IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Business & Executive Coach, Christine Rose (www.christinerose.coach):
8 Ways to Increase Company Value
Imagine you’re a business owner (or, if you are a business owner you might think someone’s been reading your mind as you read this post…don’t worry, you’re not alone with some of these thoughts.)
You’ve invested the better part of half your life successfully growing your company, stewarding it through the ups and downs, and managing multiple goals, roles and priorities over decades. It hasn’t been a sprint. It’s been a marathon. You’re turning sixty-one on your next birthday, and your spouse keeps asking you when you’re going to retire. You’ve invested in the market and other financial assets, yes, but you’ve plowed more earnings back into your business than you’ve put into your retirement account, with the intention of someday dramatically increasing your retirement assets by selling your business at the right time.
Someday is not today. It’s not the right time yet, but you’re feeling a bit of a push. So you tell your spouse that it will be at least three to five years before you’re ready to look at exiting. It doesn’t matter so much whether your management team, family, or the marketplace end up owning your “baby.” In spite of all the pandemic and economic-related tasks that have accelerated, making you wish you could clone yourself (at least two or three times), your mind starts wandering from strategy and operations, to wondering how you can make sure that you’re getting maximum value when it is time to sell.
Here’s some good news for you, for the broker you choose to work with, and for your buyer. Over fifty-five thousand business owners have had the same questions. One of them, John Warrillow, author of Built to Sell (among other great books) and Founder of The Value Builder System™ has done the research for you. Warrillow offers eight things to consider that can drive up the value of your company. Before we address those eight drivers, you might be interested in Jill’s story.
After starting her career as a receptionist for IBA, the Pacific Northwest’s oldest busines brokerage, and progressing based on her intelligence and strong professional skill set to be a business broker specializing in the sale of internet service providers (ISPs) in the early years of the world wide web, Jill Nelson founded a company she named Ruby Receptionists, a network of people around the world who answer phones. She built her company up to $11 million in annual revenue by offering administrative support to small businesses. The administrative support category, which trades at about 1.8 times pre-tax profit, would make Ruby Receptionists a business worth around $1.8 million. But Jill sold her business for a much higher multiple than1.8. The final sale price was $38.8 million. You already know that company size and industry will impact your company value and ultimate selling price. Let’s look now at the other factors that can increase value for your company like Jill experienced.
- The first is recurring revenue. Identify any recurring needs your customers may have and how you can meet those needs over the long term with a recurring revenue model. (Warrillow shares these models in his book The Automatic Customer.) This was huge for Jill when she wanted to start her business. She wanted a service business with a subscription.
- The second driver of value is monopoly control, or what Warren Buffett calls “a deep and wide competitive moat.” Customers see you as the source. Like Ruby Receptionist became the go to source for a personal receptionist with high tech and high touch human connection, growing annually over 30 percent year after year. This allows pricing advantages that increase your profit margin, giving you more dollars for sales and marketing, which grows the size of the moat. Pursuing a strategy of “growing revenue at all costs” can take your focus off what a strategic buyer wants – a competitive advantage. Grow a business that’s hard if not impossible to compete with.
- Driver number three is your Net Promoter Score. Google it. Companies with a high Net Promoter Score are shown to be likely to grow at a rate much faster than the economy. This is highly attractive to buyers who are looking at the future income and growth potential of your business.
- Drivers number five, six, and seven are combined in one bundle that Warrilow calls the Switzerland structure. Warrillow named this driver after Switzerland because of the country’s insistence on independence. Businesses that have a high score on Switzerland structure are independent of any one customer, employee or supplier (the three parts of the Switzerland structure). If a business is too dependent on a single customer, supplier, or employee, including you, dear owner, it’s going to be less valuable to an investor. Jill Nelson made sure that Ruby wasn’t dependent on other companies for their tech by growing their own tech, moving from a service company to a tech company.
- The last driver of The Value Builder™ model is growth potential. Jill grew Ruby by thinking about how they could scale up and what would be needed to do that. When it comes to your company, an acquirer will be asking themselves what it will take to jump in, grab the baton from you (the owner who is taking the last lap as you finish your marathon run of growing your company), look ahead to the future of your company, and scale it by tenfold or more. How quickly could a buyer who applied significant resources, money, people, distribution, et cetera to your company grow it to the level they envision? Many owners think they’re ready to sell because they turned 61, or 65, or 67, and are disappointed when buyers offer much lower values than they imagine their companies are worth. One tool that some owners use to increase value is the Value Builder assessment and program. Warrillow found that owners who complete their Value Builder score average 59 out of a possible 100. Of 55,000 businesses, all things being equal, the average will get an offer approximately 3.5 times pre-tax profit.
“Back to the data, for our users that achieve a score of 90 or greater, these would be our highest performers, they’ve gone through the Value Builder System, they’re working with a Certified Value Builder, who has improved their score up to 90 out of a possible 100, those businesses are trading at 7.1 times pre-tax profit or more than double the business starts at an average score of 59. By working with a Certified Value Builder, slowly improving your Value Builder score overtime, you can make a material impact on the value of your company.”
Or, you can the do-it-yourselfer’s route. Leverage these value drivers yourself to drive up the value of your business and the safety of your retirement. Jill Nelson is enjoying her life after her marathon, and so can you! Either way, the clock’s ticking. And those observing and those helping you as you prepare to exit will be cheering for you as you approach the end of your marathon.
Christine Rose is the CEO of Christine Rose Coaching & Consulting. If you have questions related to the content of this article or how professional coaching can help you achieve your goals as an entrepreneur or business executive, Ms. Rose can be reached at (425) 326-9855 or firstname.lastname@example.org.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.