There are a wide range of motives that matter most to entrepreneurs in their companies. Some want to make an impact. Some want to make a good living and bring home a steady paycheck. And, some want to build companies with large valuations so that they can exit one day and make a significant amount of money from a sale. All of these motives are legitimate and credible, of course — but how to go about building and sustaining a company is different for each. That’s why defining your motives is so important to do upfront.
The ‘multiple’ of your company refers to its well-being, which is usually interpreted from an equity standpoint. According to Bobby Castro, a real estate investor and entrepreneur who has built and exited a company for over a $1 billion valuation, there is one important thing to focus on that will increase the multiple of your company, if that’s your primary motive for building your business. Castro helps entrepreneurs who are stuck at $250,000 per year scale to millions of dollars in revenue and higher. There is one magical thing that Castro says can help raise both revenue and value: looking at — and minimizing — your business’ expenses.
Minimize Your Business’ Expenses
It may seem like Business 101 to keep your company’s expenses to a minimum, but this assessment matters tremendously for your company’s valuation. Castro encourages entrepreneurs to evaluate every avenue in which money is flowing out of the business. “This includes employees and payroll, which many entrepreneurs seem to overlook since they see a dedicated team as a necessary part of scaling,” shared Castro. “Of course this is true, but how can you reduce the cost of labor?”
Analyzing each of these costs is critical in understanding the overall picture of your company’s valuation. “Another way to think of focusing on minimizing expenses is to prioritize your net income, which is ‘gross revenue – expenses,’” Castro explained. “The higher you can get your gross revenue and the lower you can get your expenses, the higher your net income will be, and your company’s multiple will be right up there with it.”
Think through with your team on how you can minimize the costs associated with running your business. Do you really need everyone on your team to be full-time? Where can you outsource or downsize? Consistently be looking for ways to optimize your expenditures, because each of them are detracting from your company’s valuation unless they have a clear and defendable ROI.
Make Payday A Long Game
Assessing expenses also includes looking at your own salary. If you’re taking home a big chunk of change every month, that too is an expense that’s detracting consistently from your business’ valuation. “I always tell entrepreneurs that the biggest paydays are exits,” explained Castro. “Think through the long game and what you can get on the back end. Taking a smaller salary when you’re in the thick of it will pay off if your company is valued more when you exit.” The idea is that there will be a higher ROI if a lower salary is taken throughout the build process, because that money instead goes to the valuation. Of course, this piece of advice applies if your motive with building your company is to have a successful exit.
Castro believes and teaches that building a company should be about building its valuation. The two are one in the same. What value does the company offer to the market? How can this valuation continue to rise? This assessment is determined by net income, but also by cash flow. By focusing on the ‘heartbeat’ of a business (this valuation), you’ll see more cash flow come in.
Time Is An Expense
On the list of potential expenses that can detract from your company’s multiple is something beyond the costs associated with running your business: it’s your time. “I always teach that time is your most valuable asset, and refer to time as ‘non-refundable minutes’. If you use all of your time for something that’s productive and begin to nix time suckers like social media, you’ll maximize your time and naturally succeed,” Castro said. If other expenses should be minimized, time is one that should be maximized. Make the most of every minute of the day.
Ultimately, your company’s valuation does come down to that net income, but aside from minimizing expenses, the amount of studying and action you put into generating cash flow matters, too. Assess daily how your business’ net income is doing. Looking at where gross revenue can expand and expenses can be limited is a crucial part of increasing the multiple of your company persistently.