term impact it will make on your cash flow, profitability, and the overall value of your business.
The next biggest source of value in your business is your relationship and reputation with your prospects…
And by prospects, I mean the broader market as a whole, as well as any prospects who’ve expressed interest (e.g. joined your email list but not bought).
The more goodwill you develop with the members of your market who have not yet done business with you, the more likely it is that they’ll turn into good customers into the future.
This includes doing things like value-first marketing, being a market leader, and actually helping your prospects make the right buying decision for them even if it means they buy from a competitor.
Life is long. People tend to buy from a lot of companies in a niche. Sometimes, in rapid-fire. Other times, with years between transactions.
Do your best to foster a great reputation with your market through time, and to position yourself as a preeminent authority in the niche.
And when someone comes to you, interested in what you offer, treat them as if they are a high-value customer long before they ever spend a cent.
It won’t always pay off immediately. But in the long run and at scale, it’s the single-best approach to running your business.
The third big source of value in your business is your marketing…
Let me tell you something that a lot of business owners hate.
How good you do what it is you do — create your product, or deliver your service — doesn’t matter nearly as much as how well you sell it.
You can be the very best butcher, or baker, or candlestick maker in all of the land. And quality does matter — especially when it comes to building that reputation with past customers.
But it’s far easier to build your butchery, bakery, and candlestick makery with better sales and marketing than with a better product. So it goes for all products and services.
You have to be able to get a prospect’s attention, build interest in what it is you offer, stimulate their desire to have your solution and only your solution, and get them to act.
If you are better at that than your competitors — which is best measured in being able to sustainably spend more than all of your competitors to get each new customer — you will win.
But again — don’t skimp on quality and think better selling ability will get you there. If you offer an inferior product or service, better marketing and selling will only hasten your demise. Rather, focus on combining quality marketing with a product or service that delivers. And that will make you unstoppable.
Everything else is an added bonus in determining the value of a business…
If you don’t have a great relationship with your past customers and your market, and you don’t have great marketing, most other assets will quickly lose their value.
But with the above, all other assets are multipliers and leverage points to only increase your value.
A quick story, as a parting warning and illustration of this lesson…
I remember a guy involved with local entrepreneurship circles. He was into the investment market, so I tried to understand his startup company. He was building software for options traders. It was unique. It was proprietary. It was the next best thing since sliced bread.
“But does anybody want it?” I didn’t ask directly. I didn’t want to sound rude. But I thought, in my gut, that he didn’t really know what people actually wanted in the space.
He spent two years building the software. On paper, the time invested in building a proprietary system for a cash-rich market made the business look valuable.
I thought it was smoke and mirrors. Eventually, after years of sinking money into an untested platform, he tried to take it to market.
What is the sound of a thousand crickets chirping?
That’s about the fanfare that he got. He didn’t have a relationship with past customers. He didn’t have a leadership relationship with the market. And he didn’t have a clear understanding of the customer’s desires, a crucial first-step to making the sale.
Eventually, his backers pulled the plug. The business doesn’t exist today.
I can’t help but wonder though what he could’ve done if he’d focused in stead on developing the three sources of value above…
Yours for bigger breakthroughs,