Increasing Company Value – What’s the Math?
Posted on March 14, 2023 by Kevin Campbell
The value of your business comes down to a single equation: what multiple of your profit is an acquirer willing to pay for your company?
profit × multiple = value
Most owners believe the best way to improve the value of their company is to increase profit and that will certainly improve value.
An additional approach to increasing value is to focus on driving up your multiple (the other number in the equation above). Increasing your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.
What Drives Your Multiple?
1) Differentiated Market Position
Acquirers only buy what they could not easily create, so expect to be paid more if you have close to a monopoly on what you sell and/or are one of the few companies who provide the specific product or service in your market.
2) Lots of Runway
Most founders think market share is something to strive for, but in the eyes of an acquirer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.
3) Recurring Revenue
An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.
The size and profitability of your company will matter to investors. So will the quality of your financial accounting.
5) The You Factor
The most valuable businesses can thrive without their owners. The most valuable businesses are masters of independence!