Six ways to optimise your start-up

How much is your start-up worth? Ordinarily, the thought process on business valuation is that there is a level of profitability to which you are applying a multiple and you arrive at your price, whether that's debt free, cash free; it's an enterprise value, an equity value. If you jump in like this you are making a mistake, because at the heart of everything in a business sale sit six factors that drive value.

1. Quality of income

Quality of income varies across businesses. Say one business secures a deal worth £2 million in profit. In another, however, you have two million events through which you have generated a pound of profit for each of those events. The quality of income in the latter is far stronger than the former.

It's all about the resilience of that income and that business model. And that's why when you're looking to start a business consider the quality of income. For example, if you are prospecting for oil, it's quite binary. You're either going to find it or you're not. You might find it to a different degree. You might find more, but that's not a business model which in itself would generate value.

2. Visibility of income

Visibility of income, is how clearly future income can be seen. If a business has contractual revenue, on the day of acquisition, the acquirer knows that they have a book of business. If a buyer can see what the income will be, that visibility is a very big catalyst for an enhanced multiple. It’s very rare that a vendor will settle for some form of asset valuation. You want some goodwill, and that is driven by what the future's going to look like.

Imagine two recruitment firms. One supplies temporary staff, another finds chief executives for permanent roles. The first firm has 60 temps that are sitting in RBS being paid £600-a-day and the agency is taking 15% margin, which is secure. However, if you are recruiting for permanent roles, even if you have placed several CEOs in the past year, the buyer has nothing contractually committed and there's no visibility of future income.

3. Opportunity map

A credible opportunity map is arguably the most significant driver of value.

If you plot multiples versus years and take three different lines, one being a high growth business, one being a medium growth and one being flat. What the valuation trends will tell you is everything converges at about a two and a half, three times multiple in year two or year three. So, Amazon might be making a pound of profit now and be worth $100 billion. No one's paying a 100 billion multiple. But what the analyst is saying is, it's going to make $300 billion in three years’ time. It's about the growth rate, but it's a credible growth rate that comes from how that opportunity map works and where you can get to.