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5 Metrics to Maximize Valuation

by on August 20, 2014

Best-Price

Everyone knows that if you  want to increase your company’s valuation that you have to increase revenues and/or profits.

But there is another way.

Increase your multiple.

The valuation for every company is determine by a simple calculation: Profit or Revenue (depending on the industry) times a multiple.

EXAMPLE

Company A and Company B, operating in the same industry, are both doing $20 MM in annual revenues with a 10% profit margin.

Using the formula the companies’ values should be determined as V=$20 million x M, where M is the multiple.  Let’s say the industry average is 4 times revenue.

So each company should be valued at $80 MM, right?

You intuitively know they’re not.

Why?

Because you have to look at other factors that make up the determination of the multiple.

That multiple is determined by a number of factors.

The rate of growth, the profit margins, the customer concentration, the amount of recurring revenue, the ability to scale, the quality of management, the sales processes, the go to market strategy, etc.

Valuation is effected by a lot of things.  Some of them suppress your valuation because they involve RISK.

Others effect your multiple because they can impact how the company is different than other companies.  It is these areas that set the company apart and allow it to command a premium, relative to its peers.

To really increase your company’s valuation focus on the key areas that buyers care about.

What Buyers Care About Most

Here is a partial list of metrics acquirers care about most:

1. Revenue Growth: The larger and faster-growing your business, the more attractive it will be to a buyer.

2. Gross Margin Growth: Maintaining and increasing your gross margin (the difference between the price of your product and the costs of acquiring the raw materials to make it) indicates to a buyer you have a differentiated value proposition that enables you to control your pricing.

3. Sales Per Employee: Illustrates how dependent you are on people to make a profit and how efficiently you translate talent into profit. This number will vary according to the industry but, like most numbers, bigger is better in the eyes of an acquirer.

4. Sale Per Square Foot: Illustrates how efficiently you use commercial space. Critical among retailers, it can also help an acquirer understand how efficiently a business in any industry uses real estate.

5. Customer Acquisition Cost: Take the total of your sales and marketing expenses in a given time period (e.g., a month) and divide it by the number of customers acquired in the same period. This helps an acquirer understand the capital required to scale your business.

Once you start optimizing your internal numbers, you can sell your business for whatever the market is paying at that time for businesses like yours.   If you’re able to execute at a level better than your peers you can sell the company for a premium.

p.s.

If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation: a Proven 5 Step Process.  http://www.therevenuegroup.net/free-offer.html

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From → Strategy, Valuation

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