Have you ever compared your business to another company in your industry to estimate how valuable it may be? If you think similar companies in your industry are comparable to yours, you might be in for a big surprise…
When we examined data provided by over 30,000 businesses, we found there are eight factors that drive business value. And, they are ALL potentially more important than which industry you’re in.
Let’s take a look at a recent transaction involving Jill Nelson of Ruby Receptionists, a telephone answering service. Because of unique differentiating factors, Nelson sold a majority interest of her $11 million company for $38.8 million. That’s a lot of money for answering the phone on behalf of independent companies across America.
To give you a sense of how high that valuation is, let’s look at some comparison data. The average value for companies starting the Value Builder program is 3.6 times pre-tax profit. Those who achieve a Value Builder Score of 80+ (out of a possible 100) are getting an average of 6.3 times pre-tax profit.
The average multiple offered for companies in the administrative support industry over the last five years is just 1.8 times pre-tax profit.
Nelson, by contrast, sold the majority interest in Ruby Receptionists for more than 3 times revenue.
There were three key factors that made Nelson’s business significantly more valuable than her industry peers. Luckily, they are the same things you can focus on to drive the value of your company.
1. Cultivate Your Point Of Differentiation
Acquirers do not buy what they could easily build themselves. If your main competitive advantage is price, an acquirer could simply set up shop as a competitor and win most of your price-sensitive customers away by offering a temporary discount.
In the case of Ruby Receptionists, Nelson invested heavily 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. Her competitors were mostly low-tech mom and pop businesses who often missed calls when there was a sudden surge 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.
2. Recurring Revenue
Acquirers don’t simply want to know how your business did last year; they want to know how the business will perform after they buy it. The best way to show that the business will continue to thrive is through subscriptions or service contracts.
Ruby Receptionists billed through recurring contracts, meaning the new buyer didn’t have to question whether clients would stick around.
3. Customer Diversification
In addition to having recurring contracts, the most valuable businesses have many small customers rather than one or two biggies. Why? If one of those big customers suddenly disappeared, it could put the company in jeopardy. And beyond that, small customers are typically easier & faster to replace. Buyers will want to know that no single customer represents more than 15% of your revenue.
At the time of acquisition, Ruby Receptionists had 6,000 customers paying an average of just a few hundred dollars per month. Nelson could afford to lose a client or two each month without skipping a beat. This 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. Her success proves that HOW you run your business is more important than the industry you’re in.
How Can You Make Your Company More Valuable?
If you’d like to discover how valuable your business is, we encourage you to take the Value Builder Questionnaire, which consists of 35 questions that assist in estimating your company’s value. Once you’ve completed the Questionnaire, an RFB Business Advisor will contact you to schedule a complimentary, no obligations meeting to discuss your results.