🏦 [Finance] How to maximize your valuation

How to use 👇

Thoughts on how to what drives the valuation of your company and how you can make is as valuable as possible.

Template 👇

Due Date
Status
Done
Category
🤑 Finance
Sellability Impact
High

💡 What?

💡
A valuation is the practice of putting a price tag (value) on your company.

❓ Why?

💡
If you ever want to sell your business either partially or fully and reap the benefits of your hard work, potential buyers will value what your business is worth in $ within a so-called valuation. Your aim as a founder therefore should be to understand the different levers of a valuation and how to influence them, to receive the maximum amount of $ possible.

💪 How?

💡
There are a thousand different business models with the unique value levers for each company. However, if you focus on the list down below, you are most likely adding some decent value to your business.
Read the
📚
Basics
, or continue below if you already understand valuation

🪄 Lever #1 - Have a plausible and catching business plan

If you don’t already have one, draft a business plan with the key components outlined above.
Make sure it is plausible, coherent and follows a attracting overarching narrative you are able to defend.
Make it a habit to revisit your plan over time and iterate on the basis of new findings/changes in the market.
Use the key insights you generate from crafting/updating your own business plan to continuously refine your business.
Make sure you keep and continuously update a list of your main competitors and their ways of trying to steal your market share. By being on the lookout you can foresee market changes and safeguard a potential monopoly position, hence your top-line.

🪄 Lever #2 - Know key levers of your cash flow and how to impact them

Learn to read and influence your Cash Flow Statement for it is the final verdict of what is left after everything is said and done → If you don’t know how to read one here is a good intro article
Brainstorm ideas on how to increase revenues with the main levers: Price, Customers, Retention, Churn, Upsell Potential etc.
Always stay on top of your expenses by having a tight bookkeeping, hence identifying potential for cost reductions, within reason.
Crafting your own P&L or having your accountant walk you through one is a good starting point to understand where you are spending money and what could potentially be improved.
Automate as much as possible early on to increase efficiency and reduce P&L-heavy labor costs.
Improve your working capital (the funds needed to run your day-to-day operations) by:
Pre-charging customers for your services/products
Having customers pay bills on time or reducing the payment deadline altogether
Outsourcing your receivables to a factoring agency (they usually take a cut of the amount outstanding)
Negotiating better payment terms with your suppliers

🪄 Lever #3 - Diversify internally and externally to reduce risk

Make sure you have a tight documentation in all of your business processes to reduce truck factor (see above) and the overall dependency on specific personnel or knowledge holders.
Have a rough back-up plan for every one of your key people so the “show can go on” shall they evaporate into thin air.
Step by step, fire yourself from the different operational positions you are doing to show investors they can run the ship w/o you after an acquisition.
Pro Tip: Take a vacation and see how your business operates, reinforce where the business breaks down
Diversify within your top line:
Have as many different customers as possible (preferably from different economies) without any of them holding a major chunk of your monthly revenue.
Rule of thumb: No one customer should represent more than 15% of your revenue
Try to base your business model on recurring revenue, since they are much “safer” and predictable than “one-time” purchases or agency work. The following are the 6 types of recurring revenue from least to most valuable:
  1. Consumables (e.g. coffee)
  1. Sunk-cost consumables (e.g. Nespresso Machine)
  1. Subscription Revenue (Magazines)
  1. Sunk-money subscription (Bloomberg Terminal)
  1. Auto-renewal (subscription without start and end date)
  1. Contract revenue (customer is contractually required to pay, e.g. phone)
Diversify within your cost-structure → Have a back-up plan for all your crucial suppliers so you are more independent when it comes to price increases or outages.

🪄 Lever #4 - Have a tight grip on your financials and forecasts

Run a tight ship when it comes to your financials to get insight into key value drivers like revenue, costs, profit, cash and so on - here is how:
Invoice correctly (a no-brainer, we know)
Implement monthly reporting of your key value drivers (e.g. revenue, cost. profit, cash flow).
Draft a P&L (maybe even on a product level) to check profitability and forecast where you are heading with your business/product within the key value drivers.
Revisit the forecast on a regular basis to spot incoherence and improve accuracy.
Calculate your run rate to spot cash leaks and a potential need for fresh cash by doing:
A simple direct cash forecast → Ask us for a template!
A fully integrated 3 statement model (advanced) → We can help with that as well! :-)

🪄 Lever #5 - Make a good case for future potential, but keep it realistic

Make the best estimate of your growth, both within the top line but also your overall profits and cash flows, by using lever #2 & #4
Always consider the impact of scaling on e.g. your operations/infrastructure/market positioning hence costs and how those translate into the profitability and ultimately cash flows of your business.
Tie everything together (e.g. your business plan, forecast, historical numbers, key value drivers) into a plausible, coherent and attracting overarching narrative for your potential buyer.

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