Determining the value of your business boils down to a straightforward equation: the multiple of profit that an acquirer is willing to pay for your company.
Profit × multiple = value
A common belief among owners is that enhancing the value of their company hinges on increasing profits. As a result, they often strive to boost sales tirelessly. Given their expertise in the industry, customers naturally seek personal engagement, leading owners to spend more time on calls, on the road, and face-to-face to drive sales.
While this approach may result in slight growth, it often makes the owner’s life more challenging. Increased demands from customers, employee burnout, and a perpetual sense of not having enough time in the day can lead to stagnant revenue, compromised health, and strained relationships. If this scenario sounds familiar, it might be time for a shift.
If your focus is disproportionately on increasing profit, you could inadvertently be diminishing the overall value of your business. The solution? Redirect your attention to driving your multiple—the other critical factor in the value equation above. This shift can help you not only grow your company’s value but also enhance profit and reclaim your freedom.
5 Factors Driving Your Multiple
- Differentiated Market Position
Acquirers are willing to pay more for businesses that offer something unique and challenging to replicate. If your company holds a near-monopoly on what it sells or has exclusive licenses for specific products or services in the market, expect a higher valuation.
- Lots of Runway
While many founders strive for increased market share, acquirers may perceive this as a limitation on future growth opportunities. Instead, focusing on developing your addressable market and creating a reserve of untapped potential with ample room for expansion can make your business more attractive.
- Recurring Revenue
Acquirers seek assurance that your business will thrive even after you exit. A strong base of recurring revenue demonstrates stability and ongoing viability beyond the founder’s involvement.
- Financials
The size and profitability of your company are crucial factors for investors. Additionally, well-maintained financial records enhance the appeal of your business. A full audit is not often required, but prepared and reviewed statements from a third-party accountant are highly recommended.
- The You Factor
The most valuable businesses can operate independently of their owners. Businesses that demonstrate a mastery of independence tend to command higher value. Find a couple of trusted lieutenants that you can point to that can run the business while you are enjoying the fruits of your labour.
In conclusion, while increasing profit is important, a myopic focus on it may not be the most effective strategy. By shifting attention to enhancing your multiple through differentiation, untapped potential, recurring revenue, solid financials, and operational independence, you can fortify your business’s overall value and secure a more prosperous future. Do you want to learn more – please give us a call.