How to Make Your Business More Valuable

What actually makes a business more valuable? In this video, Steve breaks down the key value drivers most companies miss—like how to command price premiums, optimize capital, and scale smarter.

He shares real strategies to help you grow your business’s worth without just piling on more work. If you're looking to boost valuation, improve cash flow, and build something buyers (and you) love, this one’s packed with actionable insight.

TRANSCRIPT:

When I'm turning around or building a company, I like to stay laser focused on value. But the term value can be mysterious and it's often mistakenly used in business. So in this video, I'm going to walk you through how to take strategy plus finance and combine them together to create value.

Now, value doesn't have to be all complicated. Like I said, it's really simple. So if you think about the definition that Warren Buffett uses to describe value, he says, intrinsic value of a company is basically the discounted value of all the cash that the company will produce over its remaining useful life.

So that's the definition that we're going to build off here. So if you think about it, you have a company and if you invest dollars into this company right here, I'll put a C here for company, then you're going to expect that the company is going to produce additional dollars in the future. And this is how value is derived.

Organizations create value for their customers and therefore they're able to capture value through price premiums, cost and capital efficiency, and through strategic growth. That's it. Very simple, right? So don't get it confused when we talk about value.

When you're investing in financial assets, you're not investing in revenue growth. You're not investing in profits because profits don't necessarily equate to free cashflow, which is what drives value. Instead, we have to be really focused on this simple definition.

It's the sum of all the cash the company's going to produce over its remaining useful life, discounted back into today's dollars, into present value terms. All right. So that's what we're talking about here.

I'm going to erase this diagram and keep going with my chart. This is value right here. Like I said, organizations create value for customers.

And if they're successful at that, then they're going to capture value for themselves. So let's break value down into its component parts. First, like I said, value is derived from cashflow of a business.

All right. Cashflow is king. 70% of companies that go bankrupt are actually profitable when they close their doors.

So we're not talking about profit here because there's other things to consider. We're talking about pure cashflow that can be used to pay down debt, provide returns to investors, or to reinvest back in the business. So it's all about cash, baby.

Now, it's not just about cash actually, because we have to consider, I'll put the cost of capital. There is a cost to borrowing capital. And when you combine these two things together, that's ultimately what's driving cashflow.

Now, let's go even further down the line. And cashflow is generated from two things. First, abbreviate revenue growth.

And revenue growth is simply growing the top line of your business by selling more products and more services. But you have to remember that there's smart growth and then there's dumb growth. So we want to be strategic with our growth.

Now, there are a variety of ways to grow the top line. You can go to existing customers and sell more products and services to them. You may introduce new products and services to existing customers, or you may introduce new products and services to new markets.

You may engage in M&A activity and just buy other companies or merge with them and then acquire more revenue that way. There's a variety of ways to do it. The key thing is you want to be strategic because I've seen too many companies grow in the wrong way and they can grow themselves out of business.

So you want to be careful there. But when you combine revenue growth with return on invested capital, these two things drive cashflow. Now, return on invested capital is very simple.

I'm going to keep it really high level here. But essentially, if you take net income of your business and you divide it by your invested capital, then that's how you determine your return on invested capital. Now, you may be wondering, well, Steve, what is invested capital? This comes from your working capital base and your investments in capital expenditures.

In other words, working capital is the difference between current assets and current liabilities of your business. Think about it. Your biggest current asset accounts are going to include accounts receivable, the amount of money your customers owe you, and your inventories.

Now, there are some other accounts there, but let's just keep it really high level. So the money that is owed by your customers and the amount of cash that is tied up in your inventory has to be covered elsewhere. And there's a cost to that.

Also, when you combine that with your current liabilities, which is essentially the amount of money you owe your vendors, like I said, there's some other liabilities in that whole scheme, but let's just keep it really high level. The Delta between the two is your working capital. And that is the amount of cash that is tied up on the balance sheet.

In other words, you sell a product or service. You give an invoice to a customer. You record that as revenue.

So that's flowing here to net income, but you don't have the cash because the customer is holding onto your money until you collect that. The same thing is true with inventory. You're buying raw materials or you're sitting on products and services.

And until you sell those to customers, that cash is tied up. So that's what I'm referring to here with working capital. And this can kill a business if you're not careful because this does not show up on the income statement.

So if you're just watching your profit, your net income, and you think this is a gauge of your financial health, you can be severely mistaken. So you want to be careful of that. So that's why you got to take net income divided by your invested capital base to get your true return on invested capital.

With CapEx, this is essentially the property plant and equipment that you are investing in. So you buy a tractor, you buy some trucks, whatever it may be, but these investments once again, aren't on the income statement. So you have to account for these costs as part of your return on invested capital formula.

In other words, to just keep it very simple for non-financial people, return on invested capital represents the amount of money you're earning on the capital that you have invested in your business. And that comes down to your working capital and your CapEx. All right.

So this is how value is ultimately created here. All right. Let me add some more color here.

Like I said, we have revenue growth. And when we talk about strategy here, there are ways to strategically grow your revenue. Like I said, this is where building a strategy blueprint, which helps you to overcome your strategic problem by deciding your shared aspiration, your market focus and position, your competitive behavior, and the resources and returns required to put your strategy in place.

This is all part of that strategy blueprint. If you want to learn more about this and how to create one for your business, you can go to Coltivar.com. I have a free course. There are no gimmicks.

I have nothing to sell you. It's purely educational to help you put in place a million dollar strategy blueprint. In other words, I want to help you to get to a million dollars in annual profit.

And if you're already at that point, congratulations. I want to help you to get to the next level. So you could go to Coltivar.com, like I said, and find that free course there, which will walk you through how to build a strategy blueprint.

But when we come back here, if you have the right strategy in place, then you're going to be able to strategically and effectively grow your revenue. Now return on invested capital. You can do this in two different ways.

And let me clear this up here. When it comes to return on invested capital, you can achieve this through price premiums, I'll abbreviate here, price premiums and cost and capital efficiencies. Once again, this requires strategy.

The way to achieve price premiums is through enhancing the customer experience, investing in your brand, delivering higher quality products, investing in more innovative products, whatever it may be. These strategies contribute to achieving price premiums in business. When your price exceeds perceived value, customers are not going to buy.

So when you can invest in a strategy and you can clearly define your market focus and position and how you're going to achieve price premiums, then your perceived value is going to go up and your price will be down here and customers will buy. Most organizations don't do this. Instead, they're just all over the place.

And when customers aren't buying, they offer discounts, which can be detrimental to the bottom line. So don't do that. The second way to boost return on invested capital is through costs and capital efficiencies.

In other words, do the same thing as your competitors, but do it for less or do different things from your competitors at a lower cost structure. And this allows you to achieve these costs and capital efficiencies. So how do you do that through scalability, through economies of scale, by having a different operating model, maybe through the integration of technology, whatever it may be, you combine all the activities of your business in a way that allows you to do it at a lower cost compared to your peers.

Now, if you're able to achieve price premiums and costs and capital efficiencies, all you're going to do is you're going to skyrocket your return on invested capital. And when you do that, and you could also grow at the same time, cashflow is going to increase wildly. You keep your cost of capital down and value is going to be maximized.

So I know I said a lot there. I've walked through a lot of things. I said a lot of accounting and financial jargon, but the point I want you to understand is that when it comes to strategy and finance, you have to combine the two together.

And this is what makes me so different because I'm always talking about strategy and finance. I've seen too many organizations try to put in place a strategy, but if they're not combining true economic fundamentals as a part of that strategy, then it's just a glorified marketing plan. And I don't want you to fall into that same trap.

So this is how you maximize value. I broke it down very simply. Value is derived from free cashflow, but remember there's a cost of capital associated with this.

When your return on invested capital exceeds your cost of capital, then you combine that with cashflow and you're going to maximize firm value. Okay. I just said a lot.

Does this make sense to you? If so, can I get a yes in the comments box below? Okay. What if it doesn't make sense to you? Maybe just put a no in the comments box below and tell me where I tripped you up because your feedback will help me to follow up with my next video, which will explain this in more detail for you. But if you are running a business, if you're making financial decisions on behalf of your company, if you are in charge of driving strategy, you have to understand how all this comes together in order to maximize value.

Otherwise you're just going to have this vanity strategy, which looks really good on paper, but it's really not moving the needle as it pertains to cashflow and cashflow leads to value. So that's where I want you to be different. I want you to double down in a different way because I learned this the hard way.

For years, I would put in place these strategies and I'd go execute. And then at the end of the year, I had maybe incremental improvement at best, but oftentimes I was just flat and I would get so frustrated. But it's because I was focused on the wrong things.

So when you get focused on the true drivers of value, then you're going to have a powerhouse strategy that is going to allow you to achieve amazing results. And that feels really good when you can win with your team. It's really energizing.

All right. Like I said, I'd love to hear from you. So make sure you drop your comments down below in the comments box.

And until next episode, take care of yourself. Cheers.