The Purest Way to Increase the Value of Your Business

Picture a magic slot machine. Each time you pull the arm, you make back a multiple of whatever you wagered. How much time would you devote to cranking that arm?

When it comes to the value of your business, you can make many bets, but only one has a virtually guaranteed return. Most companies are valued on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), so every dollar of incremental profit you earn in the short term will translate into a multiple of that down the road.

Since most acquirers look at three years’ worth of financial reporting, squeezing out every extra dollar of profit makes even more sense if you’re considering an ownership transition in the next thirty-six months.

Memorable acronym referred to as “PURE.” P stood for “Plus,” something profitable, and he wanted more. U stood for “Unnecessary,” an expense he could eliminate. R stood for “Replaceable,” a cost that could be replaced with a better or cheaper option. E stood for “Equal” and was used for items that should be left untouched.

There’s a downside to treating your company like your piggy bank. Co-mingling personal and business expenses while letting other costs go unchecked may help you reduce taxes in the short term but could end up costing you more in lost value when you decide to sell your business. Instead, keep your P&L “PURE” to jack up the value of your business.

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Franne McNeal, MBA Significant Business Results, LLC Significant GPS Small Business Growth Services