Value is the quantity of revenue and profit multiplied by the quality of revenue and profit. Businesses need engines that create value by improving the quantity and quality of revenue and profit.

Every industry has a range of multiples on EBITDA. (Do you want to know the range for your business? Private message me for insight into the latest multiples by industry.) Average businesses should expect to receive an average multiple. High-quality businesses can command a premium multiple.

Last week when I was speaking to a group of midmarket business owners, I shared this example. Let’s say you are in an industry with multiples ranging from 4 to 8. For this example, let’s say you have $1.5M in EBITDA. Simultaneously improving the quantity and the quality of the business could lead to an 8X increase in valuation.

Average Valuation Characteristics

Average businesses focus on the quantity of revenue and profit leading to average multiples.

1. Revenue Growth: In the pursuit of growing revenue, salespeople are encouraged to “call on anyone you want” and “take down any deal you can,” regardless of the profitability of the account. A few superstar sales reps drive revenue while the rest of the sales team is a revolving door. Marketing is off in their own world, unaligned with sales.

2. Profit Growth: To preserve profit, finance teams cut personnel and expenses, unaware of the impact on customer experience. Since many sales deals are not profitable, the finance team feels the need to slash expenses. Technology is one of the first things to get cut since most technical platforms never get fully integrated and are therefore not used. Processes are documented and followed by most, but it has been a long time since anyone worked on improving them.

3. Strategic Innovation: When it comes to strategy and innovation, all of this resides in the founder’s mind. We hope that they get some good ideas from time to time. However, since there is no system to test, optimize, and package these ideas, many of them never see the light of day. Employees with gifts of innovation surf job sites wondering if there is a company that might value what they bring to the table.

Premium Valuation Characteristics

Smart businesses focus on the quality of the revenue and profit, leading to premium multiples.

1. Revenue Growth: Sales and marketing align to pursue quality revenue from ideal prospects that value what you do, need everything you sell, and have a higher likelihood of being loyal. The Revenue Growth Council team brings sales and marketing together to get clarity on the Ideal Prospect and Clients. They focus the message on the outcomes these people want. They design and document systems for both net-new and cross-sell growth.

2. Profit Growth: Rather than randomly slashing costs, finance teams look for ways to create operational efficiencies and process improvement driven by technology and automation. The Profit Growth Council brings operations and technology together to analyze core processes. They investigate ways to integrate technology like AI to automate these processes. They document the process, developing training to ensure everyone on the team knows what to do and how to use the technology.

1. Strategic Innovation: The company has developed an entrepreneurial culture. A cross-functional team of employees with Working Geniuses® of Wonder, Invention, and Discernment, staffs the Strategic Innovation Council. This group works to innovate in areas like new products and services, go-to-market strategies, and customer experience. They explore emerging industry trends and the latest technology, looking for ways to apply them to the business.

What’s the Value of Your Business?

Most businesses focus on cash flow, revenue, and profit. All of these are important. But the most important measurement is value.

How can you discover the value of your business? You need a value estimation system that combines current data on multiples for your industry with a database of over 50,000 recent business sales. This system also needs to measure the qualitative intangibles that create value.

Fortunately, this system exists. If you would like to estimate the value of your business and where you would fall on the multiple spectrum, send me a private message to learn more.

Originally published on Darrell Amy's LinkedIn.