4C’s of Capital – Driving Value

It used to be that wealth was created from physical assets: land, natural resources, and human and machine labor. But the world has changed. 
 
As Chris Snider explains in his book, Walking to Destiny, “Technology has disrupted the entire system.  Today, wealth is created by your ability to create, transfer, assemble, integrate, protect, and exploit knowledge assets.  These are the organization’s intangible assets.”
 
Thomas Stewart, author of The Wealth of Knowledge, further states, “Because knowledge has become the single most important factor of production, managing intellectual assets has become the single most important task of business.” 
 
Today, when you look at the value of a business, you will find that it’s intangible assets account for most of its value, not tangible assets.  Intangible assets are the sum of your company’s intellectual capital, which is divided into four categories called the 4C’s of capital: social, structural, human and customer.

  1. Social capital - your culture and how you interact with customers
  2. Structural capital - your systems and procedures that allow you to execute without drama
  3. Human capital - your employees, the right ones in the right seats doing the right things
  4. Customer capital – customers from whom we can obtain an optimal profit, pay on time, buy often, and refer.
     

Maximizing the value of the 4C’s of capital will increase your multiple and therefore the value of your business.  
 
Remember from previous blogs, business value is determined through three primary methods – discounted cash flow, asset value, and capitalization of earnings.  The latter method – capitalized earnings - is used most by buyers to base their decisions on. The other two methods are used to support the valuation.
 
Capitalization of earnings is an industry term for multiple X EBITDA (earnings before taxes, interest, depreciation, and amortization – basically the cash flow of the business).  Multiple is directly correlated with the capitalization rate, a formula-based rate.  Increasing either of these variables will increase the value.   The real power in increasing your business value is in increasing the multiple. 
 
So, how do you increase multiple?  By reducing risk in your business and making it transferable. That’s where the 4C’s of capital comes in.  When you optimize the 4 C’s, you reduce risk in the business.  Additionally, ensuring these 4C’s are transferable to another owner is a key driver of value.  Value can only be harvested if your intellectual capital can be transferred.  If you as the owner own all the customer relationships, if your employees will only work for you or cannot produce without your guidance, then there is nothing to transfer. When you go away, so do the relationships, and therefore so will the business.
 
Take control of driving value in your business.  Reduce risk and improve ownership transferability by focusing on the 4C’s of Capital and watch the value of your business grow.  This will allow you to harvest some income today and create personal financial certainty, taking pressure off the transition of the business, and gives you – the business owner – options on your terms. 
 
Check out my video here on Driving Value.