Business growth occurs at four different levels: top line, bottom line, middle line (expenses) and valuation. Increases in the top and bottom lines and stability or a decrease in the middle line, causes an increase in valuation each and every year. Valuation is what your business would be worth if you sold it. Valuation is also a major factor in financing that fuels expansion.
My clients are generally mindful of the top, middle and bottom lines and not very mindful of valuation.
Here's what you need to get started understanding valuation for your business:
- Increasing revenue: you can increase revenue by increasing dollars per sale and increasing the number of sales. To do this you need to assess everything from your customer lists, to operations, sales, marketing and management. The more of a 360 degree look you take at your business, the stronger the likelihood of increasing your top line.
- Stability or decreases in expenses: Let me be very clear--I do not advocate cutting expenses to provide a quick hit to the bottom line. This hurts your business far more than it helps it. The top contributor to reduced expenses is counter-intuitive: increase productivity, fully utilizing your capacity with your existing personnel, managing your infrastructure to maximize your output, and focusing intensively on your marketing and sales efforts. Be sure that what you spend generates more revenue and you have effectively reduced your expenses.
- Bottom line: this is the amount left when you subtract expenses from top line revenue.
The valuation for a small enterprise (revenue of 1 million to 10 million) is typically 3-5 times the annual bottom line. For example, if you have revenue of $1 million and expenses of $900K, your bottom line will be $100,000. The valuation of your business is now $300-500K. Your business will have a valuation of $3-5 million if your bottom line is $1 million annually.
The valuation multiplier is typically 5-7 times the bottom line for businesses with greater than $10 million annual revenue.
My clients are delighted with the many new ideas I have to help them increase their valuation. As my varied clients will attest, my process works across all industries and small and medium enterprises.
It doesn't take a huge increase in the bottom line to generate a sizable increase in valuation. What could you and your business do with 3-7 times increase in valuation? Why wait?