Business Growth and Business Value: Joined at the Hip

Regardless of the business that you own, there are certain underlying concepts that will determine the future success of your venture. That said, some of the most important concepts are encapsulated in two words:  growth and value.

Growth and value are relevant from the time you start your business to the time that you sell it to another buyer. Paying close attention both of these concepts can lead to business glory; ignoring them could lead to bankruptcy.

“Growth” and “value” are not entirely separate concepts. Rather, they are related. In fact, you can make a convincing argument that they are dependent on each other. By understanding these concepts and their relationship, you as a business owner can achieve all of your business goals and find success—however you define it.

Growth and Value: A Close Relationship

Business growth and business value are inextricably intertwined. They are inexorably linked and affect each other. A higher growth rate for a company can have a direct effect on a company’s value, and a high company value can speed up growth.

Why is this?

Let’s start with the first proposition (growth rates affecting a company’s value). Whether you run a small or large business, improving growth rates are often a sign that your company is solidifying its value proposition. That said, not all growth is great.

For instance, a firm that has an increasing growth rate but has negative cash flow and negative net income is destroying value. This type of growth, if unchecked, could bankrupt the firm. By contrast, high growth with increasing free cash flow, increasing margins, and lower operating expenses can create immense value.

Ultimately, when determining the value of any business one critical input,  especially if you are using a discounted cash flow model, is the growth rate of the firm. A higher growth rate (assuming it is good growth and all else being equal) leads to a higher valuation of the company. The opposite is true as well, as a lower growth rate will lead to a lower valuation. This intuitively makes sense: if you imagine yourself as an investor, you would naturally apply a higher valuation to a company that has increasing, significant growth compared to a company that is stagnant or experiencing declining growth.  

On the flip side, value can affect the growth rate of a company. A higher valued company can affect the sentiment around a company, which can lead to future growth. This is most prevalent in the startup world.

For instance, let’s say you founded a startup that obtained a new round of venture capital funding. This round provides your company with a high valuation (in fact, the highest of any startup in your sector).

This high valuation and the premium that you receive in your venture round allows you to hire more talented individuals or take on experimental projects. Your high valuation gets noticed in the press. Even customers take notice. All of these factors working together can lead to higher growth for your company.

By contrast, a lower value for your company can lead to lower growth. A lower value means you have fewer options when searching for external funding, meaning that you will find it more difficult to find the capital to take on that project or hire that star employee.

A Note About Franchises

One additional factor is how this discussion of growth and value applies to franchises. Franchises may not have as many tools to affect this equation. For instance, they cannot alter their brand in order to generate new growth. But that said, franchises have access to many effective tools to influence both their growth and value.

Often, it comes down to providing the best possible customer experience. Ensuring that all of your customers are delighted with your product or service will lead to a wave of organic growth, which will increase your value, lead to further growth, and all that comes with it. Your franchisor can also help in this effort.

By proving that you are adding value to the franchise itself, you may be first in line to take advantage of growth opportunities such as the acquisition of additional franchises. Ultimately, while franchisees may have less flexibility, they do have powerful options to affect the growth and value of their business.

Pay Close Attention

Growth and value are two concepts that you simply cannot ignore. They are inseparable, and they can significantly impact the future direction of your business.

Whether you own a franchise business or any other type of business, pay close attention to the value and growth of your business. By doing this, you will increase the odds that you accomplish your business goals, whatever they may be.

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