The One Number Owners Need to Start Focusing On

In its most simple terms, the value of your business comes down to a single question: 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, you find ways to sell more and more, ideally with improving margins. As an expert in your industry, it’s natural that customers want to personally engage with you, which can mean spending more time on the phones, on the road and face-to-face to increase sales.

With this model, a company can grow, but the owner’s life becomes much more difficult: customers demand more time and service, employees can 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. A 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?

1. Standing out from the crowd

 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.

2. Lots of Growth Potential

 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 eaten up most of the opportunity.

3. Recurring Revenue

 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.

4. Financials

 The size and profitability of your company will matter to investors. So will the quality of your management accounting and how well you have delivered a financial dashboard for your business over the last three years. Cashflow is also crucial as any acquirer needs to fund the purchase of the business and the working capital. The less they have to spend on working capital the more they can afford to spend on buying the business.

 5. 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.

6. Your Switzerland Score

The less reliant you are on a small number of customers, employees or suppliers, the more valuable is your business. So how neutral are you from these effects?

7. Customer Satisfaction

On a scale from 1-10 how likely are your customers to recommend you to a friend or a colleague? This can be expressed as a Net Promoter Score (NPS), and bench-marked across time and within your industry. Being able to demonstrate a good and improving NPS provides significant assurance to a purchaser that the future of the business is bright.

And while business owners are often very proud of the history of their business, the harsh reality is that acquirers are only interested in the future.

Join me next week to explore these "multiple" points in more detail at my seminar "How to Build a Business you can Sell", taking place at Alderley Park Conference Centre on September 20th. For details and registration see here.

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