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 the value of their company 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, which means spending more time on the phones, on the road and face-to-face to increase sales.
With this model, a company can slightly grow, but the owner’s life becomes much more difficult: customers demand more time and service, employees begin to burn out, and 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 company value, improve your profit and redeem your freedom.
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 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.
An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.
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.
Most business do not adequately plan for the ultimate exit of their business whether that means selling it or passing it down resulting in far less value received when they want to sell or retire. By preparing now you can dramatically increase your company’s value and the cash that you receive down the road.
To see how your company scores in terms of the ability to sell one day, you can complete the Value Builder questionnaire and get a report on how you’re doing in each area.
It only takes 15 minutes and even if you are not thinking of exiting in the short term, it can give you tremendous insight on the areas where you are strong and the areas that you can improve on to increase the value of your business.
If you were to draw a picture that visually represents your role in your business, what would it look like? Are you at the top of an organizational chart, or stuck in the middle of your business like a hub in a bicycle wheel?
The Hub & Spoke model is a diagram that shows how dependent your business is on you for survival. The Hub & Spoke model can only as strong as the hub. The moment the hub is overwhelmed, the entire system fails.
Acquirers generally avoid these types of managed businesses because they understand the dangers of buying a company too dependent on the owner. It also is tough for you as the owner to enjoy the freedoms of owning you own business.
Here’s a list of the 5 top warning signs that show your business could be too dependent on you.
1. You are the only signing authority
Most business owners give themselves final authority… all the time. But what happens if you’re away for a couple of days and an important supplier needs to be paid?
Consider giving an employee signing authority for an amount you’re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home (not the office).
That way, you can review everything coming out of your account and make sure the privilege isn’t being abused.
2. Your revenue is flat when compared to last year’s
Flat revenue from one year to the next can be a sign you are a hub in a hub-and-spoke model. Like forcing water through a hose, you have only so much capacity.
No matter how efficient you are, every business dependent on its owner reaches capacity at some point. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people.
3. Your vacations… don’t feel like vacations
If you spend your vacations dispatching orders from your mobile, it’s time to cut the tether. Start by taking one day off and seeing how your company does without you.
Build systems for failure points. Work up to a point where you can take a few weeks off without affecting your business.
4. You know all of your customers by first name
It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together.
Consider replacing yourself as a rain maker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else.
5. You get cc’d on more than five e-mails a day
Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work.
Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from you.
Putting systems in place such as these not only will allow you more freedom and peace of mind in your day to day life but it also puts you in a much better position to sell, pass on, or retain an income stream from your business when you are ready to retire.
If you would like to discuss how to maximize your revenue and your profitability today while building an asset that can support you down the road, contact us today!
Are you looking to add more revenue to your business? Most of us are at some point in the growth of our companies. When it comes down to it, adding more revenue to your business is a relatively simple concept. There are only 4 ways to do it and they apply to just about any business.
The first way to grow revenue is to increase the size of the transaction, which is the actual amount that a customer spends when they purchase from you. This commonly known as an “upsell” when you have the intention of purchasing a certain item and you wind up purchasing a more expensive item or additional products or services.
Anytime you go to a restaurant and are asked about coffee and dessert, are in the checkout line at the grocery store and are contemplating picking up a magazine or a candy bar, or on Amazon and the site suggests additional items or “bundles” you are witnessing a company attempting to increase the size of the purchase. They know that if they can systematically increase the average purchase per customer, it will have a major impact on their top line.
The second method of increasing revenue in your business is to increase the number of transactions made by each purchaser. This is essentially creating repeat customers who will buy from your or your company multiple times in one year or over the course of their lives.
This can be the same product or service when they need it again, or it could be additional products or services that you offer. Businesses use memberships, thank you cards, email marketing, subscription services, and loyalty programs to increase revenue in this way.
The third way to grow sales and revenue is to simply raise your prices on the products or services that you are already offering the marketplace. This is of course is the easiest to implement but also carries some risk. You have to make sure that you are delivering enough value to justify the increase and have to ask the question if the market will bear such a move.
You see many companies increase pricing slightly year to year and justify it due to cost of living. This becomes somewhat of a self-fulfilling prophecy because if everyone moves their pricing up in lock step then the cost of living definitely will definitely rise as a result!
The businesses that are most successful with this method tend to offer premium products or services as people often want the best that they can afford and there can be a certain cache to being priced at the top of the market. You just have to make sure that the quality matches the price point.
The last way to increase revenue in your business is to increase the number of clients or customers that you serve. It is crucially important to have systems in place that generate new customers or leads and it is the main difference between companies that thrive and those that struggle to survive but it is also the most expensive way to generate more cash in your business.
You want to make sure that your lead generation strategies are highly targeted and that you are getting a return on your investments in terms of both customer acquisition costs vs average lifetime value of each customer. This is the difference between “hope and pray” marketing and having a lead generation machine that you can count on to generate significant cash flow month after month.
Looking at your business today how would you apply each?
Starting Vs. Growing Your Business
Most company founders are good at the first stages of entrepreneurship. But in the phases that follow, they may only be average. Just because you have a knack for starting companies, doesn’t necessarily mean that those skills translate well into growing one.
There are celebrated cases of founders who have successfully started and grown a business – Elon Musk and Bill Gates come to mind. There are, however, many more examples of entrepreneurs who perform well initially and then hold back their company as it ages. But, as a business owner, you can avoid this.
How One Founder Unlocked the True Value of His Company
Damian James grew up in Melbourne and learned a lot about the aging population in Australia. Realizing that healthcare could be a lucrative field, he discovered a sector ripe for disruption, podiatry. This is a branch of medicine devoted to the diagnosis, medical and surgical treatment of foot and ankle disorders.
At the time, most podiatrists in Melbourne worked from a retail location where the doctor owned and operated a private practice. The podiatrist would rent space, hire some staff, and charge patients per visit. At night, some enterprising doctors would also visit old age homes to offer care. Reasoning that many old people nodded off shortly after dinner, James saw an opportunity for a podiatrist to visit old age homes during the day when it was more convenient for patients.
The Million Dollar Idea
James, who had earned a bachelor’s degree in Podiatry in 1996, started Aged Foot Care. He approached old age homes with a compelling offer of removing the traditional overhead of an office.
Aged Foot Care went through a variety of growing pains over the years, including an expensive rebranding to the name Dimple. By 2015, Dimple was generating roughly $200,000 of profit on $2.5M in revenue.
Time to Grow
Despite his success, James was frustrated. The company’s growth had stalled. His management team seemed perpetually incapable of hitting its targets.
Quarter after quarter, he would set goals with his team, but they would fall short. James decided it was time to bring in outside help, so he hired a Chief Operating Officer.
To recruit the new COO, James knew he would need to give up some equity, so he commissioned a valuation for Dimple which came in at $2.5 million. He offered a salary, plus 5% of the company. James also offered another 3% of the business (up to a maximum of 20%) for every $1 million the COO would grow Dimple’s revenue past $5 million.
The new role was a success. James quickly promoted him to Chief Executive Officer and stepped back from the day-to-day operations. He decided to let the company thrive under the new CEO’s leadership.
Down to just one day a week, James limited his involvement to providing a vision and protecting the company’s core values. The CEO, on the other hand, ran the day-to-day business – pursuing James’ core strategy of contracting with aged care facilities.
The company hit $11 million in revenue by 2017.
The Big Bonus
Zenitas had a similar strategy of bringing healthcare to patients in homes or care centers rather than having them languish in hospital beds. The company was keen to add podiatry to its stable of services. The decision makers realized that acquiring Dimple would allow it to become an overnight market leader.
In July 2017, Zenitas announced they had acquired Dimple for $13.4 million. Under different leadership, the company had grown in value over 500% in less than three years.
Starting and growing a company require different skills which are rarely found in the same individual. This begs the question, ‘is it time to find someone else to run your business?’
Small businesses often operate as if their sole purpose is to fund the owner’s lifestyle, but the most valuable companies are run with financial rigor. You may be years from wanting to sell, but starting to formalize your operations now will help you predict the future of your business. Then, when it does come time to sell, you’ll fetch more for what you’ve built because acquirers pay the most for companies when they are less risky. There’s nothing that gives a buyer more confidence than clean books and proper record keeping.
Jay Steinfeld is a great example of how to run a business like a public company. Steinfeld studied Accounting at the University of Texas and joined KPMG after college. His wife owned a small retail store selling blinds and window treatments. The store was successful, but by 1994, Steinfeld had noticed a little Seattle-based outfit that was trying to hawk books online. This company with the peculiar name “Amazon.com” started to succeed in selling books online and Steinfeld wondered if he could get consumers to buy blinds online.
Soon after, Blinds.com was born.
Unlike many of the first-generation online companies that were run with little financial controls, Steinfeld grew Blinds.comlike an accountant. He was determined to run his business with the same rigor as a publicly listed company. He built an experienced management team and took the unusual step of assembling an outside board of directors even though Blinds.com was private and Steinfeld owned all of the stock.
The board met quarterly and each of Steinfeld’s senior managers were asked to prepare and deliver formal presentations to his board. Steinfeld hired a big four firm to complete a full audit of his financials each year even though all he needed to satisfy Uncle Sam was a simple tax return.
By 2014, Blinds.comhad grown to 175 employees and, at more than $100 million in revenue, was the largest online retailer of blinds in America. Even though Home Depot had close to $90 billionin sales at the time, Blinds.com was outperforming them in its tiny niche, which – coupled with their fastidious bookkeeping — made Blinds.com absolutely irresistible to Home Depot. On January 23, 2014, Home Depot announced its acquisition of Blinds.com.
Running your business like it’s public will make it more predictable as you grow and ultimately a whole lot more attractive when it comes time to sell.