Building a valuable business is not for the faint of heart. It takes persisting over the long haul. At some point in the journey you may begin to think of selling. However, I will not advice you sell until you reach a million dollars in earnings before interest, taxes, depreciation and amortization (EBITDA). At this point, the number of buyers interested in buying your business increases. To explain this further, I will use an example from everyday life. Let us say I am looking to buy a gift for a friend and my maximum budget was $50 with a minimum purchase of $20. I go to an online retail store to search for a gift, to increase my likelihood of finding something within my price range, I will limit the number of choices I am shown by selecting the option that only shows me gifts between $20 and $50. I do not want to waste time looking at anything less or more. This is the same process business buyers follow, when looking to buy a business, buyers express a range of values. Buyers who pay higher multiples do not want to waste time looking at businesses less than 1 million dollars EBITDA. This is because the cost and time involved in acquiring another business does not vary drastically with smaller companies. So if they are going to invest the same amount of resources why not go for the bigger companies. If you want to attract buyer with deep buckets, it is worth waiting till you get to a million dollars EBITDA. The multiple you attract almost doubles at this point and not only that the number of buyers you attract increases. So waiting till your business hits a million dollars EBITDA is worth it as you get more from the sale.

Building value in your business – getting to $1million EBITDA

A business is a linked sequence of activities that transforms inputs into sellable outputs.

The inputs are the people, raw materials, overhead, technology and information needed to create the necessary output using a given process. To increase the value of your business, you have to improve the strength of the chain. To improve the strength of the chain, you have to find the weakest link in the chain. In other words, you need to find what is stopping you from moving forward. The weakest link is also known as the constraint. Once the constraint is found it should be improved. The ironic truth is finding one constraint only reveals another. So the process to improve your business never ends. Continuous improvement should be a part of your overall business growth strategies. When working with constraints, business owners must be careful to allocate enough resources to the process. Resource allocation (budgeting) refers to the efficient allocation of people, materials, and equipment in order to create the desired objectives. If there is a conflict between resource allocation and management spoken objectives, nothing gets done efficiently. Resource allocation determines what work will be performed by what person and/or machine and under what conditions.

To start the process of revealing constraints in your business, you can take the value builder assessment.

Funding the growth of your business

Regardless, growing your business will take cash which can be funded by either equity investments or debt financing (the 2 sources of assets). A business owner’s main responsibility is to build assets which in turn produces income which is converted to cash. Income that comes from business assets is called retained earnings – a type of equity financing. Besides business income, cash could also come from other investors and lenders.

After a plan has been devised and the entrepreneur has decided how much cash is needed, the entrepreneur can look at the following sources for cash:

Retained earnings – cash from past business income could be a great source of growth funds for business owners with high profit margin businesses. However, for more capital intensive businesses, dealing with cash shortages is not uncommon so other sources of cash should be sought out.

Investors– the business owner can seek cash from equity investors. Be cautious giving out equity of your business: The more equity you give, the less control you have of your business. Carefully evaluate your goals and be sure this route of financing is the best way for you.

Debt: When looking for debt financing first look to see if there are organizations that deal specifically with your industry. By dealing with an industry specific lender, you speed up the process as they already understand your industry which makes it easier for you as the borrower.  With debt financing you should take care that the loan taken matches the use of the loan. For example short term financing like lines of credits should not be used to financing long term asset purchases. Talk to a lender to see what solutions meets your needs. By expressing your needs, you can get the loan term that will be best for you.

If you are not at the million dollar mark, do not lose heart. There are strategies you can implement to grow your business. With proper planning and budgeting you too can reach a million dollar EBITDA. When developing your plan be sure to address the what, why, when, who, where and how of the plan. Without these specifics a plan is like building a house in the sky. That is, there are not enough specifics to execute on. Building a valuable business could be a long ride. But be persistent and seek help when stuck. You do not have to feel hopeless
or stay where you are. Help is available to take you to the level you desire.