Healthy businesses grow. However, there are three distinct options for growth. As we step into a new season, with deregulation on the horizon and over $1.9 trillion in private capital waiting to be invested, the way we think about growth matters.

In this article, we’ll explore three options for growth. As you review these options, I challenge you to ask this question: “What type of growth are we aiming for in 2025?”

Level 1 Growth: Revenue

When I ask business owners about their goals for the next few years, the vast majority provide a revenue target: “We want to grow from $10 million to $20 million.”

Revenue is the lifeblood of a business. However, when revenue becomes the primary focus, businesses often underperform in profit margin. This approach leaves massive amounts of money on the table every year. Sadly, the net margin of many such businesses is so low that they find themselves in a precarious position.

Level 2 Growth: Profit Margin

The second level of growth relates to profitability. When I ask business owners about their profitability, the typical response is a number: “We made $1.2 million last year.” While the total profit amount is important, the critical figures are the profit margins.

• What is your gross margin?

• What is your recast EBITDA? (Recast EBITDA reflects the actual cash flow of the business, adjusted for discretionary expenses, one-time costs, and other factors.)

Once you know your margins, you can benchmark your business against peers in your industry. For instance, if your bottom line is at 10% but best-in-class in your industry is 18%, you have a tangible growth opportunity.

Last week, I spoke with two business owners who exceeded their profit goals despite missing their revenue targets.

What if you set your profit goal as a percentage instead of an absolute number?

Level 3 Growth: Value

The smartest business owners set goals around their company’s value. They understand that business value is calculated by multiplying recast EBITDA (profit quantity) by the industry multiple (profit quality).

An Example

Consider a business with $10 million in revenue, generating a 10% profit margin ($1 million). Best-in-class profit margins in the industry are 18%. The range of industry multiples for this business is 4–8x EBITDA. Currently, the business is valued at 5x EBITDA, making it worth:

$1M profit × 5 = $5M

Let’s explore three growth scenarios:

Revenue Focus

If this business focuses on revenue, it might set a 30% growth target. By year-end, revenue grows to $13 million. Assuming the profit margin remains at 10% (and the sales team doesn’t compromise margins to close deals), profit increases by $300,000:

$3M revenue growth × 10% margin = $300K profit.

With no focus on increasing the multiple, the business remains at 5x EBITDA:

$1.3M profit × 5 = $6.5M.

Net value growth: $1.5M.

Profit Focus

If this business focuses on profit, it might aim to grow its profit margin from 10% to 13% (+30%). Assuming revenue grows by 10%, year-end revenue reaches $11 million:

$11M revenue × 13% = $1.43M profit.

Profitability improvements make the business more attractive to investors, potentially increasing the multiple to 6x:

$1.43M profit × 6 = $8.58M.

Net value growth: $3.58M.

Value Focus

If this business focuses on value, it will pursue a holistic approach. A Value Creation Plan might include reducing risks, decreasing owner dependence, raising employee engagement, and enhancing customer and employee experiences.

While revenue grows by 10% and profit margins improve by 30%, the business also becomes best-in-class, achieving an 8x multiple:

$1.43M profit × 8 = $11.44M.

Net value growth: $6.44M.

The Leadership Difference

What separates these scenarios? Leadership. A leader focused on value creation has a significantly higher chance of driving transformational growth.

Yet, here’s the sad truth: Many business owners don’t measure their company’s value annually. Instead, they rely on hearsay from trade shows or golf course conversations. Most don’t have a plan to grow their business’s value, opting instead to prioritize revenue or profit goals.

It’s no wonder that, in a UBS survey of people who had sold their businesses, 80% wished they had spent more time preparing. It would be wise to be a part of the 20% that focused their business around value creation.

A Private Equity Insight

Private equity firms often acquire businesses at a discount from owners focused solely on revenue growth. Once acquired, they implement strategies to create value, yielding handsome returns for their investors.

Here’s the question: Why let private equity reap the rewards of the field you’ve planted? Why not grow value now?

What Will 2025 Look Like for You?

You've seen the three scenarios. What do you want your business to look like at the end of next year?

• Will you continue prioritizing revenue growth?

• Will you focus on improving profit margins?

• Or will you make the smart shift to setting goals and strategies around value creation?

The choice is yours.

The journey begins with Measuring the value of your business. If you do not know the value of your business and the factors that affect the value, schedule a confidential conversation with me today at https://valuecreationengines.com/get-started.

Originally published on Darrell Amy's LinkedIn.