Tell someone at a cocktail party that you own a business, and one of the first things you’ll be asked is how many people you employ. It’s that person’s way of gauging how valuable your business is.
If you say that you employ only three people, watch your new acquaintance wander off to find more “important” people to talk to.
But I think measuring the value of a company by its payroll bloat is misleading. In the eyes of a buyer, the fewer people you need to generate each million dollars of revenue, the more valuable your company is.
Acquirers like to see a business with predictable revenue. But people are the least predictable part of any company: Employees get sick, tired and bored, so a company overly dependent on people holds less value.
Let’s look at some big-company examples.
Last year, Google Inc. generated more than $29.3-billion (U.S.) in revenue with just 24,400 employees. That means it squeezed $1.2-million of revenue out of every butt in a seat.
Apple Inc. in its last fiscal year generated $65.2-billion in revenue. With 46,600 employees, it generated $1.4-million of revenue per employee.
To put that in perspective, if you had three employees and were generating the same revenue for each employee as Apple, you'd be running a business with nearly $5-million in sales.
At the opposite end of the scale is Interpublic Group of Cos. Inc., which is in the people-dependent business of creating logos, brochures and TV ads. Last year, Interpublic needed 40,000 employees to generate just $6.3-billion in revenue, for revenue per employee of $158,000.
Interpublic needs roughly 10 times more people than Apple does to generate each dollar of revenue.
Not surprisingly, the value of these companies follows suit: Interpublic is worth roughly $6-billion, and Apple, with about the same number of employees, is worth roughly 53 times (that’s times, not per cent) more at $319-billion.
There are exceptions to the “less (people) is more” rule. For example, low-margin distributors often generate lots of revenue per employee despite being relatively low-value businesses. But, in general, the more revenue and profit you can squeeze out of each employee, the more valuable your business is.
While it won’t help your cocktail-party status, your revenue per employee can be a key equation in driving up the value of your business.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released in April.