There’s a good chance the last thing you are thinking about right now is selling your startup. While it may be part of the plan—everyone wants to cash in for multi-millions someday—in the beginning, it’s hard to see how you’ll get to this point. Cash is tight, and you’re working a ton, so it’s hard to look too far down towards the end of the tunnel, never mind see the light.
But just because the eventual sale of your business is still a ways away, it doesn’t mean you shouldn’t be thinking about it. Taking the time to assess the value of your business is a useful way of analyzing your current situation. Once you do this, you can determine where you should be focusing more energy to help make your business grow.
It’s never too early to start preparing your business for a sale, but it can quickly become too late. Even if you never end up selling, plotting out what your exit strategy is and how you will execute it is a useful way to assess the state of your business, determine where you need to improve and set yourself on a course for a big payday when it does come time to sell your business.
1. Determine your exit strategy
The first thing you’ll want to do is to decide which exit strategy you’d actually like to pursue. The most common exit strategies are:
- Initial public offerings (IPOs)
- Selling the business to an individual or group
- Merging the company with a larger, similar entity
IPOs are the most profitable. They are the big leagues of exit strategies. But they are also the most unrealistic. Very few startups actually end up having an IPO that turners the owners into millionaires.
Mergers are also hard to depend on. You need to wait until a specific organization is looking to expand, not just someone looking to make a profitable investment.
Plus, if you focus your efforts on merging with another organization, you run the risk of trying too hard to fit into their model. As a startup, you need to differentiate yourself, not be a copycat. Now if a company comes along and makes an offer, that’s a different story. But it’s better to plan for another strategy.
This is why it’s usually best to plan to sell the business to an individual or group. These people are often merely looking for a good way to spend their money that will give them a good return.
By focusing on selling your business, you are making sure that you dedicate all your time and energy to doing what makes you successful. It stresses the importance of concentrating on your target audience and the benefits you provide to them. This razor-sharp focus is what helps startups breakout and become full-fledged companies.
2. The game begins with sales and revenue
When determining the value of your business, the starting point will always be the financials. The general rule of thumb is that your business is worth 2.5 times your yearly revenue. So, the first thing you want to do is put your accounts in order. Figure out exactly how much you’re bringing in and get a handle on your cash flow situation.
This will give you a number to work from. There are other things that affect the value of your business, which we’ll go over in a minute, but getting to this number is an important first step.
3. How are you generating new leads and how much do they cost?
Once you’ve hammered out your revenue numbers, the next thing you’ll want to do to assess the value of your company is to figure out how effective you are at bringing in new customers, and what is the cost of doing so.
Anyone looking to take over a business will want to see that there is a functioning system for bringing in clients that helps support the profitability of the business. They’ll also want to know that the system is sustainable. If you’ve been relying heavily on SEO and plan to keep doing so, what research do you have to support this being the best strategy moving forward? If you plan to branch out into new areas, where’s the proof that this will bring results?
Knowing the answers to these questions will help you get a better idea as to how you are going to grow the company, and it will also make it more valuable, as it shows investors there is a clear path to growth already laid out.
A good exercise to do is to take some time to figure out how much you are spending to bring in new customers. One easy way to figure this out is to take the total amount you’ve spent on marketing and lead generation—this could be SEO, seminars, product samples, trade show presentations, etc.—and divide this number by the number of genuine leads these efforts actually produce. It’s best to do this over the course of a larger period of time—such as a year—since there will be a time lag for some of what you do. This will give you a general idea as to what you are spending to generate each new lead.
However, you’ll want to go a little further than this to figure out things such as the cost per inquiry, as well as the cost of qualifying an inquiry. These numbers will help you get a much better idea as to how much you are paying to bring in new customers.
This is extremely valuable information not only for your investors but also for you as the head of a startup. Keeping track of expenses is essential for any new business, and you want to make sure any investments you make are producing the best possible returns. By giving yourself a snapshot of your leads generation process, you are helping to assess the value of the business, as well as identify the areas where you’re performing well and those where you need to reconsider your strategy.
4. How well does your business run?
Building off this, one of the things to look at to help figure out how much your startup is worth is to examine how efficiently it runs. For example, how hard would it be for you to figure out the costs of generating new leads? If it would be a major production to gather the data, analyze it and draw conclusions from it, then there’s a pretty good chance you need to spend some time optimizing your systems and processes.
Also, an interesting thing to think about is how well the business would run if all of a sudden you had to step away. While it’s important for startups to have a passionate leader or team of leaders, the operation is unsustainable if it depends too heavily on just one person or group.
Consider how well you’ve defined roles, outlined processes and invested in tools to help make it easier for the company to run. If you expect things to blow up upon your departure, there’s a chance your business isn’t as valuable as you may think it is. Investors will want to stay away from these types of companies, and quite frankly, you don’t want to run one like this.
5. Assess your risks
One other helpful way to determine the value of your startup is to do a full risk assessment. When companies first get going, and especially when they start having success, they often get blinded by a false sense of invincibility. This can lead to tunnel vision, and this can cause you to overexpose your business to certain risks.
For example, how dependent are you on one product or customer base? What are some things that could prevent you from selling your product to your customers? Are there any troubling trends in the industry? Or is there anyway Mother Nature could interfere with your opportunities? What about potential governmental regulations? There are any number of things that could affect your business, and you need to have a clear idea as to what they are.
Businesses that fully understand where they are vulnerable and that have plans in place to mitigate these risks are more valuable to own. This is true not only because they are in less danger, but it also demonstrates a company culture that is focused on ensuring growth well into the future. If you don’t have good contingency plans or diversification strategies, it’s a good idea to make this a part of your planning now before it’s too late.
Taking some time figure out the value of your business is a worthwhile exercise for any startup. It helps to not only give you an idea as to where the company is, but it also is a good way of determining where you need to be focusing your energy. Furthermore, the earlier you start thinking about building value into your business, the better. It will give these strategies more time to work, meaning a bigger payday when the time finally comes to sell and walk away.
Editor’s Note: This article is part of the startup tools blog series Start Your Business brought to you by the marketing team at UniTel Voice, the virtual phone system priced and designed for startups and small business owners.