Focusing On Driving Your Multiple

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.

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.

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.

Take a step today in increasing your multiple with a Free Assessment of your Business Value Drivers.

One Way To Decide When To Sell Your Business

How do you know the right time to sell your company? One answer to this age-old question is that the time to sell is when someone else is willing to invest more in your business than you are.

When you start a business, nobody is willing to invest in its success more than you. You’ve already worked a 40-hour week by Wednesday and, if you’re like most founders, you’ve invested a big chunk of your liquid assets to get your business going.

You’re all in.

In the early days, you are willing to risk your business on a new strategy because the business is pretty much worthless. As the Bob Dylan lyric goes, “When you ain't got nothing, you got nothing to lose.”

As your business grows and becomes more valuable, you may find yourself becoming more conservative, unwilling to risk the equity you have created inside your business on your next big idea. You have reached a point where someone else may be willing to risk more time and money for your business than you are.

Peach New Media 

David Will is the founder of Peach New Media, which he started back in 2000 as a reseller of web conferencing. In the early days, Will changed his business strategy frequently, trying to find an idea with legs. After a number of pivots, he landed on selling learning management software to associations.

The business grew nicely and by 2015 Peach New Media had 40 employees and then received an attractive acquisition offer from a large private equity company. Will was conflicted. He loved his business and treasured the team he had built. At the same time, the acquirer was offering him a life-changing check.

In the end, Will realized that he had become somewhat more conservative as his business had grown and the potential acquirer was willing to make a big bet on integrating Peach New Media into another one of its acquisitions. Will realized he had reached a point where his appetite for risk in his own business was lower than his potential acquirer’s. Will decided to sell.

 When To Sell

The point where a buyer is willing to risk more than you are happens at a different stage for everyone. Let’s say you have a business worth $1 million today. Would you be willing to risk the entire thing on a new strategy for a shot at making it a $10 million company? Many entrepreneurs would take that bet.

Now imagine you have a company worth $10 million and your business represents the bulk of your net worth. Most would argue $10 million is life-changing money. Would you be willing to risk your entire company for a chance to make it a $100 million company? The marginal utility of an extra $90 million is minimal—we all only need so many cars—but the risk is significant. Fewer owners would bet $10 million for a chance at $100 million.

What if your business was worth $100 million? Would you risk it all for a long shot at becoming a billion-dollar company? It is hard to imagine any one person betting $100 million dollars on anything, but if you’re the CEO of a billion-dollar corporation with ambitious growth goals, $100 million is a bet you may be willing to make.

When someone else is willing to invest more in your business than you are, it is probably time your company finds a new owner.

Growing Fast? Here's What Could Kill Your Company?

If your goal is to grow your business fast, you need a positive cash flow cycle or the ability to raise money at a feverish pace. Anything less and you will quickly grow yourself out of business.

A positive cash flow cycle simply means you get paid before you have to pay others. A negative cash flow cycle is the direct opposite: you have pay out before your money comes in.

A lifestyle business with good margins can often get away with a negative cash flow cycle, but a growth-oriented business can’t, and it will quickly grow itself bankrupt.

Growing Yourself Bankrupt

To illustrate, take a look at the fatal decision made by Shelley Rogers, who decided to scale a business with a negative cash flow cycle. Rogers started Admincomm Warehousing to help companies recycle their old technology. Rogers purchased old phone systems and computer monitors for pennies on the dollar and sold them to recyclers who dismantled the technology down to its raw materials and sold off the base metals.

In the beginning, Rogers had a positive cash flow cycle. Admincomm would secure the rights to a lot of old gear and invite a group of Chinese recyclers to fly to Calgary to bid on the equipment. If they liked what they saw, the recyclers would be asked to pay in full before they flew home. Then Rogers would organize a shipping container to send the materials to China and pay her suppliers 30 to 60 days later.

In a world hungry for resources, the business model worked and Rogers built a nice lifestyle company with fat margins. That’s when she became aware of the environmental impact of the companies she was selling to as they poisoned the air in the developing world burning the plastic covers off computer gear to get at the base metals it contained. Rogers decided to scale up her operation and start recycling the equipment in her home country of Canada, where she could take advantage of a government program that would send her a check if she could prove she had recycled the equipment domestically.

Her new model required an investment in an expensive recycling machine and the adoption of a new cash model. She now had to buy the gear, recycle the materials and then wait to get her money from the government. The faster she grew, the less cash she had. Eventually, the business failed.

Rogers Rises From The Ashes With A Positive Cash Flow Model

Rogers learned from the experience and built a new company in the same industry called TopFlight Assets Services. Instead of acquiring old technology, she sold much of it on consignment, allowing her to save cash. Rogers grew TopFlight into a successful enterprise, which she sold in 2013 for six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) to CSI Leasing, one of the largest equipment leasing companies in the world.

Rogers got a great multiple for her business in part because of her focus on cash flow. Many owner think cash flow means their profits on a Profit & Loss Statement. While profit is important, acquirers also care deeply about cash flow—the money your business makes (or needs) to run.

The reason is simple: when an acquirer buys your business, they will likely need to finance it. If your business needs constant infusions of cash, an acquirer will have to commit more money to your business. Since investors are all about getting a return on their money, the more they have to invest in your business, the higher the return they expect, forcing them to reduce the original price they pay you.

So, whether your goal is to scale or sell for a premium (or both), having a positive cash flow cycle is a prerequisite.

Learn more about how this value driver and others will impact business value with our FREE Sellability Score.

2019 Exit Planning Checklist

All business owners will stop being business owners at some point.  So, there is no better time to begin planning for the inevitable than the present.  The earlier you begin planning, the more options you will have for a successful exit.

However, like any strategic plan, it can be difficult to know how and where to begin.  As we wrap up 2018, it's also an ideal time for us to publish a basic "To-Do List" that will serve you in considering that most significant event as a business owner...your future exit. 

DECIDE WHERE YOU WANT TO GO.  Establish Clear Goals and Objectives for Exit and Your Life After Exit.

  • When do you want to leave the business? Whom do you wish to transfer/sell the business to?

  • What are your values-based and legacy exit goals?

  • What is your post-exit "life-plan"? Business owners can often regret leaving when lacking a plan for life that replaces the sense of purpose and meaning they experienced in building their business.

  • Update your Personal Financial Plan. Find out how much $$$$ you will need post-exit to do all you want to do. Is there a gap?

ASSESS WHERE YOU ARE.  Without Accurate Data All Planning Becomes Meaningless.

  • Get an accurate Business Valuation. If the business is your largest asset shouldn't you know what it really is worth to potential buyers?

  • Assess your business Value-Drivers and areas of Risk.

  • Review your Business Continuity Plan for life transitions and unexpected death or disability. Co-Owners would include a review of their Buy-Sell Agreement to ensure alignment with current goals of all owners.

  • Review Estate Plan to ensure alignment with exit goals.

DESIGN AND IMPLEMENT A PLAN.  Build Transferable Value and Enjoy a Future Exit On Your Own Terms and Conditions.

  • Which Exit Route will best accomplish your goals? Sale to Third-Party | Sale to Insiders | Transfer to Family Members | Sale to ESOP | Absentee Owner.

  • Focus on growth and profitability today. At the core of tomorrow's successful exit plan is today's profitability and plan for growth.

  • Strengthen business value drivers. An owner with a sellable business will have more freedom in life and options for exit.

  • Update strategic financial plan for the business.

  • Do you have the right Team of Experienced Advisors for plan design and implementation?

  • Who will Manage the Exit Planning Project?

The most important things you could do in 2019 would be to GET STARTED AND GET HELP if you have yet to do so.  If you wait until you're ready to exit to begin planning, you won't be ready and neither will your business.  Keep in mind, that "You don't know what you don't know" and, like in all other areas of life, that could end up being disastrous. 

There is much at stake during this most significant event in your life as a business owner.  Take steps in 2019 to be as responsible and successful in planning your eventual exit as you have been in running your business. 

Following are some easy next steps:

Contact Us Today for a No-Obligation Exit Planning Exploratory Meeting.  Take our Free ExitMap Readiness Assessment and get your Free Sellability Score.  Get Online Learning and Resources at exitreadiness.com.

3 Surprising Reasons To Offer A Subscription

You can now buy a subscription for everything from dog treats to razor blades. Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent access to them. Starbucks now even offers coffee on subscription.

Why are so many companies leveraging the subscription business model? The obvious reason is that recurring revenue boosts your company’s value, but there are some hidden benefits to augmenting your business with a subscription offering.

Free Market Research

Finding out what your customers want is expensive. By the time you pay attendees, rent a room with a one-way mirror and buy the little sandwiches with the crusts cut off, a focus group can cost you upwards of $6,000. A statistically significant piece of quantitative research, done by a reputable polling company, might approach six figures.

With a subscription company, you get instant market research for free. Netflix knows which shows to produce based on the viewing behavior of its subscribers. No need to ask viewers what they like, Netflix can see what they watch and rate.

For you, a subscription offering can allow you to test new ideas and gives you a direct relationship with your customers so you can see what they like first hand.

Cash Flow

Subscription companies are often criticized for being hungry for cash. Many charge by the month and then have to wait months—sometimes years—to recover the costs of winning a subscriber.

That assumes, however, that you’re charging for your subscription by the month. If you’re selling your subscription to businesses, you may get away with charging for a year’s worth of your subscription up front. That’s what the analyst firm Gartner does, and it means they get an entire year’s worth of cash from their subscriber on day one. Costco charges its annual membership up front, which means it has billions of dollars of subscription revenue to float its retail operations.

Loyalty

Customers can be promiscuous. You may have a perfectly satisfied customer but if they see an offer from one of your competitors, they might jump ship to save a few bucks.

However, if you lock your customers into a subscription, they may be less tempted to try a competitor since they have already made an investment with you.

One of the reasons Amazon Prime is so profitable is that Prime subscribers buy more and are stickier than non-Prime subscribers. Prime subscribers want to get their money’s worth, so they buy a wider swath of products from Amazon and are less tempted by competitive offers.

The obvious reason to launch a subscription offering of your own is that the predictable recurring revenue will boost the value of your company. And while that’s certainly true, the hidden benefits may even be more important.

Get Your Sellability Score today and contact us at [email protected] for an exploratory conversation about building recurring revenue and other value drivers.