Increasing the Value of Your Business With The Value Builder System (VBS)

Knowing the eight drivers that determine a business’s value is the first step to knowing what your company is worth

Different business owners are, well, different. They practice different leadership styles, sell different products, and employ different strategies. They all have one thing in common, however: they want to increase the value of their businesses.

And whether you plan on exiting your business in the near future or staying on for a while longer, increasing its value through concerted, concrete steps must be a priority.

What is your business worth?

It’s a straightforward question, but one that puzzles many business owners. After all, every company is unique, which often makes the art of valuing a business something of a “subjective science.” Certain factors are based on the business itself—such as the net value of its assets, for example—while others are the result of outside circumstances, like the sales of comparable businesses within the same industry.

In most cases, businesses are valued as net profit times multiple. The multiple is applied to a specific financial metric of a company to calculate its valuation. The most common financial metrics that multiples are applied to are:

  • EBITDA, or earnings before interest, tax, depreciation, and amortization
  • EBIT, or earnings before interest and taxes
  • Net earnings, or earnings minus the cost of goods sold, taxes, and expenses during a period of time
  • Revenue, or the earnings a company receives during a period of time

Put simply, the multiple is as a measurement of risk—the higher the multiple, the less risky the investment for a buyer. To increase the value of their business, owners must do one of two things: increase profit or increase the multiple.

The VBS: an introduction

Business valuation professionals use a variety of methods to help owners determine what their business is worth and increase its value. One of the most comprehensive and highly regarded methods is The Value Builder System or The VBS. The brainchild of John Warrillow, author of the best-selling book of Built to Sell: Creating a Business That Can Thrive Without You, The VBS is a statistically proven methodology for increasing the value of a company through increasing the multiple.

The VBS differentiates itself from other methodologies based on 8 factors, or “drivers:”

Financial Performance

This is the most straightforward driver, but it’s also one of the most difficult to deliver. It’s made up of your top-line revenue and your bottom-line profit, but there are other elements to consider as well. Have you invested in an audit? If a buyer were to scrutinize your numbers, do they add up?

Growth Potential

Many business owners view their business based on its past successes, but a buyer will typically focus on its potential. What does the future hold? Can this business operate in a different market if needed? Can you cross-sell additional products or services to existing customers? These are all questions that determine a business’s growth potential.

Switzerland Structure

A successful business is an independent one. It doesn’t rely on a particular customer, employee, or supplier in order to operate efficiently or effectively. Some questions to consider: Do you have diversification among your customers and suppliers? Are you overly reliant on a single employee? If not, your business is a risky investment for potential buyers.

Valuation Teeter Totter

The more cash your company needs to operate, the less likely a buyer is willing to pay for it. In other words, your business needs to be generating cash. Can you collect receivables faster? Can you extend your payables? Doing so will help you improve your Value Builder Score.

Recurring Revenue

Have you considered how your business will continue once you leave? Even if you don’t plan on exiting any time soon, this is an important factor in your business’s value. There are six main ways to create recurring revenue. In order from least valuable to most valuable, they are consumables, sunk money consumables, subscriptions, sunk money subscriptions, auto-renewal subscriptions, and contract revenue.

Can you move up this ladder? Can you channel your sunk money subscriptions into auto-renewal subscriptions, for example? If so, you can increase the stability of your recurring revenue.

Monopoly Control

When investing in a company, renowned investor Warren Buffet looks for the durability of a company’s competitive advantage or its “moat.” The wider the moat, the more leverage a company has. This leverage allows a company to control its pricing, which in turn creates more margin, better sales, marketing, and so on. Some questions businesses should consider: Does my marketing make my business different from my competition? And do my customers care? Is this a unique advantage likely to stay unique?

Customer Satisfaction

Happy customers are an obvious driver of a company’s value and success, but it can be difficult to gauge customer satisfaction in quantifiable terms.

Enter the Net Promoter Score (NPS). Your company’s NPS answers the question, How likely will my customers recommend me to their friends? The more data you have on this particular subject, the more you and your potential buyers will know that your customers are satisfied.

Hub & Spoke

Are you the “hub” of your business? If so, the likelihood of your business falling apart once you exit is high. In order for your company to succeed long after you leave, your customers, employees, and suppliers can’t be solely dependent on your contributions. One way to begin solving this problem is by documenting your processes so your employees will know how to operate when you’re not present.

Getting started with The VBS

These drivers come together to determine a business’s Value Builder Score. On average, companies with a Value Builder Score of 80 or above (The highest score is 100) receive offers that are 71 percent higher than the average business.

Now that you know which factors drive a healthy, successful, and high-value business, you can increase the value of your own company. The first step is to find out your business’s Value Builder Score, and an expert business advisor can help you determine this number—and figure out ways to improve it.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact on their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and business strategy, and to find out how we can help your business exceed your expectations.

Business Exit Planning Using the Value Builder System

100 percent of people eventually leave their business. A good exit strategy allows owners to turn a good thing into a better one by protecting assets, building value, and striking the best deal

Entrepreneurs want their business to grow and thrive, and an increasing number also want to sell. Last year saw a record number of businesses sold as a booming market for owners and buyers took shape. Almost 12 million businesses will transition ownership in the next 15 years, representing $10 trillion worth of assets changing hands.

Nevertheless, further data shows that too many owners are far from prepared for their exit:

  • 48 percent of businesses don’t have an exit strategy
  • 58 percent have never undergone a formal business appraisal
  • 75 percent of business owners believe they can sell-up successfully in under a year

These figures don’t go well with the 82 percent of owners who’d rather make money from selling a business than keeping it. Those who want to capitalize successfully cannot do so without a well-structured exit strategy. Even if you don’t plan to sell or transition out in the near future, you’ll eventually need a plan, no matter the size of your operation. And it pays to start planning ahead of time.

Succession and continuity planning

Many exit strategies don’t involve a buyer from the open market. Instead, owners often choose a successor from within. This guide provides the steps for a solid succession plan; a strategy which involves mentoring your successor and setting a clear timetable of their responsibilities and all future transition dates. There are a couple of key considerations when choosing to go this route:

  • Ensuring that you have the right relationships in place is essential. You may have the most power in a business you own, but your exit can be vastly smoothed or shaken by those around you. Many once-harmonious business partners will attest to the fact that acrimonious splits can be a nightmare. Any issues can be avoided (or at least mitigated) by drafting your exit strategy proactively, while key parties are on good terms. It will clarify buy/sell agreements and the best exit strategies will let every employee know that a change of ownership is coming and what it means for them.
  • Be sure to factor successful estate planning and retirement into your exit strategy. Your business may have multiple owners and if so, a cross-purchase agreement will smooth succession, assist in retirement, and guard against unforeseen events.

The Value Builder System: a key to ROI

If you plan to sell your company to an insider or an outside buyer, you want to make it as valuable as possible. The Value Builder System (VBS) is the brainchild of John Warrilow, author of the highly rated Built to Sell: Creating a Business that can Thrive Without You. The VBS makes things simple if you’re looking to attract buyers: to increase the value of your business, you must increase either your profit or your multiple.

Your multiple is driven by 8 factors:

  • Financial performance: Recording your top line revenue and your bottom-line profit is a priority for any exit strategy. Consider investing in an audit so you’re better able to present your business numbers reliably.
  • Growth potential: Your past successes are great, but buyers are purchasing tomorrow, not yesterday. They want to invest in your future profit stream. Can you show them anyways your business can significantly scale up?
  • The Switzerland Structure: Just like the famously neutral country in question, your business should not be overly dependent on any one faction—not customers, not employees, not suppliers. You’ll be considered more of a risk if buyers see you’re too reliant on a single source.
  • Valuation Teeter-Totter: Anyone buying your business essentially writes two checks—one to you, and the other to fund your business’s working capital. The more money it costs to run, the less likely it is to sell. Your operation must be generating enough cash to balance things out.
  • Recurring revenue: There are six types of recurring revenue: consumables (like coffee), sunk money consumables (espresso machines will need capsules regularly), subscription revenue (like magazines, this is a reoccurring revenue for a specified time into the future), sunk money subscriptions, auto-renewal (a subscription in perpetuity), and contract revenue (where a customer is obligated to buy from you in the future).
  • Monopoly control: This means you have control over the pricing of your product; you’re not a commodity. Your business should be in a differentiated position which makes you unique in the marketplace. This empowers you (and whomever inherits your business) to stand out and connect more effectively with customers.
  • Customer satisfaction: This is directly linked to the growth potential for prospective buyers. Can you empirically quantify and demonstrate customer satisfaction to a buyer? The more data you can show that proves your customers are happy and likely to keep buying, the more impressive you’ll be to anyone looking to acquire the business.
  • Hub and Spoke: How much freedom do you enjoy as the current owner of your business? It’s not an attractive sell if your entire life is consumed by its operation. A company that can flourish even in the absence of the boss is much more likely to close a deal. Document, distribute, and drive home your business practices so all your employees intrinsically know their roles and responsibilities. They’ll be more likely to run a smooth ship whether you’re on deck or not.

A smart, comprehensive exit strategy should be put in place early to make sure you maximize the ROI from the sale of your business. If you’d like expert advice on how to exit plan ahead and sell a business tax efficiently, contact us below.

Provident CPA & Business Advisors helps successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and discover how we help businesses exceed expectations.