Everyone would like a higher valuation for their company. The trick is to know what you need to do to increase that. It is important to break it down into several components and take a look at the pieces:

1. Increase the earnings or revenues. Certainly, the most obvious way is to improve the performance of the company since the value’s based on a multiple and the higher the multiple you have the higher the valuation could be due to that. So what can you do to increase the earnings, in particular the ebitdah of the company?

2. Grow your revenues. The multiples aren’t the same for all companies. Companies at higher sizes can command higher multiples of earnings than those in the same industry, but a smaller size. The difference could be significant. A company doing over $100 million might have multiples 50% or more higher than a company doing $10 million.

3. Lower the risk. It can also be a function of the risk. The higher the risk the greater the discount’s going to be on your company. If you can do some things to reduce the perceived risk in the company, this could help improve your valuation in discussions with investors. For example, having a steady flow of product revenues versus consulting revenues can be perceived as being less risky. Having long-term contracts with renewals paid upfront can be less risky. Other types of agreements with customers could also help. Conversely, perhaps, sources of supply are a risk. What could you do to lock in long-term pricing or assure access to materials, people or other critical supplies?

4. Move up the timing. If you can hit a certain target three years from now, as opposed to five years from now, that helps your valuation too. The further out your expected returns are the greater the discount there is to bring it back to the present. What could you do to accelerate the process? Suppose you raised additional capital beyond what you were thinking of that would allow you to accelerate product development or bring on board additional salespeople or open up a new major sales channel sooner. The tradeoff might be well worthwhile.

So there you have it, several factors that could increase your valuation. Obviously, the first is one you would’ve thought of, but some of the others might not have come to mind. So you have to think what combination of these could help take the valuation up? Sometimes there might be a tradeoff. You might have to balance between taking in more investment now and having higher developmental spending versus getting more revenues and earnings down the road. You might want to take a look at different scenarios and find which seems to have the most balance.

So think more than just having to increase your earnings to raise your valuation. Consider all the factors and you might find some new angles that you didn’t think of. Take action on them now and reap the rewards in your valuation later.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value