Value Pitfall

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It’s an old and sad story.  

A young motivated professional wants to get ahead in their career. Willing to invest hours beyond a normal work day, they consistently produce exemplary results. Sometimes they sacrifice personal reward for the benefit of the company. It’s a price willing paid in the pursuit of ultimate success.

Many don’t understand the reason behind effort or motivation, but the business results provide real satisfaction. As time goes by, the effort is rewarded with increasing responsibility, perhaps even some reward. The young motivated professional evolves into a leader.

Then at some point, a leaders’ career will wind down. It’s the time to reap the benefits and transition to a new phase in life. It’s a time for new leaders to emerge. A great sense of accomplishment and pride consumes the leader as they prepare to receive the good news about how their efforts have paid off. After years of profitable growth how could the news be anything but positive?

Then it happens, and it is not what you thought. Your company is not worth what you anticipated. At first you think the valuator is not competent. So, you get a second and third opinion. Sadly, their valuations are about the same.

The third-party evaluator does not care about the monumental effort expended by the leader to get the business where it is. They are simply evaluating what the business is worth to an investor.

The worst part of this situation is that everyone associated with the business is being let down. Don’t years of consistent growth and profit increase the value of a company? The answer is no, not really.

Most owners believe the best way to improve the value of their company is to make more profit – so, they find ways to sell more and more. As experts in their industry, it’s natural that customers want to personally engage with them, which means spending more time on the phones, on the road and face-to-face to increase sales.

Is the growth sustainable?

Investors realize that growth stats alone do not tell the whole story. If a company is too reliant on the leader, growth will not continue indefinitely. As company continuously attempts to grow, the owner’s life becomes much more difficult. Customers demand more time and service, employees begin to burn out, and soon it feels like there are not enough hours in the day. Revenue flat lines, health can suffer and relationships get strained – all from working too much. Does this feel familiar?

If you’re spending too much time and effort on increasing your profit, you could find yourself diminishing the overall value of your business.

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

The solution is not profit. Focus on driving your multiple (the other number in the equation above). Driving your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.

So, what drives your multiple? There are many factors Here are some to consider before our call:

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 have been licensed to provide the specific product or service in your market.

Market Share Myth - It's not always about market share or more sales. 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 exploited most of the opportunity.

Positioning and Perspective - A big fish in a small pond is not necessarily as attractive to a buyer as being in a player in a larger expanded view of your market. Think back to the trap railroad executives faced at the end of the last century. They thought they were in the railroad industry. How much did they lose by not understanding they were actually in the transportation industry? Positioning and perspective are vitally important to maximizing the value of your company.

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.

Financials - The size and profitability of your company will matter to investors and so will the quality of your bookkeeping.

The You Factor - The most valuable businesses can thrive without their owners. The inverse is also true because the most valuable businesses are masters of independence.