How to Maximize the Value of Your Business

Picture a magic slot machine. Each time you pull the arm, you make back a multiple of whatever you wagered. How much time would you devote to cranking that arm?

When it comes to the value of your business, you can make many bets, but only one has a virtually guaranteed return. Most companies are valued on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), so every dollar of incremental profit you earn in the short term will translate into a multiple of that down the road. 

Since most acquirers look at three to five years’ worth of financial reporting, squeezing out every extra dollar of profit makes even more sense if you’re considering an ownership transition in the next three to five years. 

For an example of a founder obsessed with finding every dollar of profit available, let’s look at Derek Morin. Morin founded Tabarnapp to create after-market sales applications for Shopify website owners. 

The business was a success, but when his partner, who handled finance, left the company, Morin was forced to look closely at his profit & loss (P&L) statement. Morin saw potential improvements, so he made notes in the margin next to each line item he wanted to change. 

To save time, he started using a single letter beside each entry to represent the action he wanted to take:

P stood for “Plus,” something profitable, and he wanted more. 

U stood for “Unnecessary,” an expense he could eliminate. 

R stood for “Replaceable,” a cost that could be replaced with a better or cheaper option. 

E stood for “Equal” and was used for items that should be left untouched. 

Morin realized his shorthand notes could be organized into a memorable acronym he referred to as “PURE.”

Morin treated the PURE method like a game. Every month he scrutinized his P&L with the same four-letter system. Morin engaged his team to act on each item that needed improvement. He became obsessed with squeezing out a few more dollars of profit every month. 

His game worked. In 2020 Morin had bought out his business partner in a deal that valued the company at around $400,000. Two years later, after applying the PURE methodology of improving profitability, Morin sold Tabarnapp in an agreement that implied a roughly tenfold increase in the value of his business.

Let’s not forget that privately-held companies operate to minimize taxes, while publicly held companies operate to maximize earnings.  If you do use your company as a personal puggy bank, as most entrepreneurs do, you need to keep track of these personal or non-recurring expenses.  Keep a ledger of these expenses, ideally five years worth.  If these expenses are well documented when presented to a potential acquirer, they will be less challenged by any potential buyer.  Any investment banker representing you in a potential sale will present these expenses as ‘adjustments’ to your companies EBITDA, which can be substantial.  If your company is properly represented, you will receive a multiple on these profits that have supported you and your family over the years.

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