𝐕𝐚𝐥𝐮𝐞 𝐢𝐬 𝐭𝐡𝐞 𝐦𝐚𝐠𝐢𝐜 𝐰𝐨𝐫𝐝 𝐢𝐧 𝐩𝐞𝐫𝐬𝐨𝐧𝐚𝐥 𝐟𝐢𝐧𝐚𝐧𝐜𝐞 𝐚𝐧𝐝 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬

Value is the magic word

It’s not just about how much money you have, but how much it can grow and work for you. Whether you’re managing your personal finances or running a business, you need to understand the concept of value and how to apply it in different situations.

Personal finance is all about making smart choices with your money. You need to budget, bank, insure, invest, plan for retirement, and deal with taxes and estate issues. You also need to know the time value of money (TVM), which means that money today is worth more than money tomorrow because of its earning potential.

Business value is all about making your business more valuable and profitable. You need to market, sell, operate, and innovate. You also need to protect your business from risks and threats, such as lawsuits, accidents, cyberattacks, or natural disasters. You need to have insurance, intellectual property rights, and data security measures in place.

But value is not just something you create and keep. It’s also something you can share and transfer. As a business owner or stakeholder, you can extract value from your business by receiving dividends or selling your shares. You can also transfer value to someone else by selling or passing on your business. The key is to do it in a way that preserves or increases the value of the business.

Why Value? What Value?

Value is not the same as cost or price. Those terms can be misleading. I want to clarify that I am mostly talking about small business here. Big multinational corporations that are traded on the stock market are a different story. That is a whole other topic. But for small and medium businesses, I think of value as the potential exit value or terminal value of the investment. I see business as an investment. Some people may run a business as a job. That is fine. They may be self-employed or contractors who exchange time for money. But for those who want to grow their business, I believe it is an investment. The idea is that someday, the owner(s) will sell their business and get some cash for it. They will cash out their investment value. Otherwise, the business will fade away or be bought for a fraction of what it was worth.

Different industries have different ways of valuing their businesses when they exit. In my industry, which is financial services, the value is based on a multiple of the recurring income that I receive from the providers. For accounting firms, the value is usually based on a multiple of the annual fees that they generate. When I was helping to buy businesses at G3 Group, the value was often based on a multiple of the EBIT or profitability of the company.

The four elements of Business Value

I think there are four interconnected dimensions of value in business. Each has a function for the business, a purpose, guiding principle if you will:

1. Grow Business Value: This involves enhancing the business’s value through effective marketing strategies and revenue generation. Operational excellence, which includes improving efficiency and customer satisfaction, is also key in increasing value.

2. Protect Business Value: This dimension focuses on financial risk management. Small businesses can protect their value by having proper insurance coverage in place to safeguard against unforeseen circumstances. It also involves safeguarding intangible assets like intellectual property, customer data, unique skill sets, and processes.

3. Extract Business Value: This is about providing returns to owners and stakeholders, often in the form of dividends. By effectively managing and growing the business, value can be extracted and distributed to those who have invested in the business. Small businesses can also extract value by maximizing their resources and capabilities. This could involve leveraging existing technologies or capitalizing on the owner’s unique skills. It’s about capturing value from the competitive market process to the company’s advantage.

4. Transfer Business Value: This involves the process of selling the business or executing a succession plan. The goal is to ensure a smooth transition that maintains or even enhances the business’s value.

These dimensions provide a comprehensive approach to managing and enhancing the value of a small business. Without understanding the value elements, owners risk potentially losing lots of their firm’s value, which ultimately, erodes their investment return.

Peace of Mind

I believe that everyone deserves financial peace of mind.  The way I get there, is by looking at the concept of ‘value’ in both personal finance and small business. Many of my clients are small business owners.

It’s not just about how much money you have, but how much it can grow and work for you. Whether you’re managing your personal finances or running a business, you need to understand the concept of value and how to apply it in different situations.

Value is the magic word in personal finance and business. It’s what makes your money and your business grow and thrive. It’s what you need to master if you want to achieve financial success and freedom.