A Blood Pressure Test for your Business When was the last time you had your blood pressure tested? Taking your blood pressure is one of the first things most doctors do before treating you for just about anything. How much pressure your blood is under as it courses through your veins is a reliable indicator of your overall health; and it can be an early indicator of everything from heart disease to bad circulation. Does it tell the doctor everything they need to know about your health? Of course not, but one powerful little ratio can give the doctor a pretty good sense of your overall wellbeing. Likewise, your Value Builder Score can be a handy indicator of your business wellbeing. Like your blood pressure reading, your company’s Sellability Score is an amalgam of a number of different factors and can help a professional quickly diagnose your business’s overall health. Predicting Good Outcomes Too When a doctor takes your blood pressure, they not only rule out possible nasty ailments; they can also use the pressure reading to forecast a healthy life ahead. Similarly, your Value Builder Score can predict good things for the future. For example, based on more than 10,000 business owners who have completed their Value Builder Score questionnaire, we know the average multiple of pre-tax profit they are offered for their business when it is time to sell is 3.7. By contrast, those companies that have achieved a Value Builder of 80+ are getting offers of 6.6 times pre-tax profit. In other words, an average-performing business turning out $500,000 in pre-tax profit is likely worth around $1,850,000 ($500,000 x 3.7). If the same company improved its Sellability Score to 80+ while maintaining its profitability of $500,000, it would be worth closer to $3,300,000 ($500,000 x 6.6). Are you guaranteed to fetch 6.6 times pre-tax profit if you improve your Value Builder Score to 80? Of course not. But just like blood pressure, one little number can tell you and your advisor a whole lot about how well you are doing; and your advisor can then prescribe an action plan to start maximizing your company’s health – and its value down the road. Heart disease is called “The Silent Killer” because most people have no idea what their blood pressure is. People can walk around for years with dangerously high blood pressure because they haven’t bothered to get it tested. The first step on the road to health is to get tested. If you have a great score, you can sleep well at night knowing you have one less thing to worry about. If your score is not where it should be, then at least knowing your performance can get you started down the road to better health. If you’re interested in getting your Value Builder Score, please visit our website for more details.
Will this be the year you seriously drive up the value of your Company? If you have resolved to make your company more valuable in 2017, you may want to think hard about how your customers pay. If you have a transaction business model where customers pay once for what they buy, expect your Company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA). If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue. Breedlove & Associates sells for 6X Revenue In 1992, Stephanie Breedlove started a Payroll Company to make it easier for parents to pay their Nannies on a recurring basis. It began small and Breedlove self-funded her growth, which averaged 20% per year. By 2012, Breedlove & Associates had hit $9 million in annual sales when Breedlove accepted an offer from Care.com of $55 million for her business—representing an astronomical multiple of more than six times Breedlove’s revenue. Buyers pay up for Companies with recurring revenue because they can clearly see how your Company will make money long after you hit the exit. Not sure how to create recurring revenue? Here are five models to consider: Products That Run Out If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest) in running to the store to re-stock on Pampers. Dollar Shave Club, which was recently acquired by Unilever for five times revenue, sells razor blades on subscription. The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions. Membership Websites If you are a Consultant and offer specialised advice, consider whether Customers might pay access to a Premium Membership website where you offer your know-how to subscribers only. Today there are membership websites for people who want to know about anything from Search Engine Marketing to running a restaurant. Services Contracts If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business. Piggyback Services Ask yourself what your “one-off” Customers buy, after they buy what you sell. For example, if you make a Company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service. Rentals If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. ZipCar subscribers can have access to a car when they need it without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to the company’s co-working space without buying a building or committing to a long-term lease. You don’t have to be a Software Company to create Customers who pay you automatically each month. There is simply no faster way to improve the value of your Business this year than to add some recurring revenue.
You already know that your business turnover and profits play a big role in how much your business is worth. Do you also know 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 “magic” of your profit and loss. For example, if you charge $10,000 upfront for a service that takes you three months to deliver, you will be recognising only $3,333 in revenue for 3 months. But since you charged upfront, you get all $10,000 of cash on the day your customer decides to buy (go you!). This positive cash flow cycle improves your business valuation because when it comes the 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 like payroll, rent, etc. The trick is that both cheques are drawn from the same bank account. So if you are receiving cash in advance, the requirement for working capital is reduced, which means more for you. Unfortunately, the inverse is also true. If your business is a cash suck, an acquirer is going to calculate that they need to inject on closing day, which depletes their resources and results in less for you. How To Improve Your Cash Flow There are many ways to improve your cash flow – and therefore, the value of your business. One often overlooked tactic is to spend less on the machines your business needs to operate. In the restaurant business, for example, there is an often repeated truism that it takes three bankruptcies at a single location before any restaurant can make money. The first owner of the restaurant walks in and – with all of the typical optimism of a new entrepreneur – pays cash for a brand new commercial kitchen complete with fancy stove, commercial grade walk-in coolers, etc., as well as all new dishware, pots and pans, thus depleting their cash reserves before opening night. Within a year, the restaurant owner runs out of cash and declares bankruptcy. Then along comes a second entrepreneur who decides to set up their restaurant at the same location and buys all of the shiny new equipment from owner number one’s creditors for 70 cents on the dollar, figuring they made a wonderful deal. But the outlay of cash is still too great and they too are out of business within a year. It’s not until the third owner comes along that the location actually survives. They save cash by buying all of the equipment off the second owner for 10 cents on the dollar. The moral of the story is: find a way to reduce the cash you spend on equipment, however you can. Can you buy your gear used on sites like eBay? Can you share a very expensive piece of machinery with another non-competitive business? Can you rent instead of buying? Profits are an important factor in your business value but so too is the cash your company generates. We call this phenomenon, The Valuation Seesaw and it is one of the eight key drivers of the value of your business.
Some owners focus on growing their profits, while others are obsessed with sales goals. Have you ever considered making it your primary goal to set up your business so that it can thrive and grow without you? A business not dependent on its owner is the ultimate asset to own. It allows you complete control over your time, so that you can choose the projects you get involved in and the vacations you take. When it comes to getting out, a business independent of its owner is worth a lot more than an owner-dependent company. Here are five ways to set up your business so that it can succeed without you: 1. Give Them A Stake In The Outcome Jack Stack, the author of The Great Game of Business and A Stake In The Outcome wrote the book on creating an ownership culture inside your company: you are transparent about your financial results and you allow employees to participate in your financial success. This results in employees who act like owners when you’re not around. 2. Get Them To Walk In Your Shoes If you’re not quite comfortable opening up the books to your employees, consider a simple management technique where you respond to every question your staff brings to you with the same answer, “If you owned the company, what would you do?” By forcing your employees to walk in your shoes, you get them thinking about their question as you would, and it builds the habit of starting to think like an owner. Pretty soon, employees are able to solve their own problems. 3. Vet Your Offerings Identify the products and services which require your personal involvement in either making, delivering or selling them. Make a list of everything you sell, and score each on a scale of 0 to 10 on how easy they are to teach an employee to handle. Assign a 10 to offerings that are easy to teach to employees and give a lower score to anything that requires your personal attention. Commit to stop selling the lowest scoring product or service on your list. Repeat this exercise every quarter. 4. Create Automatic Customers Are you the company’s best salesperson? If so, you will need to fire yourself as your company’s rainmaker in order to get it to run without you. One way to do this is to create a recurring revenue business model where customers buy from you automatically. Consider creating a service contract with your customers that offers to fulfill one of their ongoing needs on a regular basis. 5. Write An Instruction Manual For Your Business Finally, make sure your company comes with instructions included. Write an employee manual or what MBA-types called Standard Operating Procedures (SOPs). These are a set of rules that employees can follow for repetitive tasks in your company. This will ensure employees have a rulebook which they can refer to when you’re not around, and, when an employee leaves, you can quickly swap them out with a replacement to take on duties of the job. You proofing your business has enormous benefits. It will allow you to create a company and have a life. Your business will be free to scale up because it is no longer dependent on you, its bottleneck. Best of all, it will be worth a lot more to a buyer whenever you are ready to sell.