A healthy business is a saleable business. Whether you ultimately intend to sell your business or not, your business strategy should be to maximise the market value of your business. If your intention is to sell, then maximising the market value of your business becomes a strategic priority. Generally there are 8 factors that impact the market value of your business. These 8 factors don't change overnight. They are things that take years to build.


How is a business valued?
Generally, a buyer values your business as a multiple of its annual profits. For this purpose profit is defined by the accountancy term EBITDA. (Earnings before interest; taxation; depreciation and amortisation). Often the multiplier is common across similar types of business or across a particular industry. So, if in your industry a multiplier of 2 is common and your business has an EBITDA of £200k then a the market value of your business is likely to be £400k.

The multiplier isn't set in tablets of stone. There are things that you can do to alter the multiplier. You can increase the market value of your business with the right strategy.
What are the 8 factors that impact the market value of your business
1 Turnover
Most people believe that the size of the business is the main thing that changes the market value of your business. If we take two businesses that are the same in all respects other than size, then the bigger business will be worth more. In our original example the business is worth £400k. Lets assume it turns over £1m and therefore has a net profit margin of 20%. A second business in the same market has a turnover of £5m with the same net profit margin, so has an EBITDA of £1m. A 2x multiplier would indicate a £2m business valuation, but its likely that, as this business is bigger, then the multiplier is also bigger, maybe 2.1x so the market valuation might rise to £2.1m.

Turnover isn't the only factor that will increase the market value of your business, there are 7 other things you can build into your business strategy that don't involve growing your business massively to increase its valuation.
2 Recurring revenue
The nature of turnover is often just as important as its absolute size. £1m worth of product sales might generate a similar EBITDA to a second company that makes £500k of product sales plus £500k of annual maintenance agreements. Most of the £500k of maintenance agreement revenue will re-bill to the same customers every year producing a guaranteed income stream. The company just selling product will need to work much harder every year to generate new sales to hit its turnover target.

As you develop your strategy to maximise the market value of your business consider how you can build recurring revenue. There are lots of different ways to do this. Many online businesses have monthly membership schemes. Hobby businesses often have members clubs. Supermarkets have loyalty schemes. What might work in your business?
3 Cash requirement
Some businesses need much more cash than others. A business that is a strong cash generator will be worth much more than one that needs a big cash investment as it grows. Often this is down to the billing model. If you win a contract, then you do the work before you bill the customer, and you wait a month for payment, you tie up a lot of money in working capital. Each time you grow the business more and more cash is tied up in working capital. If your business is able to make a sale and get paid immediately then this problem goes away. Cash can be in the bank before suppliers and staff need to be paid. As the business gets bigger it generates cash rather than consumes it.

A buyer will think very carefully about the total amount of money he needs to invest in a business. Not just the purchase price. Often a purchase is made with the express intention of growing a business. The purchase price might get discounted because of the further cash the new owner will need to find to...

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