3 Ways To Make Your Company More Valuable Than Your Industry Peers
Have you ever wondered what
determines the value of your business?
Perhaps you’ve heard an industry rule of thumb and assumed
that your company will be worth about the same as a similar size company in
your industry. However, when we take a look at the data provided by The Value
Builder System™, we’ve found there are eight factors that drive the value of
your business, and they are all potentially more important than the industry
you’re in.
Not convinced? Let’s look at Jill Nelson, who recently sold
a majority interest in her $11 million telephone answering service, Ruby
Receptionists, for $38.8 million.
That’s a lot of money for answering the phone on behalf of
independent lawyers, contractors and plumbers across America.
To give you a sense of how high that valuation is, let’s
look at some comparison data. At Value Builder, we’ve worked with more than
30,000 businesses in the last five years. Our clients start by completing their
Value Builder questionnaire, which covers 42 questions that allow us to place
an estimate of value on a company. The average value for companies starting
with us is 3.6 times pre-tax profit and those who graduate our program with a
Value Builder Score of 80+ (out of a possible 100) are getting an average of
6.3 times pre-tax profit.
When we isolate the administrative support industry that Ruby
Receptionists operates in, the average multiple offered for these companies
over the last five years is just 1.8 times pre-tax profit.
Nelson, by contrast, sold the majority interest in Ruby
Receptionists for more than 3 times revenue.
There were three factors that made Nelson’s business much
more valuable than her industry peers, and they are the same things you can
focus on to drive up the value of your company:
1. Cultivate Your Point Of Differentiation
Acquirers do not buy what they could easily build
themselves. If your main competitive advantage is price, an acquirer will
rightly conclude they can simply set up shop as a competitor and win most of
your price sensitive customers away by offering a temporary discount.
In the case of Ruby Receptionists, Nelson invested heavily
in a technology that ensured that no matter when a client received a phone
call, her technology would route that call to an available receptionist.
Nelson’s competitors were mostly low-tech mom and pop businesses who often missed
calls when there was a sudden surge of callers. Nelson’s technology could
handle client surges because of the unique routing technology she had built
that transferred calls efficiently across her network of receptionists.
Nelson’s acquirer, a private equity company called Updata
Partners, saw the potential of applying Nelson’s call-routing technology to
other businesses they owned and were considering investing in.
2. Recurring Revenue
Acquirers want to know how your business will perform after
they buy it. Nothing gives them more confidence that your business will
continue to thrive post sale than recurring revenue from subscriptions or
service contracts.
In Nelson’s case, Ruby Receptionists billed its customers through
recurring contracts—perfect for making a buyer confident that her company has
staying power.
3. Customer Diversification
In addition to having customers pay on recurring contracts,
the most valuable businesses have lots of little customers rather than one or
two biggies. Most acquirers will balk if any one of your customers represents
more than 15% of your revenue.
At the time of the acquisition, Ruby Receptionists had 6,000
customers paying an average of just a few hundred dollars per month. Nelson
could lose a client or two each month without skipping a beat, which is ideal for
reassuring a hesitant buyer that your company’s revenue stream is bulletproof.
Nelson built a valuable company in a relatively unexciting,
low-tech industry, proving that how you run your business is more important
than the industry you’re in.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
