Most businesses with under $1 million in revenue (which is most businesses) sell at a pitiful multiple of earnings when their owners decide it's time. Typically they get two or three times their pre-tax profit, if they're lucky. How can you get more juice out the company you've slaved over? John Warrillow, author of Built To Sell: How to Turn Your Business Into One You Can Sell, has five suggestions.
- Recurring revenue:demonstrate that your customers come back to purchase regularly and you'll drive up the value of your business because buyers will have confidence your sales will continue long into the future. Try to find an element of your business that has a consumable component e.g. toner cartridges not printers.
- Revenue growth rate: acquirers will look at your top line revenue growth and project how large your business will grow in the future. In my experience, revenue growth rate is even more important than profit growth for driving value. Buyers know how to squeeze margin to juice profitability but it is difficult to replicate the secret sauce that makes someone want to buy your product.
- Positive cash flow: if your company takes in money before it has to spend it, buyers will pay more for your business. Acquirers look at opportunities by measuring the return they'll get on the money they need to invest. If your company generates cash, they will not have to put much of their own into funding your day-to-day operations. The less cash they inject, the better the potential return on their investment.
- Hire a 2IC: having a second-in-command will help you show the business can continue on successfully without you. If you can't afford an entire management team, at least find and groom your right hand person.
- Make a better mouse trap: you'll get a higher multiple for your business if your product or service is truly differentiated in the market. Acquirers will graft your product onto their distribution channels and estimate just how big your company could be in their hands. That only works if you have a truly unique product or service.
Whether you want to sell your business next year, 10 years down the road or would just like to know you could sell your business, focus on what drives up your multiple and you'll be pleasantly surprised at the value you create, Warrillow promises.