How to Make Your Company More Valuable than the Competition
If you own a business, you are certainly aware of how important it is to stand out from your competition. In the age of technology, there are so many businesses competing for customers attention across so many mediums that it’s easy for your company to get lost in the shuffle. But have you ever really thought about what exactly determines the value of your business, specifically?
Maybe you’ve taken a look at other businesses in your industry or gone by an industry rule of thumb for how successful you think your business should be. However, when we take a look at data provided by The Value Builder System, we've found that there are eight drivers of company value that correlate with success much more closely than simply monitoring your industry and your competition.
To see this data in a real world example, we can look at Jill Nelson, who owned Ruby Receptionists, a telephone answering service working with independent lawyers, contractors, and plumbers. Jill recently sold her majority interest in her $11 million company for a whopping $38.8 million - not a bad sum for answering the phone for clients in other industries.
When looking at the administrative support industry, the average multiple offered for companies like Jill's was just 1.8 times pre-tax profit. However, Jill sold Ruby Receptionists for more than 3 times revenue.
Well, there were three key factors that made her business much more valuable than her industry peers. You can use these things to drive up the value of your company as well.
1) Focus on a Point of Differentiation
If you're looking to eventually sell your business, it's important to note that people do not want to acquire what they can easily build themselves. If your main competitive advantage is price, for instance, then someone can look at your company and realize that they can compete with you and win over many of your price-sensitive customers simply by offering their services at a discount.
In the case of Ruby Receptionists, Jill Nelson invested in a technology that ensured that no matter when a client received a phone call, her technology would route that call to an available receptionist. Nelson’s competitors were mostly smaller businesses who frequently missed calls when there was a high volume of callers. Nelson’s technology could handle client surges because of the unique routing technology she had built that transferred calls efficiently across her network of receptionists.
Nelson’s acquirer, a private equity company called Updata Partners, saw the potential of applying Nelson’s call-routing technology to other businesses they owned and were considering investing in. This differentiation made her company uniquely valuable in the industry.
2) Recurring Revenue
While sales and profits are undoubtedly an important part of your business, what acquirers will be interested in above all else is how your company will perform after they buy it. The number one thing that will give an acquirer confidence in your business's long term viability is recurring revenue.
Your business is most likely to continue to thrive post-sale if you have a business model that is heavily reliant on recurring subscriptions and services. One-off clients can certainly be valuable, however, confidence in your company's viability is much more assured when your clients are on subscriptions.
In Nelson’s case, Ruby Receptionists billed its customers through recurring contracts—perfect for making a buyer confident that her company has staying power.
3) Customer Diversification
If your business is dependent on a few "big fish" customers for most of your revenue, your long-term prospects can be much murkier than if you have a lot of small, recurring customers. Most acquirers will hesitate if your company's success is dependent on any one customer that represents 15% or more of your revenue, for instance.
At the time of the acquisition, Ruby Receptionists had 6,000 customers paying an average of just a few hundred dollars per month. Nelson could lose a client or two each month without skipping a beat, which is ideal for reassuring a hesitant buyer that your company’s revenue stream is bulletproof.
Nelson built a valuable company in a relatively unexciting, low-tech industry, proving that how you run your business is more important than the industry you’re in.
All three of these factors are of tantamount importance for making your business stand out when you are ready to sell.
If you want to see how close your company is to being a valuable, sale-ready asset, we invite you to take the Value Builder Assessment today!