How Three Moves Quadrupled the Value of this Business

Are you stumped trying to figure out how to create some recurring revenue for your business?

You know those automatic sales will make your business more valuable and predictable, but the secret to transforming your company is to think less about what’s in it for you and more about coming up with a reason for customers to agree to a monthly bill.

Take a look at the transformation of Laura Steward’s company, Guardian Angel.  When the revenue of the IT consulting firm reached $400,000, a valuation was requested from an expert.  Steward was disappointed to learn her company was worth less than fifty percent of one year’s sales because she had no recurring revenue and what sales she did have were dependent on her personally.

Steward set about to transform her business into a more valuable company and made three strategic moves:

  1. Angel Watch – The first thing Steward did was to design a monthly program called Angel Watch, which offered her business clients ongoing protection from technology problems.  Steward offered her Angel Watch customers ongoing remote monitoring of their networks, preemptive virus protection and staff on call if there was ever a problem. Her clients were approached with a calculation of what they had spent with her firm over the most recent 12-month period, including the cost of her customer’s downtime.  By signing up for Angel Watch, they would save money when taking in to consideration for both the hard and soft costs.  90% of her customers switched from hourly billing to the Angel Watch program.
  2. Doubling Rates – Next Steward doubled her personal consulting rates.  When a customer not on Angel Watch called, they were quoted a technician rate and a higher rate for Steward herself.  Not surprisingly, most customers opted for the cheaper option and others chose to re-consider joining Angel Watch.
  3. Survivor Clause – Steward also credits a small legal maneuver for further driving up the value of her business.  She included a “survivor clause” in her Angel Watch contracts, which stipulated that the obligations of the agreement would “survive” a change of ownership of her company.

Steward went on to successfully sell her business at a price that was more than four times the original valuation she had received just two years after launching Angel Watch.

 

 

 

 

Source for some information from The Value Builder System TM

Business Valuation: What is My Business Worth?

Your business is likely your largest asset so it’s normal to want to know what it is worth.  The problem is business valuation is a “subjective science”.  The science part is what people learn with an MBA or professional credentials.  The subjective part is that every buyer’s circumstances are different, and therefore two buyers could see the same set of company financials and offer vastly different amounts to buy the business.

There are three commonly used methods for valuing a business:

Asset-based

The most basic way to value a business is to consider the value of its hard assets minus its debts.  Imagine a landscaping company with trucks and gardening equipment.  These hard assets have value, which can be calculated by estimating the resale value of the equipment.

This valuation often renders the lowest value because it does not account for “Good Will” or the difference between what someone is willing to pay for your company (market value) and the value of net assets (subtracting liabilities).

Discounted Cash Flow

In this method, the acquirer is estimating what your future cash flow stream is worth to them today.  Once the buyer has an estimate of how much profit you’re likely to make in the forseeable future, and what your business will be worth when they want to sell it in the future, the buyer will apply a “discount rate” that takes into consideration the time value of money.  The discount rate is determined by the acquirer’s cost of capital and how risky they perceive your business to be.  The key components of this method is based on 1) how much your business is expected to make in the future and 2) how reliable those estimates are.

Comparables

Another common valuation technique is to look at the value of comparable companies that have sold recently or for whom their value is public.  The problem with this method is that it often leads owners to expect the same valuation as much larger, public companies.  Small companies are typically deeply discounted when compared to their Fortune 500 counterparts.

Finally, the worst part about selling your business is that you don’t get to decide which methodology the acquirer chooses. If a strategic buyer is interested in your company, then a different valuation may be used because your business fits their future growth strategy.  This situation usually yields the highest value.

 

 

 

 

 

 

Source for some information is The Value Builder System TM

How to Get a Big Company Multiple for Your Business

Big public companies trade at a significant premium over small businesses in the same industry because investors perceive big, sophisticated companies as a safer bet than small, owner-dependent companies.  So how do you get a public company-like multiple for your business?

One approach is to look for a strategic buyer.  Unlike a financial buyer that is looking for a relatively safe return on their capital invested (which is the reason investors place a premium on big, stable companies trading on the stock market), a strategic buyer will value your company on how buying you will impact them.

Let’s imagine you have a grommet business predictably churning out $500,000 in pre-tax profit. These days, a financial buyer may pay you around 4 or 5 times earning – in this case, roughly $2.5 million – if you can make the case your profits are likely to continue well into the future.

Now let’s imagine that a company that sells a billion dollars worth of widgets becomes interested in  your grommet business.  They think that if they integrate your grommets into their widgets, they can sell 10 percent more widgets next year.  Therefore, your little grommet business could add $100 million of revenue for the widget maker next year – and that’s just year one after the acquisition.  Imagine what your business could be worth in their hands if they continued to sell more widgets each year because of the addition of your company.

The widget maker is not going to pay you $100 million for your business, but there is somewhere between the $2.5 million a financial buyer will pay and the $100 million in sales that the widget maker stands to gain next year that is both a good deal for you and for the widget maker.

Premium multiples get paid to big companies, and also to the little ones that can figure out how to make a big company even bigger.

 

 

 

 

Source of some information from The Value Builder System TM

Power Ratios to Start Tracking

The more data you have, the more productive your company can become.  This in turn will increase the value and make your company more attractive.  Here are some ratios which provide a different way to asses your business:

  1. Employees per Square Foot – By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designated your space.  Commercial real estate agents use a general rule of 175-250 square feet of usable office space per employee.
  2. Sales per Square Foot – By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales.  Most industry associations have a benchmark which you can use to compare where you stand in relation to your competitors.  With real estate usually a close second to payroll as the largest expense, more sales per square foot can translate into more profit.
  3. Revenues per Employee – Payroll is the number one expense for most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line.  The ratio can vary due to factors such as how people-dependent your company is and by industry.
  4. Customers per Account Manager – How many customers do you ask your account managers to manage?  Some industries lend themselves to hundreds of accounts per manager and others require more intensive customer relationships.  Finding the right  balance for your company can be tricky.  A suggestion to finding the right balance is to slowly increase  the number of accounts per manager but be watchful for the first sign of a drop in customer satisfaction of sales.
  5. Prospects per Visitor – This ratio gauges how effectively the content of your website converts visitors to your site into sales prospects.  The resulting data may lead to revisions in your content and actions items asking visitors to share their contact information.  You can further examine the sources of the visitors to determine how people are finding your site and therefore where to concentrate your marketing efforts.

 

 

 

 

 

Source of some information from The Value Builder System TM

What Is A Multiple?

I am often asked, “what is my company worth?” or “what multiple can I get for my company?” Of course, a truly thoughtful answer to these questions requires an in-depth understanding of their particular business. However, most M&A professionals use a “multiple” when discussing a sale valuation. Although the use of “multiples” may create an acceptable answer to a potential seller, it can be one of the most misleading metrics we can give our clients.
So why does everyone, even the experts, use multiples to describe valuation? Simply put, they are very easy to understand. Multiples are nothing more than the result you get by dividing a company’s sale price by some other financial result of the company such as sales or an earnings metric. Probably the most common multiple used for mid-market companies is a multiple of earnings before interest, taxes, depreciation and amortization or EBITDA.
Unfortunately, predicting the sale value of a business is a complex proposition with many internal and external variables and assumptions. Each business sale is unique and so is its resulting sale price. This is why, if we were to look at two companies that appear to be very similar, they could have very different outcomes in a sale.
Sale price variables include historical sales and profit growth rates, projected future growth rates, consistency of results, industry, the management team pre and post sale, the other human resources of the business, its property, plant and equipment, its customer list, competition, the number of active buyers in the market place, free cash flow … and on and on and on! I think you now see why multiples are used in discussing a sale value range.
An M&A professional, after reviewing some key elements about your business and having an understanding about the current M&A market, can use a multiple as a guide to give you some idea of sales price range. However, always remember, that the true sale value of your business is the price a willing buyer will pay a willing seller in an open market environment.

 

© Saddle Creek LLC