How To Grow the Value of My Business

How do I grow the Value of my Business?

The Problem: How to grow the value of my business

The owner was frustrated.

How do I grow the Value of my Business? They were telling me for months that I will get paid for my business. I gave them all the information they requested and based on what they told me, already made plans and investments in what I wanted to do next.”

The owner Mark, then put his coffee cup down, sighed and looked me right in the eye..

then their offer came in below anything they were implying. I don’t mean just a little below, but way  below  – 30 to 40% what I was expecting.  They gave me their reasons than I got up and walked away.. there was nothing further to discuss…

I asked Mark why he felt his business was worth almost double what he was offered.

Two reasons.. First,) I was profitable and my margins were growing..  in fact, in my industry the average is 10-15% net and I was at 20%. Second, my customers love doing business with me.. every single one they requested to interview vouched for me and the trust they have in me and my business.

Mark, let’s dig into those two reasons quickly.  First, what in your opinion helped you earn the superior margins over everyone else and Second, who manages the relationships with your 5 best customers and what percent of your revenues do they represent?

Well I’ll start with the 2nd.. my 5 best customers I have known for over 20 years – ever since we all went to University together.  They know the quality of my work, they love products and they are repeat customers who represent about 65% of my total revenues with the largest 2 being about 35% between them.

“In terms of my margins that is easy.  I run a very tight ship and I save a lot of costs by doing my own selling and marketing. I have a bookkeeper, use VAs for my admin and low-level customer service, and outsource my technology

We dove more into detail on Mark’s operations, but the following 5 red flags came up which were the main culprits in Mark receiving a low valuation

  1. Mark’s Business was dominated by 5 customers – Not enough customer diversification
  2. Mark’s Customers did business due to their personal relationship with Mark – Business not independent of the owner
  3. Mark “saved money” on staffing costs compared to the competition by doing critical functions (“Marketing and Sales”) all by himself – Business not independent of the owner
  4. Although high in margins, Mark’s current portfolio of products and services weren’t scalable – Lack of Scalability
  5. As Mark was close to his customers, he didn’t push hard enough for prompt payment of invoices, in fact they averaged over 45 days late while Mark was prompt with payments to his suppliers – Net Working Capital Gap

The Solution

Mark received an estimated valuation that was 1.8x his EBITDA.  The main areas to enhance his value was to be in addressing and rectifying those five flags which touched on four of the eight key value drivers.  Mark set aside any thoughts of selling and concentrated on transforming his “profitable” business into a “sellable” asset.  

Over the next 36 months the following initiatives were undertaken.

  1. 20 New customers were added to diversify the customer base. This was done by identifying and selling the top 5 existing products and services to new customers in the existing area and neighboring countries.  As a result, no one customer represented more than 10% of the company’s revenue by the end of the 18th
  2. Mark built a small sales team that not only brought on the 20 new customers, but took over the day-to-day management of the existing clients. With the existing clients, Mark undertook a transition period where he not only introduced and helped build the relationships between his sales team and the existing customers, but set the expectation to the customers that he was stepping back to focus on strategy and other business owner responsibilities (that were neglected for too long).
  3. Mark began scaling up the business on the back of the 5 top products and services he had acquired the 20 customers on. Mark was able to increase volume by a factor of three on those products without requiring any significant additional outlays.
  4. Mark stepped away from all bill payment matters and empowered his staff to collect invoices. As a result, Accounts receivable days fell sharply from over 60 to a more manageable 35.

With these four initiatives, Mark was able to increase his profitability by 10% but more importantly, double the valuation multiple to close to 4.0. As a result, when he went back to market to explore exiting his business, he not only received bids that were double in value but was receiving 3x as much interest.

In addition, besides selling his company he had other options as to what type of exit he would like to accomplish.

Epilogue

Mark can now sell at a price and time of his choosing. He can walk away with no regrets except that he wished he had made his business “sellable” from the day he opened it.  If he had done so, he could have exited earlier and arguably at an even higher price.

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