The art of creating value
Whatever the overall ambition of your business, you’re likely to have ‘growth’ and 'value' on your agenda. But how clear are your plans, how good is your strategy and how confident are you about delivering the value you desire? Many agencies fail to properly translate their objectives into practical actions and, sadly, many others just get stuck along the way. So it’s not easy – but your chances of success can be enhanced significantly with some deep thinking, careful planning and smart, decisive actions.
IT ALL STARTS WITH A CLEAR AMBITION
There are many reasons why people end up feeling disappointed with their business achievements. But a key contributor is often the failure to define their ambition clearly and early enough. Many people only make a half-hearted attempt to define what they want for and from their business. They drop a few nicely worded phrases into company presentations or annual plans – but these rarely define what they really care about and what’s really important to them. And too frequently the focus is only on the business performance as the owners are reluctant to address what they personally want to get from their endeavours.
Without real clarity about your objectives, and the related timings, it's difficult to set a clear plan. And then the chances are that you won’t take the right decisions at the right time. It can be difficult to define precisely what you want to achieve, but to make it easier don’t focus too far ahead – the next two to five years will do fine. And if it feels too hard initially, perhaps start by defining where you don’t want to be, so at least you can eliminate a raft of possibilities. But do make sure you spend the time that is needed otherwise you’ll be the one complaining about lack of progress, your inability to step back or the fact that your business is only worth a fraction of what you’d hoped.
MAKE SURE YOU KNOW WHAT’S POSSIBLE
Having a clear ambition will be really helpful – but it needs to be realistic and relevant to what is going on in the marketplace. Whether you are planning to sell your business or just keep your options open you ought to understand how value would be calculated and which factors you need to manage to optimise your position.
The main method for valuing owner-managed businesses is still a multiple of earnings. The quantitative ‘earnings’ element is based on past and future pre or post tax profits. And there’s a lot you can do to shape those numbers. The ‘multiple’ element that is applied to the earnings is based on an assessment of the quality of the business and its future potential. So many more things to stay on top of including market position, client mix and resilience, IP and products, talent and retention and, of course, management.
But what sort of performance should you be aiming for? There is a lot of mis-information out there so don’t just take the easy route and look at the headlines of what others are achieving. The last analysis of the Top 50 independent agencies’ results highlighted an average profit margin of 10% and an average growth rate of 10%. But these averages are distorted. Six agencies made losses and twelve failed to grow. So the real guide to good performance is more like 20% for both profit margins and annual growth. And if you manage things well the quality of your business might be worth a multiple of eight compared with an average of four or five. Clearly average really isn’t the place to be.
THINK CAREFULLY ABOUT HOW TO OPTIMISE GROWTH
Growth is a fundamental ingredient of any thriving business - regardless of your ultimate ambition. And it will be a key element in both quantitative and qualitative elements of any value calculation. That’s why business leaders and owners talk about it so often. But while growth is easy to talk about – it is rarely achieved.
Those growth discussions are always bold. People talk to us about winning new clients, developing new services and moving into new parts of the world. But it’s rare to find that the challenges have really been well thought through and even more unusual to find a strategy that has a strong chance of success.
Pursuing growth can be very rewarding. But it is also high risk. And it can be frustrating and expensive. Many growth plans seem to follow the higher risk options and are also over optimistic about how long it will take to deliver the desired results. The benefits of nurturing and growing existing client relationships often seem to be dropped in favour of the much bigger challenge of winning new clients. The same applies to services where the excitement of the ‘new’ is wrongly prioritised over the more predictable. And when it comes to geographic expansion the best opportunities are rarely where people are planning to go. None of these challenges are reasons not to go for growth – but they do demand deeper thinking and better planning, all in the context of your own ambition.
START TO IMPROVE BUSINESS PERFORMANCE
There are always a lot of different areas to work on. So where do you start?
One priority is to set about really understanding the workings of your business. Make sure you know how things link together and which levers can change your performance. Get whatever help you need to understand the critical details, for example the relationships between clients, fees and resource – the cost of winning business and churn – the balance between productive and non-productive people and how best to focus your leaders and managers.
Then, when you’ve got this clear, you’ll need to ensure that you have the information you need to manage these inter-relationships. It’s no coincidence that the best performing businesses have the best information reporting systems (and sadly, often vice versa). So don’t let your finance team dictate the information you should or could have – make your decision based on your objectives and your (new) understanding of how your business works. And keep the information short, sharp and to the point.
If you get the information and reporting right, it will tell you the areas that most need attention. You’ll then be able to look at improving performance in the relevant areas - sharper positioning and marketing, better client and new business development, a more valuable and durable client base, more motivated talent that is retained for longer and a depth of high quality management. But as you develop, don’t expect everything to be plain sailing. Growth and improvement is likely to be achieved in steps. So you’ll need to be prepared to work your way through the peaks and plateaus on your way to realising you ambitions.
AIM FOR GREAT, DON’T BE AVERAGE
If you are looking to sell, bring on a partner, create more value for the people in the business or just keep your options open – you’ll want to do your very best. So ask yourself if you’ve thought deeply enough, planned carefully enough and acted strongly enough to confidently realise your ambitions.
And just a final thought, an average agency with an income of £5m might have a value of £2m, whereas a good quality agency managing all the issues covered above is likely to be worth at least three times that amount.