How do you answer the question “What’s the value of your business?”
Look at this equation: Profit x M = Value, where M is the multiple that a buyer will use to determine the price they would pay for your company.
As business owners, we’re generally conditioned to believe that the fastest way to improve the value of our company is to increase profit. Their attention therefore goes to increasing sales and profits. This creates a challenge: When the owners are the experts in the business, whatever industry, customers often want to work directly with them. So owners end up spending more time in Zoom meetings, or where it’s possible, on trips in face to face meetings with clients to grow more sales.
Does this sound familiar to anyone? While sales go up, there is a downside to this approach. You, dear owner, end up struggling to get everything done. Your life is full of endless demands from customers who need help, employees who are on the edge of burnout (which has increased during the pandemic), and (we hope) staying on top of all the upgrades to systems to support the growth. It’s not humanly possible to sustain this kind of workload. As a result owners may see revenues plateau. Many face relationship issues. Some find themselves with serious health problems. Because the owner is working far too much.
And there’s another downside to focusing solely on revenue and profit. The actual value of your business can decline because buyers can see it is overly dependent on you, and your multiple goes down, if there are any serious buyers at all. Because they face a higher risk of turning your company into a valuable opportunity for themselves.
What’s an owner to do?
Let’s turn our attention to M. Your company’s multiple. Without losing your family or employees, or killing yourself, you can grow your multiple, the lever to increase your company value, grow profit and give you, the owner, a break instead of a breakdown. But how?
John Warrilow, founder of the Value Builder System™ has done the research for us and identified the following factors that drive your multiple. Quoting John’s 2019 article on this topic, they are:
Differentiated Market Position
Acquirers only buy what they could not easily create, so expect to be paid more if you have close to a monopoly on what you sell and/or are one of the few companies who have been licensed to provide the specific product or service in your market.
Lots of Runway
Most founders think market share is something to strive for, but in the eyes of an acquirer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.
An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.
The size and profitability of your company will matter to investors. So will the quality of your bookkeeping.
The You Factor
The most valuable businesses can thrive without their owners. The inverse is also true because the most valuable businesses are masters of independence.
© The Value Builder System, 2019, Used with Permission
Isn’t it time to stop working so hard, breathe, and start focusing on your multiple instead of just profits?
To learn how you’re doing on the key drivers of value, I invite you to take the free Value Builder™ Assessment by clicking the image below. You don’t have to completely lose touch with sales and profits. That would be unwise. But whether your transition out is ten years away or two years, for financial peace of mind, you’ll sleep better and breathe easier focusing a while on increasing your multiple.