How to Double Valuation?

Main Street business owners and venture capital founders, have asked me on uncountable occasions – how can businesses sell for billions when they do not have the revenue or earnings to support the astronomical valuations? How can founders and owners sell their businesses for millions? What are these high-paying buyers looking for? And most importantly how can they position their business for a blockbuster exit and retire on a luxurious yacht like this one… Let’s see how to maximize your business’ value and sell for millions…

There are over 32 million businesses in America.

• 95% of them have revenue less than $5 million.
• 60% of them are owned by baby boomers.
• 80% of Boomers are looking to retire in the next 5 years.

This is creating increasing the supply of businesses for sale exponentially. So how can you stand out? How can you sell your business for millions? What do buyers of such businesses look for?   So how do you make this happen? How can owners create consistent cash flow and have it run on autopilot with the least involvement? There are TWO THINGS owners can implement today to DOUBLE their BUSINESS’S VALUE within 6 months –

• Recurring Revenue.  I go to a car wash place where they sell packages.  If you buy five upfront you get one wash for free and if you buy 10 upfront you get two for free.  One day I tried the car wash across the street.  They had a different business model.  If you pay $50 per month, you can get unlimited car washes each month.  If you pay $30 you get three car washes a month, and if you pay $20 you receive two car washes a month.

The difference between the two business models is the second car wash has recurring revenue.  Even if their per wash price is technically cheaper than the first car wash, they have a recurring revenue business model.  If a business has recurring revenue, valuation multiple can be between 6-12x earnings versus ad hoc or non-recurring revenue models can be 2-4x earnings. The lesson is, to convince current clients to switch to a recurring revenue business model, if you have to take a hit on cash flow, it may be worth it because the loss in revenue will be covered twice over with the increase in valuation.  This of course only works if your operations can sustain the decline in cash flow. A buyer would pay a higher multiple for recurring revenue, because they do not have to wonder about the expenses the day they take over, and are less dependent on the prior owner to sustain current cash flow.

• Automate Everything. Staffing. Accounting. Email Marketing. Customer Database. Social Media Marketing. Operations and Management. Yes, there is an app for that. There is an app for everything. And now the best part is that a subscription to such software is cheap. $10-100 per month.

I am a valuation expert. In my world, most valuations are run on Microsoft Excel or iOS Numbers. Even in my world, there is software now available for $300-500 per month, which will run the valuation models. This does not mean valuation experts will be out of jobs. It has made our job easier, with fewer errors and omissions in Excel. Did TurboTax increase unemployment for CPAs? No. It only changed the landscape and the CPAs that adapted and took advantage of the automation excelled. Of course, not everything can be automated. I understand. But ask yourself and your team what can be. Start with simple things like making recurring online payments. Or automated reminders for receivables. Or notifications for customer contract renewals. Basically, reduce the busy work of the owner and managers. So they can focus on customer experience and improving product and sales. A buyer is not interested in doing busywork, they want a business that has good automation, so they can focus on how to strategically grow the top line. Ever wonder why real estate is such a coveted investment? Because it is like a tree that gives the investor both fruit and shade. The fruit is consistent cash flow as recurring revenue, and shade is appreciation in value or time and place for the owner to rest because of automation. If you can make your business like a real estate investment you have won. Because, unlike real estate, businesses can grow 100% annually! If you start implementing the above two initiatives, you can double your business’s value in 6 months. Valuation is all about the business model. Just by making these two tweaks in your business model, you are getting closer and closer to your day on such a yacht… Bharat Kanodia – Founder and Chief Appraiser