The PURE Way to Increase Business Value
Posted on 10th October 2023 at 09:48
Picture a magic slot machine. Each time you pull the arm, you make back a multiple of whatever you wagered. How much time would you devote to cranking that arm? When it comes to the value of your business, you can make many bets, but only one has a virtually guaranteed return. In this blog post, we'll explore the PURE method—a powerful strategy to increase the value of your business. Most companies are valued based on earnings before interest, taxes, depreciation, and amortization (EBITDA), so every pound of incremental profit you earn in the short term will translate into a multiple of that down the road. Whether you're planning an ownership transition or simply looking to boost your business's worth, the PURE method can be your secret weapon.
How Derek Morin Jacked Up the Value of His Business:
For an inspiring example of a founder obsessed with finding every dollar of profit available, let's look at Derek Morin. Morin founded Tabarnapp to create after-market sales applications for Shopify website owners. The business was a success, but when his partner, who handled finance, left the company, Morin was forced to take a closer look at his profit & loss (P&L) statement.
Morin saw potential improvements, so he made notes in the margin next to each line item he wanted to change. To save time, he started using a single letter beside each entry to represent the action he wanted to take:
- P stood for "Plus," something profitable, and he wanted more.
- U stood for "Unnecessary," an expense he could eliminate.
- R stood for "Replaceable," a cost that could be replaced with a better or cheaper option.
- E stood for "Equal" and was used for items that should be left untouched.
Morin realised his shorthand notes could be organised into a memorable acronym he referred to as "PURE." Morin treated the PURE method like a game. Every month, he scrutinised his P&L with the same four-letter system. Morin engaged his team to act on each item that needed improvement. He became obsessed with squeezing out a few more dollars of profit every month.
His game worked. In 2020, Morin bought out his business partner in a deal that valued the company at around $400,000. Two years later, after applying the PURE methodology of improving profitability, Morin sold Tabarnapp in an agreement that implied a roughly tenfold increase in the value of his business.
The Downside of Using Your Company’s Bank Account as a Slush Fund:
While it may be tempting to treat your company's bank account as a slush fund, there's a downside to this approach. Co-mingling personal and business expenses while letting other costs go unchecked may help you reduce taxes in the short term, but it could end up costing you more in lost value when you decide to sell your business. Instead, keep your P&L "PURE" to jack up the value of your business.
Conclusion:
Increasing the value of your business doesn't require risky bets or complicated strategies. The PURE method, as demonstrated by Derek Morin's success story, provides a clear and effective roadmap. By focusing on profitability, eliminating unnecessary expenses, replacing costly items with better alternatives, and leaving untouched what's already working, you can steadily grow the value of your business. Remember, it's not about making drastic changes overnight but consistently working towards a more profitable and valuable future. So, don't gamble with your business's worth—go PURE and watch your investment multiply.
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