Attracting millions or even billions of investment dollars is the dream of every business owner. But it’s not going to occur overnight — and it may never occur if the primary goal is to sell the business, rather than build the business.
The surest path to achieving a successful, sustainable business is to focus on long-term growth; then the investment interest will follow. Investors don’t want companies that are built to flip. They want companies that are built to last and that can sustain revenue growth. Here are the four issues that companies can focus on to maximize the long-term value of their business.
1. Know your market niche and competitors
Many business leaders are so immersed in day-to-day responsibilities that they don’t spend the time required to become intimately familiar with where they fit into the market and who their competition is. Companies should know how their product or service fills a need in the marketplace. They should know the size of their potential market, their current market share, who their customers and competitors are, and how they are changing. By staying informed, companies can remain relevant in the midst of fierce competition.
Learning the market is not a one-time investment of effort. It’s an ongoing process, and business leaders must be engaged on a regular basis. Spending at least a few minutes each day to read industry journals and websites is essential. Market knowledge is also an important avenue to growth. Organic growth is ideal, but at some point acquisition may become necessary to maintain or accelerate growth. Companies should be familiar with their competitors large and small, and should consider building causal relationships with them.
2. Drive sustainable revenue
To sustain revenue and minimize customer churn, companies must innovate and add services and products. They must continually introduce new and appealing features for their customers. These updates don’t have to be new, blockbuster improvements, but they should at least be useful and worthwhile. Companies can minimize churn by consistently delivering fresh new ideas and enhancements.
3. Build a scalable business
Scaling means adding products, services, and customers and keeping in mind that past results are no guarantee of future performance.
Companies must ensure that their business model guarantees long-term growth and they must be able to deal with these challenges:
• Quality: Can they continue to deliver the level of quality that their customers expect?
• Quantity: Can they take on new customers without suffering a decline in quality?
• Capacity: Can their internal systems handle the weight of new customers?
• Capability: Do they have a management team strong enough to handle growth?
4. Focus on profitability
It’s usually those companies that are not in dire need to sell that receive the highest valuation and they are typically well managed, have products in demand, and profits. Arriving at this desirable position means continuing to innovate to stay relevant and maintain competitive advantage. Growth is an alluring word but creating profitable growth is the key to turning a small company into a large company.
To fuel long-term, profitable growth companies must invest in a competitive advantage. Companies can grow in a competitive market by cutting prices or increasing promotions, but those maneuvers don’t increase competitive advantage and, therefore, don’t fuel long-term profitable growth. They require a company to trade margin for revenue growth — and driving revenue growth for its own sake rarely creates the success entrepreneurs want.
Companies must also understand their cost to acquire customers. If a company is spending one dollar to earn one dollar, that is not an effective business model. If that dollar comes from a customer that can be counted on for an increasing multiple over the long term, then this customer could be very valuable.Â
Christopher Aroh is a partner in CohnReznick’s private equity and venture capital practice based in Glastonbury.
