The value of your business comes down to a single equation:
Profit × Multiple = Value
What multiple of your profit is a buyer willing to pay for your company?
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. They are experts in their industry, and it’s natural that customers want to personally engage with them—which means they spend more time on phones, on the road and in meetings to increase sales.
In this model, a company can grow slightly, 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, not only are you overworked, but you could be diminishing the overall value of your business. The solution? Focus on driving your multiple (the other number in the equation above). Increasing your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.
What Drives Your Multiple
Differentiated market position. Buyers 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 a buyer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.
Recurring revenue. A buyer will want to know how your business will fare once you leave. Recurring revenue assures them that there will still be a business once the founder hits eject.
Financials. 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.