How do you know when the business you created has value? Here’s the short answer: value is created when a buyer is willing to pay for it.
Think about it. Everything has value right? You buy something from the grocery store and you pay for the value of the item. You hire someone to help you manage your books and you pay them for the value they provide. Your business is no different.
Let’s break down some of the ways value can be created within your organization.
- Development of Intellectual Property. This is a fancy term referring to innovation that has commercial value and can be protected (patent, copyright, etc.). Think trade secrets, know how, designs and so on. It could also be customer relationships, assembled workforce, trade names, etc. It has another name as well: intangible assets. Intellectual property is an asset to your organization. But it only has real value when it can contribute to the generation of earnings for your company (read, it makes you money).
- Generate Earnings. But what if you are a start up? Well, lucky for you, even pre-revenue companies (meaning you’re not making money quite yet) can have value. Remember, value is created when a buyer is willing to pay. If a buyer believes in the promise of intellectual property or intangible assets and their future earning power, value is created. But how? Project what you’ll earn, based on present value. Then, discount it to reflect the risk in achieving those earnings.
- Decrease risk. Here’s the thing. Startups have a lot of risk, especially when you’re dealing with something new. When you reduce those risks, you create or increase value. You can do this through developing patents (read, protecting your innovation), finding customers, obtaining permits, getting regulatory approval, and so on.
As your business matures, you will reach milestones that will decrease risk and increase value, such as diversifying your customer base and your products. You’ll grow the size of your organization and you’ll take on more people, helping deepen the level of management and oversight in your company. You’ll have the opportunity prove to the marketplace your idea and company can generate consistent revenue and earnings. Value will rise and risk will fall.
Now we’ve given you a short answer and, you’ve probably realized, we’ve also given you a much longer one. But the moral remains the same. Value is only created when you persuade buyers that future earnings are imminent.