Have you ever wondered how to make your company more valuable?
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 we’ve found there are eight factors that drive the value of your business. 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.
To give you a sense of how high that valuation is, let’s look at some comparison data. Using the Value Builder program stats covering more than 30,000 businesses, the average value for companies starting the program is 3.6 times pre-tax profit. Those who successfully graduate from the program 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. They are the same things you can focus on to make your company more valuable:
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. They often missed calls when there was a sudden surge of callers. Nelson’s acquirer, a private equity company, saw the potential of applying Nelson’s call-routing technology to other businesses they owned and were considering investing in.
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. In Nelson’s case, Ruby Receptionists billed its customers through recurring contracts. Perfect for making a buyer confident that her company has staying power.
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. An ideal scenario 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. That proves that how you run your business is more important than the industry you’re in. Don’t second guess how to make your company more valuable. Contact us if your thinking about selling.