“How can I increase the value of my business?”
I can’t tell you how many times I’ve been asked this question. From Main Street business owners to SaaS founders to VC-backed entrepreneurs, it’s always the same.
Most people become entrepreneurs to make money. But your big payday seldom comes from annual profits. No, the big check comes when you sell your business.
It stands to reason, then, that you want to increase or maximize the value of your business before you sell it. But how?
People are launching more businesses than ever2, and as others retire or exit for better opportunities, the glut of companies for sale could bring your valuation down.
Valuations, however, aren’t exclusively predicated on market conditions. A buyer or appraiser like myself accounts for hundreds of factors when valuing a business.
But if you pressed me to tell you what really pushes the needle on your valuation, it would come down to creating consistent cash flow and configuring your business to run on autopilot.
Recurring Revenue Is a Buyer’s Dream
Buyers will pay more for a business with recurring revenue for three reasons:
- Revenue is easier to predict.
- There’s less for the buyer to do after taking over.
- Buyers can compare your company with others.
As you might already know, it can cost up to 25 times2 more to Acquire a customer than retain one. Therefore you’re likely to earn more revenue by upselling or cross-selling to your existing customers. Convincing them to pay over time is even better. Why?
A subscription solves two problems: customer retention and revenue growth. Once a customer subscribes, you’re more likely to retain them because it takes effort to cancel. They’ll generate consistent, easily quantifiable revenue for as long as you engage them3.
Buyers like this predictability as it allows them to measure risk. Your financials are easier to understand and tell a simpler story. They have less to do when they take over. In other words, recurring revenue makes your business more sellable, which can increase your valuation.
Let’s take a look at a famous example. Adobe used to sell permanent software licenses for its creative applications. You might even have bought a Photoshop CD at your local IT store in the early 2000s. Today you need to pay a monthly subscription. Everything is delivered in the cloud, which cuts Adobe’s hardware costs (no more CDs) and ensures you always have the most up-to-date software. The result? Adobe’s share price over tripled5.
So how do you implement recurring revenue? If you sell digital products or services, consider packaging up access or usage into a recurring revenue plan. You might offer your product or service for free to encourage people to sign up. According to one retail report, 54 percent stay on after the free trial ends4. That’s a fantastic conversion rate however you look at it.
Or if you sell a physical product or service – a car wash, for example – you again might bundle usage of your product (the number of washes) into a recurring plan. Maybe your customers pay $20 per month for four washes rather than $10 per wash. You sacrifice a little cash flow in the short term, but the increase in your valuation could be worth much more in the long run.
Remember, a buyer will pay a higher multiple on recurring revenue because it’s easier and cheaper to sustain and benchmarks your performance against similar businesses. It’s a triple win for them and a better valuation for you.
Automate the Boring Stuff to Free Buyer Time
Your valuation is partly based on how much work the buyer needs to put into your business to earn a return on investment. A low-maintenance business is usually valued higher than one needing continuous care. Why? Because it frees up time for the buyer to maximize growth.
Some buyers operate a portfolio of businesses as investments and don’t have much time to spare. Others want to maximize growth in the shortest time and then move on to something new. In any case, time is money, so the more time the buyer saves through automation, the more generous their valuation will be.
You can automate almost every part of your business. Accounting, staffing, email and social media marketing – you name it, there’s an app for it. Best of all, most apps are cheap, some are free, and if you know how to code, perhaps you can even write your own automations.
Almost half of workplace activity could be automated with current technology6, but that doesn’t necessarily mean putting your staff or yourself out of a job. Automation is more about a shift towards doing more impactful tasks. Abandoning admin for meaningful work.
Some entrepreneurs spend as much as 15 hours a week on admin7 (close to two working days). That’s time lost to pursuing revenue and profit goals. Spend some time researching and then deploying what can help you do more, faster, and your valuation will increase as a result.
Start with simple things like the buying process. How do your customers pay? You could automate payments with a recurring revenue model. Or automate reminders for receivables. Or contract renewal notifications. Then move to order fulfillment, customer management, and more.
Busywork obfuscates the buyer’s opportunity. If you present a long list of admin tasks to keep the business running, how do you expect the buyer to find time to grow your business? Automate the boring stuff, however, and you give buyers headroom to maximize their return.
Now you know how to increase the value of your business, draft a plan of action. You can integrate a recurring revenue model and automate admin in under a year. More, you’ll learn to value your business as a buyer does, bringing you one step closer to a life-changing exit.
Sources
1https://sbecouncil.org/about-us/facts-and-data/
2https://hbr.org/2014/10/the-value-of-keeping-the-right-customers
6https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/reborn-in-the-cloud
7https://www.starlingbank.com/news/starling-launches-make-business-simple-report/
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