Do You Pass The 5 x Test?

A simple test allows you to compare the value of your company with your industry competitors.

Imagine you wake up one morning to find your business is receiving five times the amount of demand that it usually does:

• Five times the number of phone calls.
• Five times the inbound leads.
• Five times the website traffic.
• Fives times the number of customers.

Would you be able to handle it? Would it cripple your business and your people or would your company absorb the spike seamlessly?

The answers to those questions have a big impact on how attractive your business will be to an acquirer when you’re ready to sell.

An Analysis of 14,000 Businesses

I can say this with confidence because we’ve just finished analyzing our pool of Sellability Score users for the quarter ending December 31, 2014.

To give you some background, we offer The Sellability Score questionnaire as the first of twelve steps in The Value Builder System, a statistically proven methodology for increasing the value of a business.

We asked 14,000 business owners if they had received an offer to buy their business in the last 12 months, and if so, what multiple of their pre-tax profit the offer represented. We then compared the offer made to the following question:

If customers were lined up at your door to buy, would you find delivering FIVE times the current volume of what you sell:

• Impossible
• Very difficult
• Fairly difficult
• Fairly easy
• Very easy

2.88 vs. 4.65 Times

The average offer received among all of the businesses we analyzed was 3.7 times pre-tax profit. However, when we isolated just those businesses that could easily handle five times more customers, the offer multiple went up to 4.65.

Companies that would find it impossible to serve five times more customers got offers of just 2.88 times pre-tax profit–a steep a hair cut off the average.

Rethinking Your Industry

The natural inclination is to look at these numbers and come to the conclusion that the difference can be chalked up to the industry you’re in. For example, a law firm is going to have more trouble taking five times the number of cases than a software company would have accommodating five times more users.

There is some truth to that, but you can find companies operating in a traditionally unscalable industry that have bucked convention and become scalable.

The Scalable Law Firm

For example, take a look at the story of Brian Lee. Lee was an attorney with New York-based Skadden, Arps, Slate, Meagher & Flom, LLP, where they charged hundreds of dollars an hour for their time. Realizing good quality legal advice was out of reach for most consumers and small businesses, Lee started LegalZoom.

Now you can login to LegalZoom and get basic legal documents (e.g., a will, business incorporation or lease) for a fraction of the cost of hiring a lawyer. LegalZoom can accommodate five times the demand because they are relying largely on boilerplate documents rather than high-priced lawyers to prepare your papers.

Not surprisingly, LegalZoom caught the attention of investors who would never consider investing in a traditional, bill-by-the-hour law firm. In 2011 LegalZoom received $66 million in a venture round of financing from the darlings of Sand Hill Road, Kleiner Perkins Caufield & Byers and Institutional Venture Partners. Then last year, European private equity firm Permira acquired close to half of the business at an implied valuation of approximate $425 million.

The secret to making your business worth more than those of your industry peers and competitors may not be what you do, but how you go about doing it.

Click here to get your score now.

The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business.

Click here to attend our next FREE workshop!

Links to the 8 Factors Series:

1. The valuation technique used by professional business buyers;
2. The three attributes of a scalable business model;
3. How to bulletproof your business from demanding employees, overbearing customers, and suppliers who hold you hostage;
4. One simple technique for eliminating cash flow worries;
5. The one kind of revenue that can triple the value of your business;
6. The two essential elements of your marketing plan you need in order to avoid commoditisation and costly price wars;
7. The one question you need to ask your customers to predict the likelihood that they will buy again in the future and refer you to others.
8. Are you working IN or ON your business

 Business Doctors is a business support network dedicated to helping small and medium sized businesses achieve their vision. We are experienced business people, passionate about sharing our skills and experiences. Our aim is to offer hands-on support, dedicated to getting you back on track to growing a profitable and more valuable business.

The Value builder score is an easy way to instantly see how well you are performing against the 8 Factors that drive value in your business. Business Doctors are certified Value Builders combining elements of the system created BY JOHN WARRILLOW with 10 years of hands on experience in helping businesses grow.