In business, there’s one crucial aspect that many overlook: business valuation. Sure, everyone talks about profitability, but what about the true worth of your business in the market? How much of your profitability should be reinvested to drive the actual value of your business as an asset?
Let me give you an example from the real estate industry to illustrate this concept.
If I could go back, I would have spent more time understanding the core financial levers that matter. These levers aren’t just some theoretical concept—they are the very things that allow a business to run profitably and sustainably.
The Profitability vs. Valuation Dilemma
In real estate, particularly with property management businesses, the value of your business is often determined by a multiple of your annual revenue—typically three to three and a half times, depending on the strength of your operations. This means, if your property management business generates $1 million in annual revenue, its market value could be anywhere between $3 million and $3.5 million.
But here’s where many business owners get stuck—they focus purely on profitability. They chase the numbers that show how much they are making this year, but neglect the fact that business value isn’t just about profits. It’s about growth, expansion, and sustainable development.
A Real-Life Example: Focusing on Profitability Without Growing Business Value
I worked with a client in the real estate space who was making $1 million in annual profit. Great, right? But here’s the catch: for years, they were consistently making the same profit without increasing their revenue base. Essentially, while they were bringing in the same amount of money, the value of their business wasn’t moving.
Their business was valued at three times their annual revenue, so at that $1 million revenue mark, the value of their business remained stagnant. In other words, despite their profitability, their business valuation wasn’t growing.
Shifting Focus: Reinvesting to Grow Both Profit and Business Value
I sat down with them and asked two key questions:
- How much of that $1 million in profit do they need personally?
- What could they do to reinvest some of that profitability back into the business to drive growth and increase the value of the business itself?
Once they evaluated these questions, they realised that a portion of their profits could be reinvested into marketing and hiring a business development manager (BDM). This move would not only help them grow profitability but would also increase their revenue base, which directly impacted the value of the business.
Understanding unit economics and cash flow isn’t just about keeping your business afloat—it’s about creating the space to reach your bigger objectives. When you focus on these core metrics, you’re not just building a business; you’re building a business that works for you.
The Results: Profit and Value Both Increase
The following year, the results spoke for themselves. They maintained their $1 million in profit—but their annual recurring revenue from property management increased by $150,000. As a result, the value of the business increased by $450,000.
Why is this significant? It’s not just about having more cash flow coming in today; it’s about future value. The more you grow the underlying value of your business, the higher the potential multiple you can achieve when it comes time to sell or evaluate your company’s worth.
The Takeaway: Building Profitability AND Business Value
While profitability is essential, it’s only one piece of the puzzle. To build a high-value business, you need to focus on growth, reinvestment, and scaling in ways that increase both profit and business valuation. The smartest businesses are those that balance the two.
If you’re chasing profits, ask yourself: How much of that profit can I reinvest to increase the long-term value of my business?
In this case, reinvesting in marketing and a business development team helped turn a stable profit into real growth, which boosted both revenue and the future valuation of the business.
In the end, it’s all about building a business that is sustainable and valuable—one that works for you today and grows in worth for the future.
Frequently Asked Questions
How do I calculate the value of my business?
The value of a business is often determined by a multiple of your annual revenue, especially in industries like real estate property management. Typically, this multiple ranges from three to three and a half times your revenue, depending on the strength of your operations and growth prospects. To get a more accurate valuation, you should consider factors like profitability, revenue growth, and how well your business can scale in the future.
Why should I reinvest profitability into growing my business value?
Reinvesting profitability back into your business allows you to increase its value over time. By focusing on growth areas like marketing or hiring a business development manager (BDM), you increase your revenue base, which directly impacts the market value of your business. Reinvestment ensures that your business not only stays profitable but also grows in value, which is key for long-term success and higher valuation when it comes time to sell or expand.
What’s the relationship between profit and business valuation?
Profit and business valuation are closely related, but profit alone won’t grow your business’s value. To increase your business’s market worth, you need to focus on both profitability and growth. While profitability shows current success, the value of the business is determined by its long-term growth potential and how effectively it can scale. Focusing on reinvestment and sustainable development helps achieve a higher valuation, giving you a stronger position when it comes time to sell or expand.
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