How to make more profit if you want to sell your business
Most startups begin a business without much thought as to how they will end the business. They also tend to build a business around their technical skill – builders start construction companies, chefs open restaurants, accountants start an accountancy business. The trouble is, these technicians get so involved in ‘doing the work’ they forget about why they are in business in the first place, which for most people, is to sell it, explain Kobi Simmat, author of How to Build a Business Others Want to Buy.
If you want to sell your business ten years from now, my advice is to start with the end in mind and act as if you will sell the business from the moment you begin it.
I didn’t do this. I started my business improvement consultancy when I was 29 years old, and wasted ten years working out why I was in business to start with. I sold it recently for an eight-figure sum but if I did it all again, I’d do things differently. I want to share that hard-won wisdom with you so you can get to where you’re going more quickly.
First up, it pays to know what a buyer looks for when buying a business. The # 1 metric they look at is profit. I know that runs counter to the prevailing wisdom of the start-up community where revenue, downloads, trials etc are the flavour of the day, but that’s not the world I operate in. I run a real business with real people who make something that others want to buy, who pay us in real money, and then we do it all over again.
Learning how a buyer might value your business and make you an offer is instructive. In short, if your business made an average profit of $1 million in the last three years, a buyer might use a multiple of x 5 to value your business, which means, roughly speaking, your company is valued at $5 million e.g. $1 million x 5 (multiple) = $5 million. (In investment terms, the buyer invests $5 million to buy your business; in the short term, they will get a 20 per cent PA return on their investment.)
Yes, you can use those other metrics e.g. revenue, to value a business, but profit is what you should aim for. How do you work out your net profit? In simple terms, net profit is the money you get to hold onto. The number comes last on the profit and loss statement, which is why it’s called ‘the bottom line’.
The calculation looks like this:
Net profit = Gross profit (or total income) – all expenses
Example:
Your pottery business sells $20,000 worth of hand-made plates per year. It costs you $11,000 in clay, paint, labour (your time) and studio hire to make them, and you pay $4000 in tax to the government.
Result:
$20,000 – $11,000 – $4000 = $5,000 net profit
To calculate the ratio, you need to divide net profit by sales and multiply by 100 to get the percentage:
$5000 / $20,000 x 100 = 25 per cent
To make your business attractive to a prospective buyer:
This figure needs to be greater than 20 per cent.
How to make more profit
- Sell more of what you offer
Let me guess. You hate selling. Most technicians do. All that prospecting, following up, customer care, nurturing – they hate all of it! Fear of selling is the #1 reason most technicians remain small and a cottage industry. It doesn’t have to be this way.
Believe it or not, there are people out there who actually love selling. They thrive on the thrill of the chase and love nothing better than getting on the phone and taking prospects from cold to sold. Yes, they are a unique breed, and they are worth their weight in gold. You are one phone call or one LinkedIn click away from finding that person. Start looking for them now.
- Put your prices up
I know you’re afraid to put your prices up. You’re scared you’ll lose customers. But put it this way – if you doubled your prices, would you lose half your customers?
Pricing is inextricably linked to value. We focus way too much on the price of things without thinking about the value we offer in return. Most people struggle to remember the price of what they purchased even just a few hours after they’ve bought it. Pricing is one of the most neglected areas of marketing, yet it is the easiest lever to pull and can have the biggest impact. Write this on a Post-it note and pin it up on your wall:
‘When value exceeds price the clients will flow.’
If we can demonstrate value, price becomes irrelevant. Buying becomes a ‘no-brainer’.
Profit matters. If you plan on selling your business, I would say it’s the only thing that matters. Start focussing on it today; when it comes time to sell, you’ll be glad you did.
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