Big public companies trade at a significant premium over small businesses in the same industry because investors perceive big, sophisticated companies as a safer bet than small, owner-dependent companies. So how do you get a public company-style multiple profit value for your business? One approach is to look for a strategic buyer. Unlike a financial buyer that is looking for a relatively safe return on their capital invested (which is the reason investors place a premium on big, stable companies trading on the stock market), a strategic buyer will value your company on how buying you will impact them. Let’s imagine you have a grommet business predictably churning out £320,000 in pre-tax profit. These days, a financial buyer may pay you around 4 or 5 times earnings – in this case, roughly £1.6 million – if you can make the case your profits are likely to continue well into the future. Now let’s imagine that a company that sells a … [Read more...]
One Hidden Thing That Drives Your Company’s Value
You already know that your company’s turnover and profits play a big role in how much your business is worth. Are you also aware of the role cash flow plays in your valuation? Cash vs. Profits Cash flow is different from profits in that it measures the cash coming in and out of your business rather than an accounting interpretation of your profit and loss. For example, if you charge £10,000 upfront for a service that takes you three months to deliver, you recognize £3,333 of turnover per month on your profit and loss statement for each of the three months it takes you to deliver the work. But since you charged upfront, you get all £10,000 of cash on the day your customer decides to buy. This positive cash flow cycle improves your company’s valuation because when it comes time to sell your business, the buyer will have to write two cheques: one to you, the owner, and a second to your company to fund its working capital – the cash your company needs to fund its immediate obligations … [Read more...]
10 Things That Make Your Business More Valuable Than That of Your Industry Peers
The value of your company is partly determined by your industry. For example, cloud-based software companies are generally worth a lot more than printing companies these days. However, when we analyse businesses in the same industry, we still see major variations in valuation. So we dug through the data available to us and we found 10 things that will make your company more valuable than its industry peer group. 1. Recurring Turnover The more turnover you have from automatically recurring contracts or subscriptions, the more valuable your business will be to a buyer. Even if subscriptions are not the norm in your industry, if you can find some form of recurring turnover it will make your company much more valuable than those of your competitors. 2. Something Different Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to copy are more valuable than a company that sells the same commodity … [Read more...]
Eight Questions You’ll Be Asked When Selling Your Business
One of the most intimidating aspects of selling your business can be facing the barrage of questions during the various management presentations you’ll be doing for potential acquirers. Be prepared to be grilled on all facets of your operations. Of course every meeting will be different, but here are some questions you can expect to be asked when you’re in the hot seat: 1. Why do you want to sell your business? It's a slippery question because if your business truly does have a bright future and you want the buyer to believe that's the case, the obvious question is: ‘Why do you want to sell it, and why do you want to sell it now?’ 2. What is your cost per new customer acquired? The potential acquirer wants to find out if you have a predictable, economical and scalable formula for finding new customers. 3. What is your market penetration rate? The acquirer, with an eye to future growth, is trying to understand how big the potential market is for your product or service and what … [Read more...]
Growth vs. Value: not all turnover is created equally
When you look ahead to next year, will your growth come from selling more to your existing customers or finding new customers for your existing products and services? The answer may have a profound impact on the value of your business. Take a look at the research coming from a recent analysis of owners who completed their Sellability Score questionnaire. We looked at 5,364 businesses and found that the average company that had received an overture from an acquirer was offered 3.5 times their pre-tax profit. When we isolated just the businesses that had a historical growth rate of 20 per cent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 per cent more than their slower growth counterparts. However, the real bump in multiple came when we isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 per cent … [Read more...]
Six ways to profit from your holiday this summer
Summer is nearly here, and although it may seem strange, now may be the perfect time to increase the value of your company. The most valuable businesses are the ones that can survive without their owner. A buyer will pay a premium for a company that runs on autopilot, and levy a steep discount for a business that is dependent on its owner. This summer, consider taking an extended break from your business to see how things will run when you’re not in the building. It’s likely that some things will go wrong, but use those errors as the raw material for making your business operate more independently of you – and therefore making it more valuable. Here is a six-step plan for profiting from your vacation time this summer: Step 1: Schedule your vacation plus one day Whatever day you plan to start working again after your holiday, tell your staff you’ll be back one day later. That way, you’ll have a full day of uninterrupted time to dedicate to understanding what went wrong in your … [Read more...]
Do you have a £500 million business hiding inside your company?
Asking customers to pay to join a special group of your best patrons can increase your turnover; encourage customers to buy new products and services from you, and provide a healthy boost to your cash flow. Just ask Jeff Bezos, the founder of Amazon.com and the chief architect behind Amazon Prime. In exchange for £49 a year, Amazon Prime customers get: FREE One-Day Delivery with no minimum order size on millions of items. Upgrades to Express Delivery (before 1pm) for just £4.49 per item and Evening Delivery to all eligible addresses for just £7.48 per item. Over 350,000 popular Kindle Books to borrow for free, with no due dates. According to TIME Magazine, more than 10 million people have signed up for Amazon Prime programs worldwide. If you do the maths, that makes Prime a five hundred million pound business for Amazon. And like most programs, members pay upfront, giving Amazon a big injection of positive cash flow. But what is even more interesting is what being a … [Read more...]
Building a Business for Sale
To grow a valuable business – one you can sell – you need to set up your company so that it is no longer reliant on you. This can be easier said than done, especially when, like a PR consultant or plumber, what you are selling is your expertise. To scale up a knowledge-based business, you first have to figure out how to impart your knowledge to your employees, so that they can deliver the goods. However it can be difficult to condense years of school and on-the-job learning into a few weeks of employee training. The more specialised your knowledge, the harder it is to hand over work to juniors. The key to scaling up a service business can often be found by offering the service that prevents customers from having to call you in the first place. You have to shift from selling the cure to selling the prevention. Fixing what is broken is typically a hard task to teach; however, preventing things from breaking in the first place can be a far easier task to train others to do. For … [Read more...]
Is Now the Time To Sell Your Business?
Have you been thinking about selling your business but just can’t decide if now is the best time? Do you find yourself repeatedly analysing the economic situation and wishing you had a crystal ball? There are positive signs and there are negative signs…. If you’re still up in the air and can’t quite decide whether or not to hit the eject button, here are six reasons you might want to consider getting out now. 1. You’re less interested in fighting the good fight A lot of business owners took the Global Financial Crisis in the teeth. If you’ve got your business stabilised and the prospect of possibly having to fight through another recession leaves you panic-stricken, it could be time for you to get out. 2. The worst is behind you Let’s say you were mentally ready to consider selling a few years ago, and then 2008 hit and 2009 was bad, and in 2010 and 2011 you made cuts and adjustments, and now you’re seeing some profit and revenue growth. With your numbers going in the right … [Read more...]
How to make your company irresistible to potential buyers
One of the biggest factors in determining the value of your company is the extent to which an acquirer can see where sales will come from in the future. If you’re in a business that starts from scratch each month, the value of your company will be lower than if you can demonstrate the source or sources of future revenue. A recurring revenue stream acts like a powerful pair of binoculars enabling you and your potential acquirer to see months or years into the future. Creating an steady income stream is the best way to increase the desirability and value of your company. The more certain your future revenue is, the higher the value the market will place on your business. Here is the hierarchy of recurring revenue presented from least to most valuable in the eyes of an acquirer: No. 6: Consumables (e.g. shampoo, toothpaste) These are disposable items that customers purchase regularly, but they have no particular motivation to repurchase from one seller or to be brand loyal. No. 5: … [Read more...]
How to thrive as a middleman – become an Expert
Being a middleman (or woman) has become risky business. When was the last time you used a travel agent? Agencies have largely become irrelevant given the rise of online travel booking companies. How about a record/CD store? iTunes and online music subscription services have removed the middleman from between you and your music. Think back to the last time you rented a film – did you get in your car to visit the local Blockbuster? Travel agents, record/CD stores and film rental businesses have all fallen victim to the curse of the middleman. When all you do is move other people’s product, the only value you have is your location. But in a world where content can be streamed and containers can be shipped overnight, being the local person is becoming irrelevant. Even if you have a protected geographic territory, near perfect pricing information available to your customers through the Internet will eventually grind down your margins. Dragging down your value Not only do … [Read more...]
Beware of the Mile Wide Trap
If your turnover has stalled after a period of rapid growth, you may have fallen into the Mile Wide Trap. Consider the case of Kim (not her real name) who runs a public relations firm. Kim studied marketing at school and went on to work for a big advertising agency where she spent ten years learning a variety of marketing disciplines, from public relations to advertising to direct marketing and social media. Then Kim decided to leave her job to start a public relations firm. Given her depth of experience and connections, she quickly landed tractor giant John Deere as a client, and was asked to handle their regional dealer events. She hired some helpers and her start-up agency quickly began to grow. Kim did a great job with the dealer events, so John Deere asked her to handle their annual sales conference. Again she delivered with style and creativity. Impressed by Kim’s innovative approach to the event, John Deere asked her to handle some of the creative for their next advertising … [Read more...]
