Key Drivers that Increase the Value of Your Business

Whether you want to raise money for your business, or are thinking about selling it, there are certain key drivers that will significantly increase its value. If raising capital, that means you don’t have to give up as much equity to investors. If selling the business, that means you get to walk away with a lot more money. In either case, you’re in the driver’s seat. You will attract multiple investors or buyers, giving yourself maximum negotiating power.

Here are the key drivers to increase your company’s valuation:

1. Predictable and sustainable revenue.

This is often called “annuity revenue.” No surprise here. Investors and acquirers are essentially buying a future revenue stream. There are all kinds of strategies you can implement to make revenue more predictable and sustainable. One example is moving customers from a one-time purchase or monthly billing to annual or multi-year contracts.

My website hosting company, for example, gives me a big discount to lock-in a 24-month contract.

2. Healthy variety of customers at different pricing levels.?No more than 20% of revenue from one customer.

This ensures that the loss of one or two customers won’t tank the business. It gives investors or acquirers the opportunity to upgrade customers at the lower pricing levels. There are all kinds of strategies you can implement to create a healthy variety of customers and reduce dependencies on a few customers. One example is offering three fixed pricing tiers, like bronze, gold, and silver.

My website hosting company, for example, offers me shared hosting server pricing, virtual private server pricing, and dedicated server pricing. I can move up or down based on web traffic and ecommerce sales.

3. Balanced mix of new customers and repeat customers. High Net Promoter Score (NPS).

A healthy business is one that is always adding new customers and has a high retention rate of existing customers. It’s a red flag to investors and acquirers when a business is solely dependent upon getting all-new customers. A business with satisfied, repeat customers, is highly valued. There are all kinds of strategies you can implement to ensure a balanced mix of new business and repeat business. One example is offering your existing customers a referral program.

My website hosting company, for example, gives me $50.00 for every new customer I refer, plus gives my referral a 50% discount on their annual hosting package. Win-win.

4. Strong (or fast growing) market position.

A highly valued business is one that dominates its niche’ or is growing on a pace to become a dominant player. Investors and buyers want to ride a wave, not have to paddle out to catch one. If you have an established brand and competitive advantages, investors and buyers will pay more. There are all kinds of strategies you can implement to dominate your market and counter competitive threats. One example is by matching or beating your competitor’s price, or better yet, offering a meaningful feature or accessory your competitors can’t offer. Always give your customers a better ROI than competitors can.

My website hosting company, for example, offers free website migration, SSL security certificate, and search engine optimization as part of the base package. It’s a huge value-add, saves money, and is a no-brainer compared to most of the other website hosting companies.

5. Multiple products and services that are differentiated and cross-sell each other.

One-trick ponies are not highly valued by investors and acquirers. A healthy product mix reduces risk. Products and services that have a unique value proposition are highly valued. Products are services that compliment one another and help sell one another give the business a higher valuation. There are all kinds of strategies you can implement to create product-line extensions. One example is to accessorize, or bundle with complimentary products and services.

My website hosting company, for example, offers domain name registration, unlimited email accounts, and website backups for additional fee. They also offer bundled integration with MS Office 365 and Google Workspace for an additional fee.

6. Experienced team. Low dependency on the founder or owner.

It’s no secret that investors put more stock in the team than the product. No acquirer wants to buy a business that requires the owner to run it. This is called key owner risk. Acquirers also buy businesses to get the team. There are all kinds of strategies you can implement to build a balanced team and reduce dependency on the founder or owner. One example is to cross-train new hires.

In my previous companies, for example, every new employee had to spend two weeks working in each department: engineering, marketing, sales, operations, and customer support. When first starting the company, I was the chief salesperson, which is common in most startups. As I hired salespeople, I personally took them to each client account and managed the handoff.

7. Efficient systems and processes. Standards Manual and Standard Operating Procedures (SOP).

In highly valued businesses, systems and processes run the business. People run the systems and processes. If you have ever watched The Profit with Marcus Lemonis, you know his mantra: People, Process, and Product. This is where many businesses take a hit on valuation. They have no processes. They are run by tribal knowledge. ?There are all kinds of strategies you can implement to institute efficient systems and processes. One example is to write a Standards Manual for every department and every function. Create SOP’s for all operations. Otherwise, the business won’t scale.

My real estate holdings company and business brokerage, for example, has documented procedures for every single action needed to run the operations, from client onboarding to transaction management. If I get hit by a bus, any capable person could step in and run those businesses without missing a beat.

8. Healthy margins. High switching Costs.

There is only one thing better than predictable and sustainable revenue. That’s predictable and sustainable revenue with good margins. What constitutes good varies from industry-to-industry, but the business’s margins should be above average for the industry. There are all kinds of strategies you can implement to increase your margins. Examples are buying in bulk, automating labor-intensive tasks, and collecting from customers in advance of delivering the product.

Back to my hosting company (they are such a good example of a highly valued business), they collect the hosting fee in advance and have automated support bots that answer most questions. The switching costs are high for customers, having pre-paid for the service, so the risk of losing them and not being able to upsell them on other products is low.

9. Intellectual property (IP). Barriers to entry.

Companies that have defensible patents, trademarks, copyrights, trade secrets, and proprietary tools and technology, fetch a higher valuation from investors and acquirers than do companies that don’t have much intellectual property. IP creates barriers to entry. It gives a company a significant competitive advantage, especially when that IP is difficult to replicate or engineer around. There are all kinds of strategies you can implement to create defensible IP. One example is to file international trademarks on your domain name and/or logo.

Every company that I ever started or worked with that had a nice exit, for example, had defensible IP. Every business is essentially in the IP business. IP is a company’s most valuable asset. This includes their customer base. A customer database (CRM) is IP.

10. Low legal and regulatory risks.

Businesses that are entangled in messy litigation, have tax deficiencies, expired licenses, or expired certifications, or are not otherwise in compliance with the various regulations that govern their workplace, are not highly valued by investors or acquirers. In fact, investors or buyers who may show interest are usually bottom feeding. These are fire sales.

There is only one strategy for maintaining low legal and regulatory risks. Be a good operator. Manage the business well and nip potential problems in the bud before they become big problems. Alternatively. Hire Ray Donovan.

Final Thoughts

Hang this list on your wall. Strive to achieve as many of these value-building drivers as possible. Mitigate investor and acquirer risks by minimizing dependencies. Do this and you will build a scalable and repeatable business that will drive up the value of your company.?

Start | Scale | Sell: Learn more with these best practices.