28 Mar The “4 Letter Word” You Can Use to Increase the Value of Your Business
Wouldn’t it be great to have a magic slot machine? Imagine what it would be like if, each time you pulled the arm, you made more than you bet. How much time would you spend cranking that arm?
You can gamble on a lot of things when it comes to the value of your business, but only one strategy has a virtually guaranteed return. Most companies are valued on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). As a result, every extra dollar of profit you earn in the short term will translate into a winning spin down the road.
When someone is interested in acquiring your business, they will want to look at three years worth of your financial reporting. Every extra dollar of profit you can generate will make a significant impact on the offer you receive if you are considering an ownership transition in the next thirty-six months.
Derek Morin and His P.U.R.E Method
Derek Morin, the founder of Tabarnapp, which creates after-market sales applications for Shopify website owners, was obsessed with finding every dollar of profit available.
When his partner, who handled the finances, left the company, Morin was forced to look closely at his profit & loss (P&L) statement. As Morin saw potential areas for improvement, he made notes in the margin next to each line item he wanted to change.
To save time, he started using a single letter beside each entry to represent the action he
wanted to take:
P stood for “Plus”, something profitable that he wanted to grow.
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.
Morin realized his shorthand notes could be organized into a memorable acronym he referred
to as “PURE.”
Morin treated the PURE method like a game. Every month he scoured his P&L with the same four-letter system. He then challenged his team to act on each item that needed improvement. He became obsessed with squeezing out a few more dollars of profit every month. His game worked.
In 2020 Morin bought out his business partner in a deal that valued the company at around $400,000. Two years later, after applying the PURE methodology of improving profitability, Morin sold Tabarnapp in an agreement that netted him a roughly tenfold increase in the value of his business.
The Downside of Using Your Company’s Bank Account As a Slush Fund
Treating your company like your piggy bank can have a negative effect when you are ready to sell. Co-mingling personal and business expenses and letting other costs go unchecked may help you reduce taxes in the short term but could end up costing you more in lost value in the long run.
To prevent this from happening, keep your P&L “PURE”. That way, you’ll increase your chances of hitting the jackpot when it’s time to sell your business.