I’ve been doing a lot of work lately with buyers looking at businesses to acquire. The buyers hire us to review the business they are acquiring to make sure everything stacks up and is what the seller is reporting.
As part of the process, we always look at how much the business is worth based on the same key factors that we measure all businesses by to see how they compare.
For many sellers, even those who have owned their businesses for twenty or thirty years, going through the process of selling is the first time they ever really stop and consider how their business looks and how much it might be worth. Most have only the foggiest idea or have some number from years ago when someone threw out a very casual and unresearched offer.
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In my opinion, the smart way to run your business is to always be looking at these metrics and have an excellent idea of how much your business is worth.
Why? Because if you understand what drives value for buyers, you’re more likely to do things that help you add value when you make business decisions.
And as it turns out, the things buyers value and that make your business worth more and the same things that, in general, ensure you have a better performing business!
So what things drive value, and what should you be thinking about in your business?
Five Metrics That Build the Most Value in Your Business
Growth
If you take two otherwise completely comparable businesses, with $1M in revenue and $250K net profit in the same industry with the same headcount, what would you use to decide which one is worth more? Suppose one has been at $1M revenue each year for the last three years, while the other one just reached $1M after having doubled in size each of the last three years?
Now which one would you prefer? Well, it sure seems like the one that is growing has figured out how to add new sales and manage growth. The other one in comparison seems to be stuck.
Obviously, the growing business is much more attractive!
So in your business, achieving year over year growth is a great way to demonstrate high value and get a premium price. If you’re not selling, it’s still a great way to operate- it means you’re staying ahead of inflation, able to invest in hiring and expansion, and showing that you can continue to attract new customers. Your goal every year should be a minimum of 10% annual growth, and more is better!
Profitability
The only thing more important than growth for a business is profitability. If you have to choose between the two, you always want to take profits over more sales. Even better is to be at the top of the range for profitability.
For one, your value is directly based on how profitable you are so more is more.
But higher profits also mean you can weather ups and downs, things that happen outside your control, a new competitor coming along trying to win on price and anything else that may happen. If your profits are low, or razor thin, it only takes a tiny disruption to put you in a position to lose money and possibly even go out of business.
In your business, keep a very close eye on profits and continually look for ways to edge that value up.
Size
If you have two businesses in the same industry, same business model, and same profit margin, but one is doing $5M in annual sales and the other is doing $1M, the bigger business is going to be worth more. Not just because in real dollars it’s producing more income, but also the multiple of the profits that determines the value will be a bigger number.
Why? Because a big business, just like a more profitable business, has a better chance of survival and the ability to attract more talent, get better pricing, win bigger deals, etc. There are a lots of reasons to grow and being a bigger size is one of them!
It may seem like being bigger just means more headaches and stress, but really what it means is you can now afford more help, delegate more activities, and reduce the time you have to spend doing things you’re not well suited for or don’t want to do.
In your business, size matters, and the bigger you can grow the more stable and less stressed you have to be about one small thing or another completely knocking you out like can happen when you’re small.
Predictable Cash Flow
Not every business has the opportunity to build recurring revenue, but if you have it, grab it! If you don’t have it, see if you can get creative on what you could offer to do so.
Even if there isn’t a straightforward answer, at least make sure you are regularly checking in with past customers and doing everything you can to ensure your current customers can buy more, stick around longer, and tell their friends.
The more you can engineer a system of predictable revenue through marketing, sales, and offers to keep the cash coming in the more valuable your business is, the faster it will grow and generally the more profitable it will be- all things already on this list that add value to your business.
Most small businesses have no system for this and rely strictly on word of mouth to make the phone ring and sales to come in.
Get ahead of that and build a real system to drive new sales and repeat orders. If you aren’t doing it now, get started on how you’re going to do it today!
Systems and Procedures
Imagine you are a buyer evaluating two otherwise equal businesses (sales, profits, growth, etc) but one owner’s desk is neat, tidy, clean, and organized while the other owner’s desk is covered in huge piles of papers, binders, and stacks and stacks of mess surround the office on all sides.
With nothing else to go on, which business do you want? Which one do you think will be easier to take over? The one that is clearly organized and under control or the one that looks like pure chaos?
A buyer wants a business that runs like a well-oiled machine, where they won’t have to wonder how to accomplish things or worried that crucial tasks are locked in just one person’s head, and if that person (often the owner!) was to leave things would come to a dead stop.
But this isn’t just good to do when you decide to sell. A business should have processes, procedures, and efficient operations at all times. It should not depend entirely on one or a few people who are the only ones who know how to do something- that puts the business at serious risk in the event something happens to one of those people! They could be out sick, or handling a family emergency or just get burned out and leave, and now everyone else has to scramble.
As a business owner, making things clear, documented, repeatable, and efficient should be part of your daily mission. If you take ten minutes a day to start, most businesses will be very well set up in less than a month. Not doing it however means everything is harder, and chances are you will be coming up short not just on this but on all of the above.
Next Steps
Take thirty minutes and review your own business in light of the above. How well are you doing on growth, profits, consistent revenue generation and the rest? What do you need to do to get these moving in the right direction?
If you make small changes each day, by the end of the quarter you will see big changes, and within a year it could be a like a whole new business. But you have to make the effort, and not just any effort but effort in the right direction to work on the above.
Otherwise, it’s easy to let every single day just be about that day’s problems but you never work on making tomorrow a little better than today.
Do that and I promise you’ll be very glad you did whether you sell now or in a couple of decades!