4C's of Business Value - A look at Customer Capital

4Cs of Capital - Your ideal customer

For many business owners, business value is something they HOPE happens along the way. But just like driving growth, profit and cash, you can and should plan to grow value as well.  This is what the owner’s game is all about – building a business that can be converted to cash someday to support the lifestyle you desire.
 
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).  Increasing either of these variables will increase the value. The real power in increasing your business value is in increasing the multiple and that happens when you focus on the 4C’s.
   
Let’s look at Customer Capital.  This is the depth and strength of your customer relationships. These relationships lead to repeat business, a significant driver of value and profit. It’s important to not only develop and nurture these relationships, but to ensure they are transferable.
   
How could the customer reduce risk in your business?  There are a number of ways.  If you're a buyer of a business and 90% of the business is tied up in one customer, that's a problem. Too much risk.  You wouldn’t pay as much. So customer diversification is an important element in increasing the multiple.
 
Most of all, understanding, focusing, and having a competitive advantage with your Ideal Customer reduces risk and therefore increases the multiple.
 
Characteristics of an Ideal Customer include:

  • they need and value what you have 
  • they will pay an optimum price 
  • they pay on time 
  • YOU enjoy working with them 

Additionally, growth opportunities in the market will also influence the multiple – both with existing customer and available market share.  
 
For example, if the EBITDA was $2M and the multiple was 4, the value would be $8M.  If you increase the multiple to 5 the value becomes $10M.  You didn’t do any more business, you weren’t more profitable, you just increased your multiple one point.  To get the same outcome with no change in multiple (4), your EBITDA would have to grow from $2M to $2.5M.
 
So, how do you increase multiple?  By reducing risk in your business and making it transferable.  Let’s focus on one area of reducing risk and growing value – the 4C’s of capital:

  1. Social Capital
  2. Structural Capital
  3. Human Capital
  4. Customer Capital  

Take control of driving value in your business.  Reduce risk by focusing on the 4C’s of Capital, and watch the value of your business grow.  This will allow you to begin 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. 
 
Check out my video here on Customer Capital.
 
And stay tuned for the recap of my 4C's Series.