By Phil Harwood
The value of your business is enhanced by the presence of specific things. So let me ask you if these things exist in your business. If so, to what degree? If not, this blog post just might inspire you to do something that will make a tangible improvement in the value of your business.
Business valuation is the process of determining the economic value of your business. The economic value is what someone is willing to pay. It includes both tangible and intangible things, some of which are relatively easy to place a firm value on and some of which are less easy to place a firm value on. For example, a piece of equipment is relatively easy to value whereas a business’ reputation is not as easy to value.
In the area of sales, there are a number of things to consider when trying to determine the value of a business. The Big 3 are as follows:
- Recurring Revenue
- Customer Retention
- Contract Length & Duration
The more revenue that is obtained from recurring services, the more valuable a business is since this revenue is likely to continue into the future. Revenue that needs to be resold every time is less valuable to a buyer since it may or may not be able to be obtained in the future. Many business owners have made strategic shifts toward maintenance services and away from project work for this reason.
The goal here is not 100%, as you might expect. It is actually a good thing to drop off a small percentage of customers each year and replace them with better customers (higher margins, less of a pain, etc.). Year-over-year high retention rates (over 90%) indicate a healthy business that takes care of its customers and does quality work.
Contract Length & Duration
I know, I snuck in a two-fer on you. This is actually two different things. First is the contract length. Multi-year contracts are more valuable than one-year contracts. Even with termination clauses, the likelihood of a contract being terminated for reasons other than cause, are small. When looking at contracts, 2 years is better than 1 year but 3, 4, 5, 6, and even 7-year contracts are not unheard of. The longer term the better, as long as price adjustments are included in longer term contracts.
Regarding duration, contracts that have been in place for many years or decades are more valuable than first year contracts, for obvious reasons.
How do you stack up? If you were to invite me to assess your sales department on these three aspects, how would you perform? What items stand out to you as possibly needing attention? Feel free to email me at Phil@GrowTheBench.com with questions or to schedule an assessment.
If you are looking to beef up your sales department for next year, I invite you to check out the free sales course at GrowTheBench.com or, if you would like a deep dive, we offer a free all-access trial subscription for 30 days.
Now go forth.
Tags: Value , Retention , Sales , Customer , Valuation , Revenue , Contract ,