Unlocking Business Value: The Power of the PURE Method for Increasing Your Company’s Worth
Imagine having access to a magic slot machine that multiplies your wagers with each pull of the arm. How much time and effort would you invest in cranking that lever? When it comes to enhancing the value of your business, there are numerous strategies you can employ, but one approach stands out with a virtually guaranteed return. Most businesses are evaluated based on their earnings before interest, taxes, depreciation, and amortization (EBITDA), meaning that each additional dollar of profit you generate in the short term can result in a multiple of that down the road. This becomes even more significant if you have plans for an ownership transition within the next three years, as potential acquirers typically review financial records spanning this period.
To exemplify a founder who was committed to maximizing every available dollar of profit, let’s delve into the story of Derek Morin. Morin established Tabarnapp, a company focused on creating after-market sales applications for Shopify website owners. As his partner, who handled finance, departed the company, Morin was compelled to closely examine the profit and loss (P&L) statement. It was during this evaluation that he identified potential areas for improvement, jotting down notes in the margins next to each line item he aimed to modify. To expedite the process, he devised a shorthand system using a single letter to represent the action required: “P” for “Plus” denoting a profitable element to be enhanced, “U” for “Unnecessary” indicating an expense that could be eliminated, “R” for “Replaceable” referring to a cost that could be substituted with a better or more affordable alternative, and “E” for “Equal” indicating items that should remain unchanged. This shorthand system eventually coalesced into the memorable acronym “PURE.”
Morin transformed the PURE method into a game, meticulously scrutinizing his P&L statement each month using the four-letter system. He engaged his team, encouraging them to address each identified item for improvement. His obsession with squeezing out every additional dollar of profit paid off handsomely. By 2020, Morin had successfully bought out his business partner, valuing the company at approximately $400,000. Just two years later, after consistently applying the PURE methodology to enhance profitability, Morin sold Tabarnapp, experiencing an astonishing tenfold increase in the value of his business.
However, it is important to recognize the downsides of treating your company as a personal slush fund. While co-mingling personal and business expenses and neglecting other costs may provide short-term tax benefits, it can ultimately result in a loss of value when it comes time to sell your business. Instead, adhering to the principles of the PURE method and maintaining a pure P&L can significantly boost the value of your business.
By adopting the PURE approach and diligently examining your company’s financials, you can identify opportunities for improvement, optimize profitability, and enhance the overall worth of your business. Remember, the key lies in treating the PURE method as a game and engaging your team in the pursuit of maximizing every dollar of profit. By doing so, you can unlock the true potential of your business and reap the rewards when it comes time to sell.
Contact Investment Business Brokers to learn more about how to increase your company’s valuation.