What Most Business Owners Miss About Growing the Valuation of Their Businesses

What really drives growth in the valuation of your business?

Likely you’ll say revenue and EBITDA, and you’re partly right. Your numbers tell a powerful story about your previous business success.

The story those numbers may not reveal is its future growth potential, and for that there are 24 other valuation growth drivers you’ll want to understand so you can operationalize them now in your business.

I’ve personally founded and grown six businesses to high nine-figure exits, and as the CEO and founder of Zero Limits Ventures since 2010, I’ve helped more than 400 small to middle market companies across all sectors and stages significantly accelerate valuation gains by as much as 5X (sometimes much more) using a proprietary value assessment and enhancement process.   

Along the way, we’ve pioneered what we call the Zero Limits Ventures Valuation Growth Assessment.  This process involves the deep analysis of 24 discrete value drivers and accelerators all businesses share in combination with a robust analysis of the value interests of the prospective buying market. By addressing the company’s value gaps and leveraging the company’s value advantages to align with the key value interests of a pool of well-defined ‘right buyers’, this process dramatically accelerates the realization of real value gains by the business owners and stakeholders.  

Now, you may say “I’m not selling” or “It’s too early to think about an exit”, and that’s fine. 

I’m here to tell you why you should still be thinking about operationalizing valuation growth long before you start to think about succession or exit.

Fact is, in my experience, too many businesses approach us to sell when they’re on a down curve, or when they’re burned out, or they’ve had a challenging life event. No one has 20-20 vision, so it makes sense to think about growing your valuation now.

Over the coming weeks here on LinkedIn, I’ll be sharing detailed explanations of each of the value drivers and accelerators, along with some illustrative examples so you can apply these to your own business growth. And I’ll be standing by to answer your questions or comments.

In the meantime, I want to share with you here the Four Key Principles of Value Acceleration that really govern the development of a sound valuation growth strategy. 

The first principle is the risk / value equation. It's sort of an umbrella principle that overrides almost all other aspects of this work. It is best stated:

The higher the risk of ownership of your business, the lower the value of the business. 

The lower the risk of ownership of your business, the higher the value of the business.

And so, to maximize value, you want to minimize risk.  Anything you do that reduces the risk of ownership is going to increase the value of the business.  For instance, shifting to a continuity or recurring revenue model, decreases risk and increases value.  Or, systematically improving employee satisfaction and increasing retention rates, decreases risk and increases value.  Or, increasing competitive market share, decreases risk and increases value.

The second principle is that the term “Valuation” does not equal “Transaction Value”. What I mean by this is that most business owners, bankers or brokers speak about the value of a business in terms of something called a “Valuation” or a “Valuation Multiple”.

A “Valuation” is often used as a numeric representation of the value of a business, based principally on a combined set of calculations using revenue, earnings, and other market factors. In many cases multiple valuation methodologies are used, which are then combined in a weighted form to provide a representation of fair market interest in a given business or industry.  

The problem with “Valuation” is that it does not represent the vast majority of the real value contributors to a given business, as it focuses all value determination on just two of what in practical terms are hundreds of value affecting factors.   Indeed, if it were the case that the value of a business is truly represented exclusively by revenue and earnings (or EBITDA), then how could the value of businesses like Amazon or  SnapChat, at one time worth tens of billions of dollars with NO revenue and NO earnings, be explained? Think about the massive valuations now being applied to the many new Artificial Intelligence startups, most wildly unprofitable, and many without revenue.

Our approach at Zero Limits Ventures is to separate “Transaction Value” from “Valuation” and represent the actual amount you, the business owner, can truly and reasonably expect to receive for your business if you were to decide to sell it.  Transaction Value incorporates all 24 value driving and accelerating factors as well as factors specific to the prospective buying market and more to provide the basis of a true value expectation for the business in a given market.

So instead of using the common two factor (Revenue and EBITDA) determination value of a “valuation”, we show over and over again that the 24 value drivers and accelerators derives a much more meaningful, useful and accurate representation of the true ‘transaction value’ of your business.

The third principle is that “businesses are sold, not bought”. 

Most bankers and brokers approach the market with a valuation, and they put the business out on the market for sale and start entertaining offers. That's a "businesses are bought" approach to the market. With that approach, a business owner is allowing the market to determine what he or she should expect to receive for his or her business, regardless of any special value advantages or other factors.  

Here’s what that approach misses: Every prospective buyer is going to value your business differently.  The value they place in your business is going to be based on factors that are related to how much more valuable their business will be by owning your business.  Your selling objective is to find the buyer who will value your value strengths more than any other buyer.

Compare two prospective buyers, Buyer A and Buyer B.  Assume Buyer A is most interested in buying you for your predictable and growing customer acquisition, growth and retention capabilities.  While they value all aspects of your business, their principal interest is in buying your business so they can leverage your customer acquisition, growth and retention advantage to make their own business more valuable.  

So sticking with this illustration, let’s say they place a value equivalent to 5X your trailing 12-month EBITDA to acquire that advantage for application in their business.  At the same time perhaps Buyer B’s principal interest is some other aspect of your business, perhaps your intellectual property (IP) or your people.  And, for illustrative purposes, let’s say they place a value equivalent to 3X your trailing 12-month EBITDA to acquire that value advantage for their existing business.

In this case, the value advantage associated with your customer acquisition, growth and retention capabilities is a more significant contributor than the IP or people factors. Assuming all other factors are the same, the ‘right buyer’ advantage would be the buyer whose principal interest is in your customer acquisition, growth and retention advantage because it drives a higher exit multiple.

The Right Buyer is the buyer who will place the most value on the elements of the business that fill the value gaps, address the value constraints, and maximize the value growth and acceleration potential of their own business most effectively. By knowing and understanding the value advantages present for each prospective buyer of your business, you are in a position to sell to these advantages and maximize the rate of return ultimately realized.

Not only will the “right buyer” value the business more (pay more) than the average buyer, but by virtue of the resulting alignment in interest, culture, priorities, mission etc., they will provide a superior and more harmonious and successful long-term outcome as a result.

The fourth principle is that an “exit strategy” is not about the “exit”; it's about the “strategy”.  

Most business owners don’t think much about an exit.  When they first start their business, they’re usually consumed with the excitement of innovation and the complex issues associated with finding product-market fit and gaining entry to an active and competitive market.  

As these businesses gain traction and grow, the focus shifts to establishing revenue and earnings momentum and achieving a level of predictability in their growth forecasts.  They’re too busy growing to think about exiting.  

The truth is that most business owners don’t stop to think much about an exit strategy until years later when it’s too late to realize the optimum returns without considerable additional investment and effort - and all too often that’s a tragic mistake.

I can't tell you how many times I’ve had conversations with business owners who conclude that because they’re not selling right now, they don’t need to think about an exit strategy and keep on doing what they’re doing to grow revenue and earnings, assuming they are growing value, and will visit an exit strategy later.  

As entrepreneurs and business owners, we all know there is much beyond our control on the journey - changing trends, new competitors, disruptive technologies like Generative AI upending whole markets. I’ve seen too many companies miss their optimum moment, only to decline and fail. One such company several years ago could have sold for $150 million, and is now worth at best $5 million. That’s painful. 

I joke that in business we can all choose to be “right or rich”. When we’re succeeding we can all fall into the trap of being right only to ultimately miss the mark on being rich.

Building a business without a valuation growth and exit strategy is a lot like departing on an epic journey without a destination.  If you don't know where you’re going, how can you possibly make any decisions along the way about how to get there?  How do you know what direction to go, when to turn or change directions?  How fast to travel? What mode of travel will produce the best outcome? 

An exit strategy is not something that just randomly happens some day in the future.   Instead, it is an intentional and carefully planned process of:

• Identifying, characterizing and qualifying potential suitors.
• Aligning the company properly in the right high-value markets to achieve maximum value for the business.
• Leveraging specific high-return value drivers for each prospective buyer.
• Preparing the company internally and externally to garner the maximum value or price at acquisition.

Here are the 5 Top Reasons why every business needs a real exit strategy on Day 1:

• Establishes key Value Drivers for your businessFocuses your efforts on what makes your business worth mostPositions your business optimally in high-return markets  
• Forces highest-return decision priorities on all areasProduct developmentMarket selectionBusiness modelSales and marketing strategiesManagement and employee alignment RecruitingCompensation and vestingFocused use of proceeds and profits
• Drives 100% to 400% larger financial returns
• Defines the Company’s mission 
• Enables for startup and growth funding

If you’re like most entrepreneurs and business owners, this is likely a whole new way of thinking about your business.

It doesn’t mean you have to sell your business now or for a long time. It just means you’ll understand the specific buying dynamics and interests that exist with the business that you're building, and manage the business into the optimum position for the highest value “right buyer” when the time is right so you can be assured the wealth creation and legacy that is yours to have.

Please watch my LinkedIn over the next several weeks as I outline all the 24 value accelerators. I’ll be standing by to answer your questions, and you can also learn more here.

Thank you for your consideration and interest.

Steve