5 Major Drivers of Value

Hey value-builders,

Welcome to the Better Business Brief, where I share takeaways from:

running a business I’m building to sell for millions
my consulting with business owners building to sell for millions
tips and tricks you can use to do the same

I was asked recently what the top 5 ways to increase the value of a business are. This is important for 2 types of people:

Someone who wants to sell their business one day for a great price
Someone who wants to buy a business one day and wants to understand what makes it worth paying for

I figured I’d share these 5 and elaborate a little more.

So today, in less than 5 minutes, I’ll give you:

📈 The 5 Main Drivers of a Business’s Value

💵 Why Each is Important as a Seller of Businesses

🫰 Why Each is Important as a Buyer of Businesses

In reality, there are much more than 5 things that drive up the value of a business, but when boiling it down to 5, I think it’s important to focus on the major ones.

Owner removal - the less that the business owner is doing in the business day to day, the higher end of its value it can sell for. This is because no one wants to pay tons of money for a full-time job. People value their time, and they will be willing to pay more for a business that already has people in place to run it. If you’re thinking of buying a business, you should look for one that will not require you to take a big role in the day to day operations of it, because this would prevent you from taking other opportunities.
Recurring revenue - so many companies operate off of handshake agreements, but contracts are where it’s at. Specifically long term contracts where there is some predictability of revenue. The more recurring or predictable revenue your business has, the more someone will pay for it, because they are paying for an amount of future cash flow that is very likely to happen, or even contractually guaranteed. As someone thinking of buying a business, it should be worth a lot for you to not have to fight for every dollar every month. Existing agreements make it a lot easier for you to keep the business running smooth and know what it’s going to make every month and year.
Documentation of ALL business processes - the more granular, the better. My business partner’s go to phrase is “it should be documented so well and simply that a McDonald’s employee could step in and run it”. This is called having standard operating procedures, or SOPs. If you have SOPs in place, you can more easily grow your business, because when new people come in, it’s easier to show them what to do. If you’re planning on selling your business, that ease of scalability is worth a lot to a buyer, and if you’re thinking of buying one, you should jump at one that you can grow a lot more quickly.
Cash. flow. - strong cash flow is literally the most important on the list. The value of the business goes up exponentially as it increases, not just linearly. So for example, if a $500k cashflow/year company is worth 3x ($1.5mm), a $1.5mm cashflow/year company might be worth more like 5-6x ($7.5-9mm). There’s nothing that will increase your business’s value more than having more cash flow, so if you want to sell for a certain price, you must focus on profitability and growing in size. As someone wanting to buy a business (especially for the first time), this is where you actually might want to shoot for a little smaller, because you will not have to pay as much of a premium for your cash flow.
Finding the right buyer - a business is worth what someone is willing to pay for it at the end of the day. No more, no less. The more it can make someone money, the more you can ask if you are selling it. I always say that you should look for a strategic buyer as a seller, because if there is some strategic advantage it provides someone in their business, they might pay more for it. As a potential buyer, you should think of this too, because a business may be worth a lot more to you for some reason you haven’t thought of yet. It’s important to ask a lot of questions and try to uncover every angle of opportunity.

There are MANY things, if not unlimited things that could drive up the value of a business, but these are a few of the most important to hone in on, and the ones that make the most difference. If you’d like to know what it would look like for these to be personalized to your business, I’d love to talk about it: Grab some time with me here and we’ll make sure your plan is on track.