One of the concepts of the Value Acceleration Methodology is The Five Stages of Value Maturity. To build real wealth in your business you have to be able to identify these stages and understand what needs to happen in each so you can create the wealth you need to fund the next stage of your life, whether that’s retirement or a new business. So, let’s start at the bottom:
Stage 1: Identify – the value of your business. This is the starting point to begin measuring your progress as you build your business. It’s your benchmark to compare results on a regular basis. You can either have the business professionally valued, ask your CPA to assist you with the number or use a cash flow multiple. Also, you’ll want to identify some key business metrics to track as well. These will vary depending on your business:
- Revenue, both recurring and one time
- Expenses, fixed and variable
- Clients, demographics & concentration
- Key suppliers or vendors
Having your business’s key benchmarks identified will help you track your progress.
Stage 2: Protect – the value you have in your business. Another way to phrase this is to help de-risk the business. You’ll want to view this from a personal and business stand point and financially.
- Personally – Do you have a plan in place in the event you die, become disabled, get a divorce, or decide to split with a partner?
- Business – Can your business continue without you? Do you have procedures in place so that a key employee or partner can take on your duties?
- Financially – Do you have a personal financial plan or road map to your retirement? How much are you going to need to retire in the lifestyle you want? Is it $1 million, $5 million or $10 million?
Stage 3: Build – What do you need to increase your business value and your personal value. This is where the really hard work takes place. Because you’re not only building and working on your business, but you’re working on your personal plan at the same time. One of the concepts in the Build stage is the Four Capitals or Four C’s:
- The Four Capitals – human, structural, customer and social capital. Working and developing the Four Cs ultimately increases the value of your business.
- Human – developing your staff, identify key people or potential successors can take years.
- Structural – developing processes or procedures for job functions and keeping them updated adds value to a potential buyer.
- Customer – diversifying your customer base and not having concentration issues is very valuable to a buyer.
- Social – develop your brand or create a unique culture within your business. What do you want your customers and vendors to think of when they hear your name or your business’s name?
Stage 4: Harvest – this is the point you reach after you’ve done all the work in stages 1-3 to build your business value to a point it can be sold or “harvested” to fund your personal financial plan.
Stage 5: Manage – this is the last stage in Value Maturity. At this point in the process, you’ll know how much your business is worth and you’ll know how much you need it to sell for. You’ve been managing the process all along, but you’ll be at the point where your business and personal plans coincide so the next stage of your life, whatever that is for you, is achieved!
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