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What’s Your Magic Number?

by on September 3, 2014

The CountI don’t know what your Magic Number is.  But you will.

It may be $19 billion.  It may be $1 million.

The Magic Number is something that makes it all right

The Magic Number isn’t rational, really, and can’t be 100% explained on a spreadsheet.

Sometimes, there is No Magic Number.  Which is great, too.

The Magic Number is when the valuation of your company makes your desired return, to Everyone. That includes investors, employees, and you.

So how will you get to your Magic Number?

Let’s assume you’re doing $10 MM in annual revenue and the industry average for companies in your sector is 3x revenue.  That would put you at $30 MM valuation.  Of course, that assumes you’re average.

Your Magic Number is $60 MM and you want to get there in 3-5 years.

Using the same math you’d expect that if you increase your revenue to $20 MM you’d hit your Magic Number, right?

Just because you are hitting your numbers does not mean your sales are helping your company’s value.

Huh?

Increasing your revenue doesn’t necessarily mean your “valuation multiple” remains the same.  It could decrease even as your sales increase.

If you pay attention to what affects the multiple you can make it increase.  That way you can get to your Magic Number even quicker and you don’t have to wait for your revenues to double while hoping that your multiple stays average.

You want to increase your multiple, which measures your company against the “average”, with the minimum possible investment to get the maximum possible result.

If your product isn’t “hot” or “sexy”, how do you make your multiple more than average or even average?

The models and approaches you’re familiar with have gotten you to where you are, but they’re not necessarily going to get you to where you want to go.

73.4% of businesses have red flags threatening their value and 95% of companies have at least one red flag threat to their ability to monetize.

What WILL move the needle to really increase your value is to create a clear roadmap of actionable steps that increase enterprise value.  Steps that address how to improve your leadership and your management team.  How to position your company to be able to support long-term, sustainable, profitable growth

Just by identifying your red flags and improving operational processes you can increase the of value your businesses 27.4% on average.

By executing and operating according to your roadmap the average annual increase in value is 21.6%.

That’s how you get from $30 MM valuation to your Magic Number of $60 MM in 3-5 years, or less.

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

8 Comments
  1. Hi Mike,
    great post – couldn’d agree more that just looking at annual revenue numbers is only part of the valuation story. In addition to what you mentioned also the type of revenues (e.g. from monthly recurring subscriptions or one-off deals) and deferred revenues already in your books are valuation drivers. Also carry-forward losses might be very valuable for a buyer due to tax savings.
    You quoted some interesting stats.

  2. Mike, this is an outstanding article that strongly suggests owners must identify the obstacles to a successful business sale. I’ve tweeted 3 of your statistics from this article. To help identify obstacles, on the How to Plan and Sell a Business website, in Issue #23, we have a list of “66 Obstacles to a Successful Business Sale” http://howtoplanandsellabusiness.com/how-to-sell-a-business-newsletters/66-obstacles-to-a-successful-business-sale/

  3. Horst, I agree that the quality of the revenue itself has a great impact on the multiple. Revenue can be a risk factor or a valuation suppressor if it’s concentrated in just a few customers, or if it’s project based, or if it’s not related to the main product, or if it isn’t scalable. Revenue becomes a valuation and multiple enhancer when it has the qualities you mentioned.

  4. Jim, Thanks for your comments and I’m glad you found statistics worth tweeting.

Trackbacks & Pingbacks

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