One Thing That Can (Instantly) Add Millions to The Value of Your Business
Posted on 26th September 2023 at 10:05
If you're a business owner looking to gauge the potential value of your company, you're likely familiar with the concept of multiples. The multiple, often used to determine the sale price of a business, is calculated based on metrics like Sellers Discretionary Earnings (SDE) for small businesses or Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for larger enterprises. It's a critical factor that can make a significant difference in your business's overall worth. But here's the twist: there's one tweak that can instantly add millions to the value of your business.
Obsession with the Multiple
Entrepreneurs tend to obsess over their multiple, and for a good reason. It's the magic number that can take your business from a modest valuation to one that can potentially change your life. Consider this: if your business generates £500,000 in profit and it trades at a multiple of four, it's valued at £2 million. Double that multiple to eight, and suddenly, your business is worth £4 million. It's no wonder that business owners are eager to learn how to increase their multiple.
However, while the multiple is undoubtedly essential, there's another number lurking in the background that deserves your attention—the number that your multiple is multiplying.
Profitability Is Open to Interpretation
Most business owners view profit as a straightforward, objective measure, meticulously calculated by accountants. But profit becomes a subjective concept when it comes to selling your business. Your profit goes through a series of "adjustments" designed to estimate your business's profitability under new ownership. And it's within this process of adjusting—and your ability to defend these adjustments—that you have the power to dramatically boost your company's value.
Let's illustrate this concept with a simple example. Imagine you run a business with £3 million in revenue, and you pay yourself a salary of £200,000 annually. Now, suppose you could hire a competent manager to run your business under an acquiring company for £100,000 a year. You can persuasively argue to potential acquirers that under their ownership, your business would generate an additional £100,000 in profit. If they are willing to pay you five times the profit for your business, this one adjustment has the potential to earn you an extra £500,000.
And that's just the beginning. You can make a compelling case for several adjustments that will not only boost your profit but also the overall value of your business. Keep in mind that this process is more art than science. You'll need to be well-prepared to defend each adjustment. It's crucial to convince potential buyers that your business will be highly profitable under their ownership.
Mastering the Art of Adjustment
Some of the most common adjustments relate to factors like rent (especially if you own the building your company operates from and your company pays above-market rent), start-up costs, one-off lawsuits or insurance claims, and one-time professional services fees. Each of these adjustments can make a substantial difference in your business's profitability, which in turn influences its value.
In conclusion, while your multiple is undoubtedly important, it's essential not to overlook the subjective art of adjusting your EBITDA or SDE when selling your business. This process can potentially unlock millions of pounds in additional value. So, as you prepare to sell your business, remember that understanding and effectively leveraging these adjustments can be the secret to achieving the maximum value for your hard-earned enterprise.
Are you curious about the true value of your business? Wondering if you're ready to sell it for maximum profit? Or perhaps you're unsure if your current assets can support the life you dream of living?
Stop wondering and start taking control of your financial destiny! We're thrilled to offer you three FREE assessments that will provide you with invaluable insights into your financial situation
VALUE BUILDER REPORT FREE report
Join 65,000 business owners and get your score on the 8 Factors That Drive Your Company’s Value, a comprehensive analysis of your score and a detailed action plan for how to improve your score on each
Watch the video to see how it works or click the link above for your free report
PREScore™ FREE report
The questions that make up the Personal Readiness to Exit (PRE) Score questionnaire are designed to help you evaluate your preparedness to exit your business and ensure you leave your company with no regrets
Watch the video for more information or click the link above for your free report
PERSONAL FREEDOM SCORE FREE report
There comes a time when the sale of your company will generate enough income to fund the rest of your life. We call it the Freedom Point. A comprehensive analysis of your financial readiness to enter the next phase of your life
Click the link above to get your free report today
Share this post: