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
Most owners believe the best way to improve their company’s value is to make more profit – so, they find ways to sell more and more. Because they are experts in their industry, it’s natural that customers want to personally engage with them, which means spending more time on the phones, on the road, and face-to-face to increase sales.
Which model is sustainable?
With the profit-driven model, a company can grow slightly, but the owner’s life becomes more difficult. Customers demand more time and service, employees begin to burn out, and it soon feels like there are not enough hours in the day. Revenue flatlines, personal health can suffer, and relationships get strained – all from working too much. Does this sound 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 company value, improve your profit, and restore your freedom.
Is your business exit ready?
If you’re planning to exit your company in the near future, you may find EastWind’s Exit Strategy Playbook helpful in developing your own exit strategy, making your company more sellable.
What Drives Your Multiple?
There are several factors to consider when you focus on driving 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 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.
- Recurring Revenue – An acquirer is going to want to know if your business will thrive once you leave. Recurring revenue assures them that there will still be a business once the founder hits eject.
- Financials – 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.
If you invest your time and energy into driving your multiple, instead of driving yourself to exhaustion by trying to make more profit, you will most likely create an attractive business that will continue to do well after you have moved on.
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