Do you want to make your company more valuable? Especially if you can say yes to these three aspects of value. I think they are really important to SME business owners like you and me:
- making good profits to fund growth, an income for you plus put money away in a pension or building;
- not having to work every waking hour. You get time to enjoy family time, do your hobbies and have holidays;
- knowing your business is an appreciating asset that you could sell in the future.
Have you ever wondered what determines the value of your business?
The 3 value drivers Jill Nelson used
I’ve written before about the 8 drivers of value before. I’m going to use a case study to highlight how 3 of those drivers helped a lady, Jill Nelson, sell her business for far more than her industry peers get.
Jill recently sold a majority interest in her $11 million turnover telephone answering service, Ruby Receptionists, for $38.8 million. That’s right 3 times her turnover. Never mind the standard 3 to 4 times adjusted EBTIDA that most SMEs get
That’s a lot of money for answering the phone on behalf of independent lawyers, contractors and plumbers across America. We have the same type of service providers here in the UK
In fact, in the administrative support industry that Ruby Receptionists operates in, the average multiple offered for these companies over the last five years is just 1.8 times pre-tax profit. They tend to be small, low tech and rely on a few big contracts.
There were three factors that made Nelson’s business much more valuable than her industry peers, and they are the same things you can focus on to drive up the value of your company:
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 set up as a competitor. They could then win most of your price-sensitive customers away with 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. 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.
Uniquely this point of differentiation allowed Jill to win new work and also be confident the business could deal with it. That meant more income for her and less time sweating over growth problems.
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.
Recurring Revenue
Acquirers want to know how your business will perform after they buy it. Nothing gives them more confidence that your business will continue to thrive post sale than recurring revenue from subscriptions or service contracts.
In Nelson’s case, Ruby Receptionists billed its customers through recurring contracts. That is perfect for making a buyer confident that her company has staying power.
That recurring revenue also made Jill’s life easier. She could predict future income and plan her costs and overheads to suit.
Customer Diversification
In addition to having customers pay on recurring contracts, the most valuable businesses have lots of little customers rather than one or two biggies. Most acquirers will balk if any one of your customers represents more than 15% of your revenue.
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. That 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. She proves that how you run your business is more important than the industry you’re in.
Listen to Jill Nelson tell her story by clicking here.