The One Number Owners Need to Start Focusing On
Most owners believe the best way to improve the market value of their company is to make more profit – so, they find ways to sell more and more. Selling more of the right products and services may increase profit; however, it may not increase the one number that makes you the most money when you go to sell your business.
The value of your business comes down to a single equation: what multiple of your profit is an acquirer willing to pay for your company?
profit × multiple = value
As an example, if your business is providing you, as the owner, $100,000 in pre-tax profit, and you sell it for three times multiple, the acquirer would pay $300,000. However, what if your business could demand a five times multiple or higher? By focusing on what drives the multiple of earnings a buyer will pay, you can significantly increase the money you receive when you are ready to sell your business.
Most business owners are pretty clear on how to increase sales and drive more money through the business; however, most have never really thought about what it takes to increase the multiple a buyer is willing to pay for their pre-tax profits.
What Drives Your Multiple:
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, have a desirable and established customer base, 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 business owners want a large share of their market, 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. Businesses with growth potential often sell for higher multiples.
An acquirer is buying future profits and will be assessing the reliability of your company’s future earnings. Having strong customer relationships that result in repeatable sales is important. To drive your multiple, consider creating a dependable stream of recurring revenue through established customer contracts, subscriptions, memberships, or maintenance agreements.
The size and profitability of your company will matter to investors. So will the quality of your bookkeeping. Clean financial record keeping gives buyers confidence they can rely on your past financial history to predict future financial profits.
The You Factor
The most valuable businesses can thrive without their owners. While you may have grown your business in the beginning by making everything possible, to get the highest multiple, your business needs for everything to be possible without you.
Driving your multiple will ultimately help you grow your company value, improve your profit, and gain your freedom.