Key Takeaways From “Increase The Value Of Your Business By Focusing On 1 Number:
- Understanding how to increase the value of your business by mastering 1 simple equation
- What a business multiple is
- 7 ways to multiply your business value
How To Increase The Value Of Your Business By Focusing On 1 Simple Part An Equation
The old cliché goes: Work smarter not harder.
Everyone understands this cliche, but most entrepreneurs I know rarely follow this advice.
When starting a business, you absolutely require hard work to grow something from nothing. Business owners work 80-hour-plus weeks because that’s what it takes to get started. Money is tight and doing the work yourself makes the business more profitable (which is good for selling, right?)
But after a certain point in time, you’ve got to be able to create a business that you manage rather than one that manages you. If you are the chief, cook and bottle washer, then you will become the most valuable member of your organization. In the short term, this approach may be more profitable. However, in the long term, these types of owner-driven organizations have little to no resale value.
Your Magic Formula For Creating Value
Instead of focusing on how many hours you need to work to make your company more profitable, why not focus on the main part of the “value” equation needed to make your company more valuable?
One number will increase the value of your business more than any other. Let me share a formula I use to conceptualize this.
Profit × Multiple = Value
The magic number is the ‘Multiple’ number.
Entrepreneurs dedicate time and effort to increase profit. Hard work will increase this number, but only to a certain degree. This is where the cliché becomes applicable. The savvy business owner directs their attention to increasing the Multiple. This creates leverage and expands value.
Increasing the Multiple will dramatically increase the value of your business. For business owners that have hit what I call the “wall of diminishing returns”, the time has come to stop cramming hours into the day and work on multiplying the value of the business.
7 Ways To Increase The Value Of Your Business
Those of you that know me know I am laser-focused on value creation. Increasing the value of your business is critical to getting the right sized check when you ultimately sell your business. I recommend seven ways to grow the value of a business, all of which can drive up the Multiple.
- Design and implement systems, processes, and routines
- Focus on competitive advantage and creating a differentiated market position
- Diversify the customer base
- Grow recurring revenue
- Remove owner-dependence
- Focus on scalability potential
- Organize and clean up the financials
Let’s take each of these in turn and their ability to increase the value of your business. Keep in mind that these seven initiatives often overlap, so talking about one will have applications in one or more of the others.
#1 Design and Implement Systems, Processes, and Routines
Much of the value of a business is the ability to provide a stable product or service, within a defined time frame, at a specific price. Predictability is critical to meeting customer demand on-price and on-time. Your business can be engineered to replicate success; in fact, a potential buyer wants to know that the business will do just that. If you haven’t already, design, document, and implement step-by-step processes that force the business to be more efficient.
#2 Focus on Competitive Advantage and Creating a Differentiated Market Position
Chances are you know your competitive advantage very well. But do your customers? More importantly, does your future buyer? Competitive advantage needs articulated, communicated, and built into the foundation of the business. The time spent on this will help customers and a buyer decide if you are a Wal-Mart (cost-effective and mass-produced ) or a Target (affordable and higher quality).
#3 Diversify the Customer Base
While a large, primary customer may be good for your bottom-line, they are a tremendous risk. Buyers know this. I constantly see buyers who are worried about purchasing a business that loses the primary business in the first few months. This happens because the relationship has changed. The former owner often takes the customer relationship with them. Diversify, diversify, diversify. Not only will this signal stability and predictability, but it also suggests growth and the chance for increasing market share.
#4 Grow Recurring Revenue
If you’ve talked to me in the last few months, you’ll know I am very interested in recurring revenue. Modern businesses are increasingly transitioning to a full or partial subscription billing model. The subscription economy is fast approaching.
Recurring revenue is a sure-fire way to increase the value of your business. Companies like Amazon and Netflix have hit it big buy locking consumers into monthly subscriptions. This creates stable cash flow, builds customer trust, and makes it harder for customers to “opt-out” of the sales cycle. High recurring revenue also demonstrates to a buyer that the business will not undergo significant disruption after the purchase.
#5 Remove Owner-dependence
We’ve touched on this in numbers one, three, and four. Most buyers ask themselves, “Can this business survive without the owner?” Owner-dependant businesses, or those that have a higher-than-likely chance of struggling without the owner, sell for less. This is a simple risk analysis on the part of the buyer. Reducing or eliminating owner-dependence is one of the better ways to drive up the value of the business.
#6 Focus on Scalability Potential
You can sense the possibility for growth and scalability. Maybe you have plans to do just this. Does your buyer know this? Flesh out the plans to scale. Make a compelling case for why and how to scale the business. Get to work laying the groundwork so you can demonstrate to the buyer the business is poised to scale.
#7 Organize and Clean Up the Financials
Clean, organized, and easy-to-read financials can multiply value indirectly. They give you and the buyer an accurate snapshot of the health of the business. From strong financials, you can make a great case for many of the other methods we’ve reviewed. It is difficult for buyers to argue with the facts of the business.
Profit is important, but increasing the Multiple is the best way to build long-term wealth. Grow your business instead of focusing on short-term returns. Time is the most valuable resource we have, and knowing how to leverage it to make out-sized returns is critical.