What is your company worth? If you wanted to sell your company in 2011, what could you reasonably expect to get for the transaction? Depending on who you ask, you’ll get a lot of different answers. Your accountant will have one view. A business broker might have a different view. An investment banker or your attorney may tell you something else entirely. And of course the real answer is your company is worth whatever someone is willing to pay for it.
When you look at all the different ways experts put a value on a business, most are using some type of “multiple-of-revenue” or “multiple-of-net-profit” formula to help get their answer. So increasing sales and improving net profit margins will make your company more valuable?
Yes absolutely – increasing sales and improving net profit margins will make your company more valuable to prospective investors or buyers. But that’s only part of the answer. To really drive the value of your company you need to increase the multiple as well. How do you increase the multiple experts use when placing a value on your business? One way is to implement predictable, repeatable systems and processes that are proven over time and that anyone can run. This is why buying a franchise can be so expensive – they’ve already built and documented systems and processes that are proven to work and produce predictable results.
To illustrate the point, let’s explore a few scenarios.
- For this example let’s say your company is currently worth 5X net profits. If you own a company with $10 million in annual revenue and net profits of 10%, or $1 million per year, you could reasonably value your company at $5 million
- If you increase sales 10% and improve your net profit margin by 10%, you now own a company with $11 million in annual sales and net profits of 11%, or $1,210,000. So you could value your company at $6,050,000 and have an extra million dollars for retirement.
- Now let’s say that in addition to increasing sales and net profit margin, you also implement sales systems and processes that not only increase revenue and improve margins, but also make your sales operations more predictable, repeatable and not dependant on any one person (especially not an owner!). If that happens, you should be able to use a higher multiple when determining value. So using the second example above with annual revenue of $11 million and net profits of $1,210,000 and a stronger multiple of 6X net profits you could value your company at $7,260,000 to add another $1.2 million to your retirement account.
Which sales systems and processes do you need to implement to increase sales, improve net profit margins, and make your sales operations predictable and repeatable? Every situation we encounter is a little different, but here’s a good list to start the conversation:
- Your sales process is mapped
- You have a clear territory plan
- Everyone on your sales team understands and acts upon the daily behaviors that drive results
- You have a compensation plan that drives the right behaviors among your sales people
- You have a sales hiring system in place that consistently attracts and retains top sales talent
- Your sales manager holds the team accountable, knows how to motivate the team, and is a highly effective coach and mentor
- You have accurate sales forecasts and can consistently rely on both the dollars predicted as well as the timing predicted
- Your customer service team can effectively defend your customers and can “out sell” your competitors’ sales people
- Your leadership team is balanced and can work together effectively (particularly the relationship between sales and operations)
If you can say yes to all of the items on this list congratulations, you can reasonably expect to sell your company at a higher multiple of revenue or net profit. If you see some areas on this list where you might need to improve, let’s talk about how we can help increase the value of your company.
Will Increasing Sales Increase Company Value?