Acq 9 Introduction

“Your task is not to foresee the future, but to enable it.” – Antoine de Saint-Exupéry, French Poet

Your business is likely one of your most valuable assets and can represent a considerable portion of your net worth. You may have spent decades building and growing your business, making countless sacrifices along the way. Investing time in preparing your company for sale is a wise investment to protect all that hard work. Getting your business ready for sale allows you the flexibility of being able to sell at any time and helps protect this valuable asset. This preparation also results in significantly more negotiating leverage throughout the transaction, which further serves to maximize the price you receive.

Unfortunately, there’s not one simple method for increasing the value of a business. Dozens, if not hundreds, of direct and indirect factors can affect your business’s value. In this chapter, I’ll examine some of these factors, as well as what actions you can take to maximize the value of your business. 

Despite the complexity involved in valuing a business, there are actually only two primary ways to increase its value:

  1. Increase EBITDA: The first method is to increase your business’s earnings before interest, taxes, depreciation, and amortization (EBITDA). One of your primary focuses when looking to maximize the value of your business should be to improve its profitability, which can either be accomplished by reducing your expenses or increasing your revenue.
  2. Increase the Multiple: The second method is by increasing your multiple. Multiples are based on two factors – risk and return. Your multiple is a reflection of the risk a buyer perceives in your company and the growth opportunities your business offers. To increase your multiple – and thereby your valuation – you can either take steps to reduce risks associated with your business or improve your business’s perceived growth potential.

Based on these two direct factors, the formula for valuing a business is simple: 

Profit (A) x Multiple (B) = Value of Business (C)

Example: $10 million EBITDA (A) x 8.0 Multiple (B) = $80 Million Valuation (C)

This generalized formula is at the heart of valuing any business. So to increase the value of your business (C), you can focus on increasing profitability (A) or increasing the multiple (B). Note that, as stated above, the multiple is based on the amount of risk and return within a business. The formula could then be restated as:

Profit (A) x Risk/Return (B) = Value of Business (C)

The advice in this chapter can therefore be categorized into the following topics:

  1. Increase profit (i.e., EBITDA)
  2. Increase your multiple, which can be done by
    1. Decreasing the perception of risk
    2. Increasing potential returns

Collection of Factors

Unfortunately, despite this clean separation of distinct categories that affect the value of your company, real businesses can’t be categorized into neat little buckets. I wish it were that simple, but it’s not. While I’d love to reduce this advice down to 8 or 10 simple value drivers all buyers look for, it isn’t that easy in the real world. Instead, from my 20 years of experience selling companies, I’ve distilled the factors that can affect the value of your business into the following categories:

  • Business Strategy
  • Financial Metrics
  • Growth Opportunities
  • Business Operations
  • Customer Base
  • Legal Factors
  • People
  • Shareholders

After reading this chapter, you’ll understand the most important factors that can impact your business’s value, which will allow you to focus on those considerations that will have the greatest impact on your business. At the end of each section is a short list of action steps you can take to maximize the value of your business. Roll up your sleeves and let’s get started.

There is no simple method or formula for increasing the value of any business. There are dozens, if not hundreds, of potential direct and indirect factors that can affect the value of your business.