A solid marketing program can increase your cash flow and take you from the lower end of the multiple range to the higher end. This leads to a much higher sale price than you would otherwise receive.
In this review, we discuss the importance of marketing if you are considering a partial sale for your business now or in the future.
Lifestyle Business or Building Business of Value to Sell One Day?
Are you running a lifestyle company or building a company of significant value to potentially sell one day? Those are not the same and the paths and strategies are different.
A lifestyle business is one where the primary focus is sustaining the lifestyle of the business owner rather than maximizing profits and building long-term value. In a lifestyle business the owner’s personal interest, values and desired work-life balance are often at the forefront of the decision making.
What is the Value of My Business Today or Tomorrow?
We have many conversations with owners about the possibility of them selling their business either now, in the next 2-5 years, or in the next 5 years plus. Quickly, the obvious questions arise:
The value of business is relatively straightforward:
The free cash flow the business generates multiplied by the multiple a buyer is willing to pay.
The multiple matters a great deal and it is further divided into two major considerations.
The size of cash flow (the higher the cash flow the better). It works in groupings:
- Under $500K: 3x to 4x (valuation range $1m to $2m)
- $500K to $1m: 3x to 5x (valuation range $1.5m to $5m)
- $1m to $2.5m: 4x to 6x (valuation range $4m to $15m)
- $2.5m to $10m: 6x to 10x (valuation range $15m to $100m)
- $10m to $25m: 10x to 20x (valuation range $100m to $250m)
- $25m and up: 25x+ (valuation range $600m and up)
A group of other factors will impact where in range a buyer will fall (bottom of range or top of range). Every buyer will have a different strategy and prospective but these will impact their thought process
Where Marketing and Advertising Fit In
Let’s focus briefly on those middle three: revenue growth, online reputation, and lead generation.
When we are having initial conversations we always ask: where does your business come from? What makes the phone ring?
Many times we hear:
- Word of mouth
- A little advertising
So many times that is the answer. When I hear that I think lifestyle business. That is strategy will get the business to a certain size level (perhaps revenues up to $2.5m) but to maximize the value of the business and get to the top end of the multiple range buyers are looking for more. They are looking for a systematic process for generating consistent new business that is predictable, repeatable and scalable.
This is multi-faceted. These are some of areas that need to be explored and considered:
- Logo & branding
- Vans wrapped
- Design, update, and management
- Website technical
- PPC – Google ads
- Google maps / Google My Business
- Review & Reputation Management – Google, Yelp, Facebook
- Social media management- Facebook, Angi, Thumbtack, Porch, Home Advisor, Yellow Page
- Print – snail mail
- Local advertising – billboard
- Radio and TV
- Email referral
How Much to Spend and How to Measure
This is a big commitment and it costs money. Really aggressive and growing businesses are spending between 5-10% of their revenue on advertising and marketing. According to the U.S Small Business Administration (SBA) , businesses with revenue under $5m typically allocate around 7-8% of their revenues on marketing.
This is a huge investment and the results need to be monitored very closely but the results are well worth it. Not only will they business and the value grow but you will be providing the repeatable, predictable and growing cash flow buyers are looking for that they do not have to build but is already in place.
Why This Matters
This matters because in order to maximize the value of the business you want the cash flow to be as high as possible and for the business to be valued at the top end of the multiple range (not the bottom end of the range).
Here are three reasons why a solid marketing program matters:
Financial Stability and Revenue Potential
A well-executed marketing program provides a roadmap that the buyer can follow to continue growing long-term. Additionally, your marketing program demonstrates the business’s ability to navigate market shifts and sustain revenue generation over time. This assures potential buyers that the business’s profitability is a consistent trajectory that they can rely upon, laying a foundation for their investment’s longevity.
A solid marketing program is a tool for reducing risks, which is particularly valuable when considering selling your business. A well-established marketing program adds a layer of stability. This reliability becomes even more crucial during a business sale, as potential buyers seek assurance that the business they are considering is trustworthy and has a proven track record of adding new customers and retaining its existing customer base. In this way, a strong marketing program boosts buyer confidence and makes the transition of ownership smoother and more appealing.
Sustainable Revenue Model
Potential business buyers want to know that your sales numbers will continue after you leave the company. An effective lead generation strategy, which is a key element of a solid marketing program, is consequently essential for showing prospects that you have a sustainable revenue model.
Considering a Partial or Complete Sale?
Contact Brentwood Growth Today
Brentwood Growth helps contractors and business owners within the home service industry sell their company for full value. If you are considering a partial sale where you still maintain control of your company or a complete sale, then contact us today for a free business assessment.