5 Levers to Increase the Value of Your Business

“What is my business worth?”

This is one of my favorite questions (and a big reason I started my career in investment banking).

Valuation is a fascinating topic.

There are a myriad of approaches to determine what something is worth:

Comps analysis, discounted cash flow, sum-of-the-parts… the list goes on.

But all valuation methodologies have one thing in common:

They mix science and art.

Today, we’re going to focus on the art piece.

The subjective characteristics of a business that determine its value.

Let’s go:

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The Basics:

Science = the more money a business earns in profit the more it is worth.

Profit is commonly referred to as “EBITDA”, or at the lower end of the market, “SDE”, Seller’s Discretionary Earnings.

But sometimes profits don’t matter at all.

In fact, of the tech companies that went public in 2017, only 17% were profitable.

These companies were collectively worth billions of dollars.

But were losing money? How?

One word: Art.

Art = the multiple applied to profits.

Fundamentally, the “Art” component of valuation depends on two factors:

1. Growth: The bigger the growth opportunity, the more the business is worth.

2. Moat: The bigger the barrier to entry, the more the business is worth.

So as an entrepreneur, operator or investor, the goal should be to position the business to optimize upside (growth), while mitigating the downside (moat).

The better you do that, the more your business is worth.

Here are 5 practical strategies:

1. Get Bigger

All else equal, a larger business is worth more than a smaller business.

Size brings efficiencies, negotiating leverage and stability.

There are a few ways to buy your way to scale.

This includes buying a supplier (vertical integration) or buying a competitor (rollup):

2. Raise the Ceiling

Ever wonder how a pre-revenue tech company could fetch a $100 million valuation?

Answer: they sold a growth narrative.

The founders were able to convince investors that they were the right people, at the right time, with the right strategy, to disrupt a massive market.

Even though their business made no money today, it was well positioned to make tons of money tomorrow.

While this doesn’t apply to every company, particularly profitable SMB’s, the framework still applies:

A well positioned business in a big market will always be worth more.

3. Become More Predictable

There’s a reason enterprise software companies sell for 50x annual profit.

Their revenue is highly predictable (and very sticky + high margin).

Even if an asset lite, technology company is outside your expertise, you can still find ways to generate “recurring” revenues that are inherently more predictable.

For example:

• Focus on selling larger accounts (national brands) that sign multiyear contracts.

• Create subscription offerings that cater to a small portion of your most loyal customers.

• Collect emails and prioritize repeat/direct purchases.

This concept is particularly relevant in a world where small merchants depend on large platforms like Amazon, Google, Facebook or Airbnb to generate demand.

A business that controls its audience is worth more.

Which leads to…

4. Build a Brand

It takes years to build a brand.

But having one unlocks free customer acquisition and higher customer lifetime values (repeat purchases, upsells, etc.)

Often, a brand can be your strongest moat.

Practically speaking:

• Invest in your brand without worrying about the short-term economics

• Spend extra on a high quality graphic design

• Polish your online presence (website, LinkedIn)

5. Replace Yourself

If you run a small business, your biggest goal from day 1 should be to make yourself obsolete.

Standard Operating Procedures (SOP’s) need to be your best friend.

Document everything you do and record videos completing the task.

Keep the tasks organized using a free task management software like Notion.

Then hire someone to take the task over.

As you scale, find people more talented than you at a specific function.

Teach them how to update and improve your SOP’s.

Then get out of their way.

Nothing hurts business valuation more than dependence on its owner.

A Final Thought:

Make no mistake, the “art” component drives valuation.

The difference between a 3x multiple and an 8x multiple is meaningful.

So if you’re thinking of starting your own business, consider these 5 attributes from day one.

📈 July 2023:

Here's a quick update on the latest numbers for the Wealth² Newsletter.

• Subscribers: 4,050 (+515 v. June)

• Open Rate: 55%

It’s been 6 months since I started writing these weekly newsletters.

Thank you for all of your supportive messages.

They make writing these issues a ton of fun.

Until next week,

Danny

PS - Celebrated 7 years of marriage earlier this week while visiting Chattanooga, TN. She tells me she reads every one of my newsletters. Including this photo is my way of finding out the truth :)