As a business owner, it is easy to become fixated on profit, the lifeblood of any business. It pays the bills, keeps the lights on and puts food on the table. But profit is not the only number that matters when it comes to the value of your business. In fact, there is another number that can be just as important as profit: the multiple.
What is the Multiple?
The multiple is the number an acquirer is willing to pay for your business, and it is determined by several factors, including your market position, growth potential, financials, and the independence of your business. Focusing on these factors rather than just profit can help you increase your company’s value as well as improve your profit.
Factors that Drive the Multiple
1. Differentiated Market Position
One of the drivers of your multiple is your market position. Most acquirers are interested in buying your business instead of creating it themselves. If you have a monopoly on what you sell, or if you are one of the few companies to provide a specific product or service in your market, expect to be paid more. A strong market position also helps protect your business from competition, making it more valuable in the eyes of potential acquirers.
2. Growth Potential
While many business owners think that market share is something to strive for, in the eyes of an acquirer, it could potentially hurt the value of your business. If you have already taken up most of the opportunity in your market, there is less room for growth, which means less potential for a return on investment. On the other hand, if your business has plenty of room for growth and expansion, you are more likely to attract acquirers who are willing to pay a premium for the potential upside.
While profit is important, it is not the only financial factor that acquirers consider when evaluating a business. The size and profitability of your company will certainly matter, but so will the quality of your bookkeeping. Clean and accurate financials can help reduce the risk for potential acquirers, making your business more attractive to buyers. It is important to understand your financials and to provide clear and accurate financial statements to potential acquirers.
4. The You Factor
Finally, the most valuable businesses are those that can thrive without their owners. This means that the business can run independently without relying on the owner’s constant involvement. The inverse is also true: if your business is overly dependent on you, it is likely to be less valuable to potential acquirers. By building a business that can operate independently, you will be able to attract a wider range of potential buyers and command a higher multiple.
The Bottom Line
Business owners need to look beyond profit when evaluating the value of their company. By focusing on the factors that drive the multiple, such as market position, growth potential, financials and independence, business owners can increase the value of their business. By understanding the importance of the multiple and working to improve it, business owners can position themselves for long-term success and financial independence.