Even the savviest business owners can mismanage these crucial factors that plateau company growth and devalue a potential exit.
Most agencies and business owners will hit similar hurdles while attempting to scale in preparation for a sale. You don’t have to be one of them.
If you want to see the maximum possible price on offer for a business you’re looking to exit, there are seven critical factors to keep top of mind throughout the process that will either directly increase or decrease your company’s valuation:
- Client Balance: If 50% of your revenue is driven by one single client, you’re taking a huge risk. Should you lose that client, your business instantly loses half of its value. During acquisition, this factor can determine the difference between a multiple of six on $800k to a multiple of three on $400k. That decreases the total asking price from $4.8 million to $1.2 million! Prospective buyers will be looking to ensure that your clients account for no more than 20% of your overall business. So, if you have 12 active accounts with none making up more than about 20% of your business, you’re in a safe space.
- Influence: You want to approach acquirers with something truly compelling on offer. A proven company with competitive market positioning, industry influence, brand visibility and heaps of opportunities in the pipeline all make for a desirable buy. The ideal situation, though, is that you become the prize — a prize that lights up the eyes of a buyer and inspires competitive bidding situations. So, invest early on in visibility-increasing activities and campaigns, such as ongoing public relations and thought leadership development.
- Differentiation: In his book, Good to Great, Jim Collins shares his powerful “Hedgehog Concept.” In essence, this principle suggests finding something that you can be the very best in the world at doing, and then securing the clients or customers who want it. This is where proposition comes into play. It’s vital that you identify what you and your team are experts at, what you’re proud of doing and what customers have asked of you. Then, plant your flag and proclaim, “This is what we do, and we’re the best at it.” If an acquirer is after a specific type of company or niche (e.g. CRM), and you own that niche — you’ll be the first person they call. Find a niche. Own the niche. Become the best of the best.
- Pricing: One of the first critical building blocks we address with our clients is money. Which clients are making you money, and which ones are losing you money? Which products are ruining your margins? Without this information, you simply can’t have a clear understanding of what your pricing is and why. Gathering and analyzing this monetary data will allow you to maximize your profits, grow the business and help you gain strategic direction.
- Financial Rigor: Financial rigor means having a constantly updated data room. An up-to-date risk register. Rolling 13-month forecasts with rear-view comparison so you can see patterns and predict cash flow more accurately. (This should include securing a solid Finance Director, even part-time, or a consulting CFO to support your team). Financial rigor gives you a deeper understanding of where your resources ought to be allocated. It means taking full control of your business, your pipeline, your revenue and your future. Buyers always look for financial rigor.
- Scalability: Buyers buy your future value. Meaning, if you’ve gone from zero to $3 million in turnover, they’re buying the profit that they’ll make when you hit $6 million or $12 million in revenue. You need to know how to get there. How to prep your business for growth, essentially, and prove its future value. This is where scalable systems and structures come into play — because stable, sustainable growth takes a realistic, clearly outlined plan of action that can take the business to the next level.
- Succession: You won’t be with your company forever. And your buyers will want to know who will drive the ship when you leave. We prepare our clients for this transition by building out a growth lab — a team of your all stars that will lead the growth and the future of the company when you step down.
If you focus bullishly on these seven factors while scaling, you will transform your business into a well-oiled beast of a machine with uncapped potential — which, ultimately, will result in the best possible valuation and offers when you do start to seek out acquisitions. Written by Felix Velarde.
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