Why increasing revenue doesn’t always make your business more valuable (and what you should focus on instead)Feb 04, 2021
The most successful exit strategies are built around making your business as valuable as possible in the eyes of potential investors.
To most entrepreneurs, driving up the value of their business means increasing its revenue.
And while higher revenue can lead to a bigger payout when you exit…
It’s far from the easiest and most effective way to make your business more valuable to buyers.
In this article, I’m going to explain why – and what you should focus on if you want to turn your business into a valuable asset you can sell at a premium.
Why increasing revenue rarely drives up your business’s value
Most entrepreneur’s first port of call when it comes to increasing the value of their business is ramping up their sales and marketing efforts.
I certainly did the same myself back in the day.
But trust me – this is rarely the right route to take.
You’ll increase your specific risk
When you drive top-line growth, you actually increase your company’s specific risk.
For example, if your only goal is to boost revenue, you might take on a client that accounts for half of all your income.
While this will drive up your earnings, it could make your business less valuable, as it might now be over-reliant on this new client in an investors’ eyes.
And suppose the new client you’ve banked everything on has a habit of not paying on time. In that case, that could cause significant cash flow issues that derail your entire organization and seriously shrink your business valuation.
This is exactly the situation I found myself in, and diversifying my business's income so it was less reliant on that high-paying problem customer was one of the nine changes that increased the value of my business the most
You might also have had to make a big investment in new staff or equipment to bring that client in, which puts you at a huge financial risk – another mark against your business when it comes to how much a buyer will be willing to pay for it.
And even if you’ve increased your revenue without drastically increasing the risk attached to your business, an investor may well want to wait until the dust has settled on your sudden growth before thinking about pulling the trigger, in case it backfires.
Driving sales takes up all your time
One thing business owners tend to underestimate is just how much time and budget they’ll need to sink into driving revenue.
Think about what’s involved:
- Hiring top-shelf sales and marketing staff.
- Creating new processes that drive and convert more leads.
- Getting new and old staff up to speed with these new processes.
- Analyzing the results and refining your processes.
If increasing revenue is your focus, steering the ship on all these initiatives is going to have to be your priority.
And if you’re already stretched thin as it is, what balls are you going to have to drop to make it all happen?
And what could you have achieved with that time and budget elsewhere in your business?
You’ll add fuel to fire
If you’re like most business owners, you spend most of your time putting out fires.
Bring more customers into the mix and you’re only going to add fuel to these fires.
Here’s the thing:
Focussing on bringing in more customers before you’ve fixed the foundations of your business is a recipe for disaster.
You’ll essentially put a magnifying glass on all your business’s biggest problems. You might even take it to breaking point.
Which means your attempts to increase your business’s value could seriously backfire.
You start pushing random acts of sales and marketing
Bring a bunch of new sales and marketing staff on board and the best case scenario is that they grow your customer base.
But if your organization is structurally unsound and lacks well-defined values, goals, or product-market fit, then throwing more money at marketing isn’t going to end well.
Instead, your new team is much more likely to fire out more random acts of sales and marketing – disjointed, poorly timed, or just plain bad campaigns that fall flat on their face or even alienate prospective and existing customers.
A common trap business owners fall into in their rush to boost revenue is thinking the key is to do more.
But sales and marketing campaigns that aren’t based around a solid strategy will never move the needle on the metrics that matter.
In fact, they’re more than likely to produce a pitiful return on investment – and might even have a negative impact on your brand.
So, beware: sinking more sales and marketing budget into a broken business isn’t likely to grow your revenue as much as you’d hope.
How to drive real value in your business
So, if driving up revenue in your business isn’t the answer to increasing its value, then what is?
The first step is understanding how potential buyers figure out what your business is worth.
The most common business valuation method is multiplying your EBITA – Earnings Before Interest, Taxes, Depreciation, and Amortization – by your industry multiple.
So, if your business has an EBITA of $100,000 and your industry multiple is two, then your business will be valued at $200,000.
Most entrepreneurs look to increase that valuation by driving up their revenue.
So, they ramp up their sales and marketing efforts to double their earnings – which requires a huge increase in revenue.
And don’t forget: double the revenue means twice the amount of production, and twice the amount of product, twice the amount of people, and perhaps even twice the amount of services.
If you already feel stretched by your business, imagine what things will be like when you have twice as many plates to spin.
Your business will be a lot more hassle to run, but your industry multiple will stay the same.
If – and that’s a big if – all that hard work and stress pays off and you double your EBITA to $200,000, your business will be valued at $400,000.
A new approach: Working smarter, not harder
Luckily, there’s a much more effective way of increasing the value of your business.
And to unlock it, you need to understand that the real value of your business doesn’t appear on the balance sheet.
Instead, it’s buried in eight distinct areas of your business:
- Your leadership team.
- Your people.
- Your processes.
- Your operations.
- Your sales.
- Your marketing.
- Your finances.
- The legal aspects of the business.
Want to increase the value of your business? Forget about chasing revenue – optimize each of these areas to unlock the real value hidden within your organization.
If each of these aspects of your business is firing on all cylinders potential buyers will assign it a higher industry multiple.
Which means those $100,000 earnings could be multiplied by a far larger number to get you a business valuation.
Uncover the hidden gems
When I work with clients, the first place I start is dissecting those eight key areas to identify the intangible assets – the hidden gems – that can set a business apart from the pack.
We look at the systems, the marketing strategy, and the value proposition. We look at client fulfillment, the leaders within the business, and the potential rockstars on the payroll.
We look at all those intangible assets and figure out how we can leverage them to increase the value of the business.
Instead of running around like headless chickens trying to chase revenue, we focus on creating a healthier, more stable business – a business making the most of what it’s already got.
Instead of pouring more fuel into a four-cylinder engine, we transform it into a V8.
Follow this path and you’ll keep revenue at $100,000, but you might have increased your industry multiple by double, triple, or more.
And you’ve got there by working smarter, not harder – with a lot less stress along the way.
Does that mean revenue doesn’t matter?
Of course, revenue matters. Your cash flow is the lifeblood of your business.
But I hope you can see that increasing revenue isn’t the right lever to pull if you’re looking to increase the value of your business and avoid an earn out.
That’s because the real value of your business is buried in your intangible assets. Uncover and optimize those hidden gems and you’ll create much more sustainable value – and the route there will be a lot less stressful.
So, instead of spending your time, budget, and energy on trying to drive revenue, focus on:
- Implementing the Core Four
- Building a talented and motivated workforce supported by seamless systems and processes.
- Removing yourself from the day-to-day running of your business
- Identify services you can productize to create recurring revenue streams.
- Investing in the latest, well-maintained equipment to keep repair costs and downtime down.
- Establish a strong leadership team so your business can thrive without you.
- Continuously work on improving your customer experience to create loyal, raving fans.
With these foundations in place, your business will be a far more appealing investment to buyers than a business that’s held together with duct tape – even if you’ve doubled the revenue.
Remember: investors aren’t interested in buying a broken business they’ll have to fix themselves. They’re looking to buy potential growth, and they’ll find that in a business that’s focussed on truly increasing its value rather than just its revenue.
So, be sure you’re maximizing the value of the intangible assets within your business if you want to sell it at a premium.
And if you want help uncovering and optimizing the hidden gems in your business then sign up for my new on-demand training at LetsGrowYourBusinessValue.com