Tag Archives: business valuation

Run Your Business Like You Are Never Selling

To get the best value when sell your business, keep your focus on building a great business, serving your clients, growing your revenue and profits and exit will take care of itself.

Many of the CEOs and leadership teams I have worked with over the years have fallen into the same trap: they get overly focused on selling their company to a strategic or financial acquirer or worse, going public. At one level this is understandable since it is a dream for many, if not most, entrepreneurs and leaders to create a lot of personal wealth through a wildly successful exit from their business. That’s why it’s so common to meet business leaders who seem to think of nothing else.

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But if you make the notion of selling the primary driver of your business, at the expense of continuing to grow a great enterprise, you’re making a critical mistake.

All too often I hear business leaders tell me that they can’t make that new IT investment or ask an under performing executive to leave the business because they are just treading water until the sale of the business closes. No one wants to spend any money, or rock the boat when it comes to key personnel, because they don’t want to jeopardize their big payday.

Strategic buyers and investors are looking to buy companies who have great executive teams in place that not only deliver results in revenue and profits now, but who also have built in the upside to deliver growth into the future. And a pile of recurring revenue is sure to help!

So when a potential acquirer looks at a business that is clearly doing its best just to keep the status quo and not making the right moves and investments, they will see right through that and wonder if the company is now too risky to invest in. Smart buyers and investors look for companies that are continuing to thrive, grow, and make smart decisions – not those who are just passing the buck.

What do you think would happen if an investor approaches your company and asks which members of the executive team they should hang onto – and which ones they shouldn’t? If you immediately give them the name of a vice president who isn’t performing, you can bet the investor’s first question will be: “Why haven’t you gotten rid of them already then?”

Or, let’s say you have been holding off on making that big investment in a new IT system your team has been begging for. What you will find is that when an investor learns about that, they will discount their offer price for your business by the amount it would take them to make that same investment at the very least.

That’s why the best strategy to get the best price for your business is to continue to focus on building a great company – not on trying to sell it. If you were to make the investment in the IT system now, you might even be able to extract a premium from a potential buyer because you have laid the foundation for future growth because of that investment.

Believe me I speak from experience. A few years ago, I, too, was in the process of selling my company. We had received such a rich offer from a public-traded company we couldn’t say no to. At the time, my CFO and I were the only ones who knew the transaction was in the works. As it happened, my VP of engineering wasn’t performing at the time. I had him on an improvement plan for the prior few months and he just wasn’t getting any better. I knew it was time to make the move and help him leave the company. But rather than worry that I would scare off our potential buyer, I let them know what I was doing and why. I told them I was making a decision that was in the best interests of the business – and that was going to be my focus regardless of what happened with our transaction. The buyer was impressed: they told me they appreciated it. The deal eventually went through, before we even replaced that VP.

If you want to get the best price or value when it comes time to sell your business, keep your focus on building a great business, serving your clients, growing your revenue and profits and the great valuation on the exit will take care of itself.

 

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Building A Better Business With Recurring Revenue

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One truth in business that most CEOs and entrepreneurs alike tend to overlook: not all revenue is created equal. Sure, a dollar in sales is a dollar in sales. But the more predictable that dollar is, as in the more likely that you will receive that dollar from your customer every month, the more valuable it becomes. When you begin to multiply that dollar by adding new customers and creating an annuity of cash flow, you begin reaping the benefits of what is known as a recurring revenue stream. And people pay for that!

Examples of businesses that have built recurring revenue into their business models range from companies like Salesforce.com and Constant Contact, which charge their customers a monthly fee to use their services, to the online GoDaddy! and dating site e-Harmony, who make their services “sticky” based on the power of their communities of customers. The point is that these companies have found ways to keep their existing customers month after month and year after year rather than having to find a new crop of customers each quarter to keep the business growing.

What makes recurring revenue so valuable is that you can spend more of your energy growing your business rather than on trying to acquire enough new or repeat business just to hit the same revenue level you did the year before.

Easier to Grow

Let’s say you run a business with $10 million in sales, 90 percent of which is recurring. Since you can already bank on receiving $9 million as you kick off your next fiscal year, all you need to find is an additional $1 to grow. Compare this to a business built with no recurring revenue. You might earn $10 million in a single year. But, every subsequent year you begin again at $0–something that makes it difficult to sustain growth.

Which business would you rather run? The answer is obvious.

Predictable Costs

The beauty of recurring revenue is that because you can predict what you’re going to earn, you can also predict your costs better which results in less risk–something that investors love (one private equity firm even hands out bumper stickers that say: “I heart recurring revenue.”). In fact, the more recurring revenue a company has, the higher the valuation it will receive from prospective investors and buyers. That’s why recurring revenue has become the gold standard of business models and something that every CEO should be working towards building into their own business.

Higher Business Valuation

Consider the example of ADT, which provides security systems. When you sign up for ADT, you sign a three-year monitoring contract. ADT knows that once you clear the three-year mark, you are highly likely to remain a paying customer of theirs–perhaps for another 5-7 years! That kind of predictable revenue stream helps explain why ADT currently has a market capitalization of about $5.87 billion with revenues of $3.3 billion. When you do the math, we see that the market is valuing every dollar of revenue at ADT as $1.78

In contrast, we can look at Ford Motor Co., which has revenues of some $123 billion. And yet, its market cap is just $30.4 billion–meaning the market values every dollar of revenue Ford generates as just $0.25. Why the difference? Because ADT has recurring revenue with lifetime value of customers and Ford is still stuck with a largely transactional business. That’s why, to repeat, not all revenue is valued equally.

Small Steps Matter

Whether you’re the CEO of a company or an entrepreneur hammering out your first business plan, you need to be thinking of how you can drive a higher percentage of these flavors of recurring revenue through your company. Even if you can move from 0 percent to 15 percent recurring revenue, you have done wonders for the value of your company. Ideally, as a culture, we’d never see another business started that didn’t have recurring revenue woven into its core. The point is that if you’re not thinking along these lines, you’re putting the future of your business in jeopardy and making your life harder.

In our next post, we’ll discuss a few strategies for integrating the power of recurring revenue into your existing business.

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