Something I picked up from the real estate crowd:
They always think in terms of how things change the asset value, not just the fact that their NOI (what we call profit) is up or their expenses are down.
I think this is a much better way of thinking for business owners, because:
- It helps up make better decisions about growth, profit, cutting costs
- We’re so trained to think about the P/L and creating cash flow that we often forget we’re building something that is more then the sum of the parts and has real value to the right buyer.
Here’s how to think about building asset value.
Profit point of view:
You add $100,000 of profit in a year. Depending on your business you’ve driven anywhere from 300,000 – $1,000,000 in business value if/when you decide to sell.
You reduce expenses by a $100,000 year. It comes back to your bottom line. [Assuming these are expenses that actually can stay reduced], You’ve just done the same thing without even adding more profit.
I don’t know if this is just a psychological trick or a better way of thinking but I like it more. Think in Enterprise Value, not just FCF. But don’t get carried away.