4C's of Business Value – A look at Structural Capital

A critical factor that affects business value is transferability.  If what a business does isn’t transferable to a new owner, the business doesn’t have much, if any, value.
 
As stated in an earlier blog, the key for a business owner to make more income today, and create more business value for tomorrow is to manage business value now.  Getting your hands on the value driver levers in your business should be the #1 priority of every business owner.
 
A business that has maximized its value runs better, generates more cash, is more fun, and provides numerous options for the business owner as it relates to ownership transition.  Purposeful value acceleration planning means you will always be prepared if something unexpected were to happen to you or you receive an unsolicited offer. Without actively working on building value, you will not be ready to pass the torch, or you may miss and opportunity to unlock the wealth in your business.
 
Remember: The basic formula to value a business for a 3rd party buyer is EBITDA (earnings before interest, taxes, depreciation, and amortization, aka the cash produced by the business) X Multiple = Value.  EBITDA is certainly important, but multiple is the wild card here. Driving both is the jackpot.  The main drivers of the multiple are risk and intangible assets.
 
Chris Snider, author of Walking to Destiny, states,“Intangible assets are the sum of your company’s intellectual capital, which is divided into four categories”:
 
1) Social Capital
2) Structural Capital
3) Human Capital
4) Customer Capital
 
These are known as the 4C's of capital.  Let’s spend some time on number 3 – Structural Capital.
 
Structural capital is your infrastructure.  These are the systems and tools which tie your human and customer capital together.  Structural capital reduces costs and helps build consistency in your operations and in the way things are done.  Structural capital is critical to successful scaling up, and bringing on new people.
 
Structural capital captures the knowledge assetswithin your company, converting that mental process into company property, and therefore, makes it transferable.
 
Knowledge assets include the people, processes, facilities and technology, as well as the intellectual property. Capturing this connect your team to the things that make them and the business special, allowing them to meet and exceed customer expectations and enabling them to build and sustain customer relationships.
 
Your knowledge assets need to be documented, so that someone else can learn from you and apply it. That’s the very definition of transferable.  Creating and maintaining these knowledge assets as company property ensures that if your talent walks out the door, the knowledge they have in their heads doesn’t walk out the door with them.
 
Value acceleration is not about the end game.  It is about what you are doing today to drive value today that in turn provides income and options in the future.
 
Click here to check out my video on Structural Capital.
 
And stay tuned for the next topic in my 4C's Series - Human Capital.