Imagine a magical slot machine where every pull of the lever guarantees a multiplied return on your wager. How much time and effort would you dedicate to cranking that lever? When it comes to increasing the value of your business, there are numerous strategies you can pursue, but only one offers a virtually guaranteed return. By focusing on maximising your profitability, you can significantly enhance the value of your business.
In the world of business valuation, most companies are assessed based on a multiple of their earnings before interest, taxes, depreciation, and amortization (EBITDA). This means that every additional dollar of profit you generate in the short term will translate into a multiplied value down the road. Considering that potential acquirers typically examine three years’ worth of financial reports, optimizing your profit becomes even more crucial if you plan to transition ownership within the next thirty-six months.
Let’s take a look at Derek Morin as an example of a founder who was determined to uncover every possible dollar of profit. Morin established Tabarnapp, a company specializing in after-market sales applications for Shopify website owners. When his finance partner departed, Morin delved into his profit and loss (P&L) statement with a fresh perspective. He identified areas for improvement and began marking each line item with shorthand notes representing the action he wanted to take.
– P for “Plus”: identifying opportunities for increased profitability.
– U for “Unnecessary”: pinpointing expenses that could be eliminated.
– R for “Replaceable”: finding costs that could be substituted with better or cheaper options.
– E for “Equal”: items that should remain unchanged.
With this systematic approach, Morin transformed the PURE method into a game. Each month, he meticulously reviewed his P&L using this four-letter system and engaged his team in implementing necessary improvements. His relentless pursuit of squeezing out a few more dollars of profit each month yielded remarkable results. In just two years, Morin’s diligent application of the PURE methodology boosted the value of Tabarnapp by a staggering tenfold, leading to a highly lucrative sale.
However, it’s crucial to avoid the temptation of treating your company’s bank account as a personal slush fund. Mixing personal and business expenses while neglecting other costs may offer short-term tax benefits but can ultimately diminish the value of your business when it comes time to sell. Instead, embrace the “PURE” approach to maintain a clean and focused profit and loss statement, thereby catapulting the value of your business to new heights.
By harnessing the power of profitability and adopting the PURE methodology, you can unlock the true potential of your business and witness a substantial increase in its overall value.
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