Profit: The One Number Business Owners MUST Stop Focusing On
When attempting to put a value on your business, it all comes down to this simple equation:
Profit X Multiple = Business Value
This little calculation emphasizes profits, resulting in an increased effort to sell more and at higher prices. This approach increases revenues, but often only slightly.
In reality, cranking up the sales volume means you will spend a lot more time on the phone, on the road, and in face-to-face transactions. While this results in boosted sales, it also makes your life a little more complicated as all aspects of customer service will also increase.
Pretty soon, you are going to feel like one day bleeds into the next. Burnout sets in, your mental and physical health may suffer, and these valuable business relationships may end up damaged in the end if you are unable to keep up with the demand.
The Other Side of The Equation: The Multiple
It’s easy to focus your efforts on profits. It’s what most people think of first. But focusing on your multiple is the smarter way to grow your company, increase its value, drive profit, and—perhaps most importantly—maintain your sanity and freedom.
So, what directs your multiple?
Differentiation. If you have a unique product or service, if you have an exclusive license, or if there is little competition in your niche, your business will be valued quite a lot higher.
Business Runway. Having a large share of a market might seem like an attractive attribute many buyers will see it as a negative as it may appear that you have already used up most of the available opportunities. Buyers want to know that there is still plenty of runway for growth ahead.
Repeat Revenue. Recurring revenue is highly beneficial from many angles, but most importantly, when you’re looking to sell your business. Potential buyers need to know that your company will survive even if you’re out of the picture.
Profitability and Financials. Good quality financials are essential. Any potential buyer or investor will value the state of your bookkeeping almost as much as they do your profits.
You. At the heart of every sale of every business is the “you” factor. Is your daily involvement critical to business continuity? To increase your multiple, your company needs to be able to run efficiently and independently without your constant input.
Increase Your Multiple and Stop Focusing on Profits
If you are looking for ways to increase your company’s value, reach out today and let’s talk about it. I would love to show you how I can help.