You know what the value gap is. You’ve learned to calculate the difference between your business’s current value and its potential. But how do you go about bridging the value gap within your business? In today’s post, I’m going to go over some of the methodologies that can help you close your company’s value gap. So, join me as we take a financially simple approach to bridging the value gap.
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If you’ve followed along with me for any amount of time, chances are, you’ve heard me discuss the multiple before. There’s a good reason that I talk about this so frequently. The fact of the matter is this – focusing on the multiple is the fastest and most efficient way to grow the intrinsic value of your business. Let’s assume that your business has an annual EBITDA of $100,000 and a multiple factor of three. That means that your business is valued at $300,000.
Well, if you’re like many business owners, $300,000 isn’t going to be enough to fund your retirement. Let’s say that you’ve got enough assets and savings lined up where you only need to get an additional $750,000 from the sale of your business. How do you get from its current value of $300K to the necessary $750K? You might be saying, “Well, Justin, that’s easy. I just need to go out and increase sales and revenues.” If this is you, I implore you to consider another way.
You see, as you make more sales, you increase the pressure on your business. You have to increase inventory, staffing, and sometimes, even overhead to accommodate the added demand. In the process, you take on more risk and work harder. You might just increase your EBITDA from $100K to $200K but your multiple is still three. So, what’s the answer?
If you focused on increasing your company’s multiplier from three to six, rather than its revenues, you could have arrived at the same value of $600K without all of the increased risks. As business owners, we often repeat the same cycles over and over again, expecting different results. According to Albert Einstein, this was the definition of insanity, folks. We will beat our heads against the wall, to our own detriment. We work harder because we know, how to do that. But, at the end of the day, we’re just tired and broke. Don’t be insane. Be smart!
Instead of working twice as hard and putting all that you’ve worked for at risk, work on increasing your multiple while leaving your EBITDA right where it is. Now, if you find yourself asking, “Justin, is it really possible for me to increase my multiple from a three to a six while still making my $100K in EBITDA?” then I tell you to look back at my last post. If you look at the bell curve and the average of your business is three, but find that you’re in the average or below average metric, but the best-in-class is selling at six, then yes, it is possible for you to make your business best-in-class.
RELATED READING: What Is the Value Gap?
I’ve seen it done too many times to doubt its possibility. In fact, I’ve done it in my own businesses time and again. Friends, focusing on the multiple is the easiest path to increasing the value of your business. Now, understand that it requires a lot of hard work. When I say it’s the easiest path, I don’t mean you can approach it lackadaisically and expect great results. You must put in the work, but it can be done without putting added strains and risks on your business.
If you’re paying close attention, you’ve noticed that we have only increased the intrinsic value of your business to $600K. Although we’ve doubled its value, you’re still short of the $750K goal. But there’s something magical that happens when we focus on the multiple of our businesses. You see, as you become hyper-efficient in your business, you actually increase the EBITDA without ever even focusing on it. “But Justin, won’t that just increase our workload and the amount of risk that we are exposed to?”
Not exactly. Friends, when you focus all of your efforts on increasing sales in order to grow the value of your business, you’re forced to increase them too quickly for your business to sustain them. However, when you focus on increasing your multiple from three to six, your EBITDA can increase by 25% organically. This means that you’ve gone from $100K to $125K in EBITDA with a multiple factor of six. All of a sudden, you’ve grown the value of your business from $300K to $750K, thus, bridging the value gap.
I like to think of it like an old water hose. If your hose is neatly wound up, water can flow through it unimpeded. However, if it’s tangled up and has a bunch of kinks in it, then the water isn’t going to flow as easily. That’s the same concept, here, folks. If your business is running at maximum efficiency, the value is going to grow, freely. Focusing on the multiples in your business, removes the kinks, allowing it to flow the way it was intended to.
Friends, this is why I often say that our goal is to double our clients’ net worth every three to five years. That’s made possible by focusing on increasing the multiples. Look, life is hard. Life is frustrating and sometimes, it can drive you downright crazy. But life is good. Bridging the value gap in your business can be complicated, but it doesn’t have to be. By focusing on the multiple, you can make closing that gap at least, financially simple.
If you have questions about how the multipliers can increase your business’s value, or if you just need someone to guide you through the process, contact us! The team at Financially Simple helps business owners just like you, every day!