Vulnerable vs. Valuable
David Ogilvy, the visionary behind Ogilvy & Mather, famously said, “All of our assets go down the elevator at five o'clock.” His point? The company’s most valuable assets were its people. Most owners are proud of the team they have built, but if the service your team delivers is all you have that makes your business unique, it will be hard to attract a premium multiple for your company.
Understanding the Value of Your Business
For service-based companies, an overreliance on people is a particular problem. The absence of tangible products means that your company’s worth is closely tied to the people who deliver your services. Because employees can leave at their discretion, potential acquirers usually view service-oriented businesses as less attractive, often offering lower acquisition multiples due to perceived higher risks.
How John Rood Expanded Beyond Traditional Services
Consider John Rood, who founded Next Step Test Preparation, which initially focused on one-on-one tutoring for aspiring doctors studying for the MCAT. John quickly recognized the limitations of a purely service-based model and saw an opportunity to enhance his business’s value. By reinvesting profits into developing mock exams and asynchronous online courses, John shifted his revenue model from solely relying on personal services to incorporating products that can be purchased while the tutors sleep.
This shift not only reduced his dependency on individual tutors but also significantly boosted his company’s value. As sales approached $10 million, the shift to productizing his services made Next Step highly attractive to acquirers, culminating in a sale to New Harbor Capital at a premium well above typical industry multiples.
Maximizing Your Business Value
The lesson here extends beyond the realm of tutoring or service companies. As a business owner, focusing on aspects of your business that can function without continuous human intervention—whether through products, technology, or automated systems—can significantly enhance your company’s valuation.
Developing and emphasizing efficient, repeatable processes reduces the impact of individual employee turnover and makes your business more robust and appealing to potential buyers. By investing in systems that ensure your business can operate and grow independently of your current staff, you increase the likelihood of securing a higher valuation in the event of a sale.
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