We explain how scaling up your business is a great way to keep pace with the current financial environment.
We are all living in a low yield/high asset price environment due to structural shifts across the world which has seen central banks willing to print enormous amounts of money to prop up the system.
The purchasing power of the dollar has been substantially eroded since the Global Financial Crisis 2008 and there has been a massive wealth transfer to those who hold property and shares. The trend continues with the Covid-19 stimulus.
Consequently, it is now a significant challenge for anyone looking to earn sufficient income from their investments and savings during their retirement years.
Business owners often have in the back of their minds that when they sell the business to retire they will use the proceeds to invest or live off. Unfortunately, the numbers are less attractive in today’s economy unless you are willing to substantially scale up your business.
Let’s say you have a business generating EBIT (Earnings Before Interest and Tax) of $150,000. If the business is sold at a multiple of 4 then its value is $600,000. That won’t buy you a rental property in Auckland. Invest your $600,000 at say 1.4% with a bank and with a tax rate of 33% you get $5,628 in the hand as income. Realistically that might pay for a few medical bills, a plumber’s bill and perhaps a car repair.
The good news is that having a business is a wonderful opportunity to keep pace with the financial environment we are in. Business owners have control of setting their own goals and there is no limit to how lofty those goals can be.
Increasing your EBIT and therefore automatically increasing the value of your business will generally require scaling up. Scaling up means growing your business, and there are four ways to do that:
- Increase the number of customers (of the type you want to have)
- Increase the sales transaction frequency
- Increase the average value of each sale
- Increase the efficiency of each process in your business
One strategy for increasing the number of customers is to acquire a competitor business or complimentary business. If you are short on time in terms of remaining working years or have some audacious growth goals, acquisition is worth looking at as a strategy for growth, particularly as money is very cheap currently.
To discuss how we can assist with scaling up your business, please contact us on (09) 839-0087.