Many entrepreneurs dream of selling their business one day for a life-changing sum of money. In the shorter term, they may want to raise money from investors and get the best possible valuation to reduce the amount they dilute their own ownership. There are dozens of way to calculate a credible valuation in theory, but ultimately the value of a business is determined by what the buyers and sellers agree on.
Here are the three most dominant factors that influence what your business will be worth in the market.
1. The revenue model
The ultimate revenue model is an upfront purchase that covers costs and generates a profitable recurring revenue that continues indefinitely into the future. Prior to market saturation, mobile phone businesses fit this model brilliantly, with customers paying for the handset and then the monthly bills. Most of the costs in acquiring a customer were covered on the first purchase, and then the monthly plan was profitable very quickly. Recurring revenues are the holy grail for investors in today’s markets, with SaaS structures attracting the highest valuations. If your business has the opportunity to add predictable subscription revenue, this will be the most attractive part of your revenue model.
2. The underlying assets of the business
Up until the year 2000, the most valuable assets were physical. Assets like plant, equipment, land, buildings, heavy machinery or vehicles made up the bulk of the balance sheet, and the valuation wasn’t far off it. Today, the most valuable assets are intangible. The brand, systems, data, culture, intellectual property and positioning are all considered to be far more valuable than anything you could put your hands on. Many of these assets require more creativity than cash, which is great news for entrepreneurs who can outclass big corporations when it comes to rapidly developing this type of value. If you want to maximize value in your business, formalize your intangible assets with media, technology, designs, contracts and formal registrations so that your strengths are clear.
3. The operational team
Having a team of talented people who work well together, understand the business and are committed to hitting future goals is considered an asset. Big companies often struggle to get great people working together in high-performing teams, and the “acqui-hire” approach has been the cornerstone for many successful business exits. If you have great people, be sure to train them, develop them and get them enrolled in the long-term success of the business.
Great people, strong assets and predictable revenue; these three factors push the value of an enterprise through the roof. Businesses that fail to achieve a valuation tend to rely upon one or two people, have lumpy incoherent revenue and don’t have any unique proprietary assets in development. Once a business focuses on developing these three areas, it will have no problem agreeing to a solid valuation with an investor or acquirer.
Written by Daniel Priestley – Entrepreneur