The Contradiction of Business Growth: Multiples for Valuation vs Sustainable Profits

The Contradiction of Business Growth: Multiples for Valuation vs Sustainable Profits

Typically, when I am out for a ride, I tend to avoid thinking about work-related matters as the inherent lack of focus whilst mountain biking can be perilous on the tracks and trails riding through the moors at high speed and at my time of life, I tend to do myself severe damage when I come off.

As a business guru once said, “Short-term profits often come at the expense of long-term growth.” This quote perfectly sums up the potential contradiction between driving a business to increase its multiples for valuation and exit and driving a company for long-term sustainable profits. In today’s world, the focus on business valuation and revenue multiples has become increasingly important, and it begs the question - is this emphasis on valuation affecting how we build businesses for the long term?

Focusing on short-term gains and maximizing valuation can lead to a situation where the underlying business isn't profitable or sustainable in the long term. When the emphasis is on increasing multiples for a quick exit, companies may resort to tactics such as cutting costs or taking on debt, which are not sustainable long-term strategies.

On the other hand, businesses focused on long-term sustainable profits prioritize building a solid foundation that can operate profitably over the long term. This involves investing in research and development, improving operational efficiencies, and building solid relationships with customers and suppliers. This approach may not necessarily lead to an immediate increase in valuation, but it can create a sustainable business that generates long-term value for shareholders and stakeholders.

The emphasis on business multiples and valuation may also change how businesses are managed and the goals and objectives set. It may also impact how products are developed and the people recruited to deliver them. Companies may focus more on short-term gains rather than building a sustainable business, which could affect their ability to innovate and stay competitive in the long run.

One of the unforeseen consequences of this emphasis on valuation is the impact it can have on employees. Individuals may sometimes make decisions that maximize share value in the short term, knowing that it may negatively impact the long-term business. This short-term thinking can lead to a lack of commitment to the company's long-term success, which can ultimately harm its sustainability.

The focus on short-termism may also vary between different regions. While it may be more prevalent in North America and the UK, it may have a different resonance for European businesses. In Europe, the emphasis may be more on building a sustainable business that can provide long-term benefits to the owner and stakeholders rather than focusing on valuation for a quick exit.

So, is life in business today all about short-termism, and is this a good thing? The answer needs to be more clear-cut, and it may depend on the company and its objectives. However, it is essential to balance short-term and long-term goals, considering the needs of both shareholders and stakeholders.

Ultimately, it is essential to consider whether the emphasis on business valuation and multiples is impacting the ability of businesses to build a sustainable future. We must remember that short-term profits often come at the expense of long-term growth, and finding a balance that can help companies to thrive in the long run is crucial.

In conclusion, while there may be a contradiction between driving a business to increase its multiples for valuation and exit versus driving a company for long-term sustainable profits, achieving both is possible. By striking a balance between short-term and long-term goals and focusing on building a sustainable business, businesses can create long-term value for shareholders and stakeholders. While success is not guaranteed, it's a matter of strategic planning and execution, not luck.

Suppose you're a business owner grappling with the tension between driving a business to increase its multiples for valuation and exit versus going business for long-term sustainable profits. In that case, it may be time to seek the guidance of a business advisor.

A skilled advisor can help you balance short-term and long-term goals, ensuring that your business is profitable, competitive, and sustainable over the long haul. By offering an objective perspective and expert advice, they can help you identify areas of improvement and develop strategies that align with your vision for the future.

I specialize in helping businesses navigate complex challenges and achieve their goals. I’m an experienced advisor with a deep understanding of the business landscape and can provide tailored advice best suited for your unique circumstances.

If you'd like to learn more about my services, I offer a free 60-minute call. During this call, we'll discuss your business goals and challenges and recommend how we can help.

Don't let the tension between short-term and long-term goals derail your business's success. Please contact me today to schedule your free call and see how I can help take your business to the next level.

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Author

Andy Hamer BA (Hons) Marketing Engineering FCIM

Andy is a highly experienced technology business professional with a proven track record of delivering disruptive technologies to the market in the UK and globally. With a diverse portfolio of experience in commercial, sales, marketing, and operations, Andy is passionate about helping his customers find solutions to improve their businesses and increase profitability while minimizing risk.

As a seasoned consultant, Andy has worked with major technology companies such as IBM, DEC, Apple, Toshiba, Panasonic, and global services businesses such as ATT, BT, CSC, NTT, KDD, and Deutsche Telecom. He has also worked with various medium-sized companies and start-ups, including CodeBook, Xinaps, Invicara, XYZ Reality, Archdesk.

Andy offers his services in-person, remotely, and in a hybrid format both in the UK and internationally.

His consultancy services include sales, business development, account management, strategic planning, analysis and marketing, business acquisition, gap analysis, investment development, and go-to-market strategy, as well as expertise in product marketing, development, management, and technical awareness.

I look forward to working with you and helping your business scale and grow by developing a clear commercial operational strategy.

Book a 60-minute discovery session.

Use this link to book a call https://calendly.com/gorilla-revops/discovery-chat