How to establish an appropriate value for your business

Key quotes:

• "Because value creation is the starting point for all businesses, successful or not, it’s a fundamental concept to understand."
• "The purpose of a business is to create value (through work), sell or trade it to customers, and capture some of that value as profit."
• "All businesses must create value, but some types of value (and methods of value creation) are more useful than others."
• "As we look at the changes in the way our economy has created value in the past 100 years, we’ve shifted from a focus on huge mechanical production during the industrial revolution to more creative and customized production through the information age."
• "This is a point raised by Jack Hughes in his piece in the Harvard Business Review, contributed by Victor Sowers, called What Value Creation Will Look Like in the Future: The value of products and services today is based more and more on creativity — the innovative ways that they take advantage of new materials, technologies, and processes."

Key quotes:

• "We’re going to explore the needs and wants that business owners have, a few pros and cons for each, as well as what the happy medium solution is."
• "The happy medium: Identifying the right target audience of customers allows you to expand your business when you’re ready."
• "Hiring contractors or a marketing agency can help you cover your needs AND wants by offering experts who handle your marketing for you, but don’t require a dedicated workspace on-site, and can develop and execute a strategy that’s the right size and budget for your business."
• "Needs: A set area to handle work, preferably away from home life and distractions, that has internet, workspace, and office supplies."
• "The happy medium: When you need to break away from your home-based business, or can’t focus inside your retail store, workshop, or other business, heading to the library or a coworking space may be your best bet."
• "A coworking space may be a bit busier, but it offers dedicated and flexible workspace with access to multiple resources that can help you build and grow your business."

Transcript: I'm going to talk to you about 10 things youcan do to increase the value of your business. But before I do that, let me kind of put thingsin perspective so you kind of have an idea why this mindset of value, profit, conversationsyou always hear about. So many people run a business and by the timethe year end comes with taxes, any profit that the company makes, they like to takeit out, pay taxes on it, and put it in their own checking account, right? Because it's my profit, it's my business,it's my this, it's my that. And then there are those that say, man, thisis what I need to live off of, but let's let it ride. Let it ride. Let's grow it. Let's let it ride. Let's invest. Let's let it ride. What is the difference between the two andwhy does some do one over the other? Here's the difference. Profit, value. Short term, long term. Working in the business to make money now,working on the business to increase value later. Now, later. Instant gratification, delayed gratification. More like a sales mentality [profit], morelike a CEO mentality [value]. Independent contractor mentality [profit],business owner mentality [value]. So this... See more →

Key quotes:

• "Value Capture (a business’s ability to create profit from it’s transactions) is one of the most interesting and under-studied areas of business."
• "In this excerpt from Tren Griffin’s new book on Munger, Charlie talks about some of the investments that he and Buffett have made that passed this test: There are actually businesses that you will find a few times in a lifetime, where any manager could raise the return enormously just by raising prices — and yet they haven’t done it."
• "It’s a good way to force you to consider the strength of your competitive advantage, the barriers to entry of your industry, the quality of your revenue — all determinants of your ability to capture value."
• "[Explore Pricing optimization in the Evergreen collection on Pricing.] Abdy Mohamed contributed an excellent article from the Harvard Business Review by Professor Stefan Michel called Capture More Value."
• "It has a powerful set of ideas for evaluating the ability of a business to create value and capture it, by studying their industry and competitive advantages."

Key quotes:

• "Many owners don’t have a clear picture of their businesses’ operating capital needs and how they might impact what buyers will pay."
• "Ultimately, the task of a CVA is not simply to arrive at some hard number for the cost of your business; instead, it’s to determine your business’s fair market value."
• "In the income approach, a healthy cash flow — either historical or forecasted — is used to determine value."
• "This involves analyzing an organization’s various income streams, determining which of them hold real value in a sale, and arriving at a potential return on investment for a buyer."
• "However, just as there are a number of unique factors in every home sale — including differing neighborhoods, school districts, and home conditions — there are qualifying factors that limit the effectiveness of this approach when it comes to businesses."
• "Whether you’re looking to sell in one year or 10 — or are just vaguely curious — a thorough valuation is an important tool for assessing the long-term prospects of your business."