The value of your business comes down to a single equation: what multiple of your profit is a buyer willing to pay to acquire your business?
profit × multiple = value
Most owners believe the best way to improve the value of their business is to make more profit – so, they find ways to sell more and more. As experts in their industry, it’s natural that customers want to personally engage with them. This means spending more time on the phones, on the road and face-to-face to increase sales.
With this model, a business can slightly grow. But the owner’s life becomes much more difficult. Customers demand more time. Employees begin to burn out. Soon it feels like there are not enough hours in the day. Revenue flat lines, health can suffer, and relationships get strained. All from working too much. Does this feel familiar?
If you’re spending too much time and effort on increasing your profit, you could find yourself diminishing the overall value of your business. The solution? Focus on driving your multiple (the other number in the equation above). Driving your multiple will ultimately help you grow your business’ value, improve your profit and redeem your freedom.
what drives your multiple?
While the level of earnings is important, buyers are also looking for consistent past and future earnings.
differentiated market position
Business 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 businesses who have been licensed to provide the specific product or service in your market.
lots of runway [leave something in it for the buyer]
A buyer wants to know that the business has a positive future and opportunities for improvement. Documenting your business goals, the activities required to achieve them and preparing forecasts, helps buyers understand what the future can look like.
Creating a formal business plan, preparing forecasts to support the plan that detail these opportunities, and the activities required to achieve them, helps the buyer see that future.
An acquirer is going to want to know how your business will do once you leave. Recurring revenue provides comfort assures them that there will still be a business once the founder exits.
The quality and timeliness of the information that is presented to buyers can make or break a sale. Up to date and well-presented information is essential. Being organised and able to respond to a buyer’s queries in a timely manner builds confidence in the operation of the business and the quality of the information.
the you factor
Strategic business buyers are not willing to pay to be locked into a business that is dependent on them. The most valuable businesses can thrive without their owners. Creating a well-run business that is less reliant on you is a key way of increasing your multiple and therefore your after-sales proceeds. To understand more on this topic visit our past blog ‘5 signs your business is too dependent on you’.
Extracting yourself from the business needs to be a managed process and will take some time. However, the benefits are significant and include improved business performance, a more engaged team and ultimately a more valuable business. Most importantly you are creating a business that is less reliant on you that will be more attractive to buyers.
So, whether you are thinking of selling your business soon or just want to know you are building a valuable asset for the future give me a call to discuss ways of growing the multiple in your business.