Growth is a major value driver for many businesses. A well documented growth story with a positive outlook for continued future growth (i.e. a sound growth plan) is very appealing to a potential purchaser. Having a competitive advantage in your industry is another key value driver because providing something unique or proprietary is extremely attractive to a potential buyer. Together these two value drivers create the perfect storm for enhancing value.
Researchers at the Sellability Score have recently studied the results from over 5,000 business owners who completed the Sellability Score questionnaire. For those companies that had received an offer from an acquirer, the average offer price was approximately 3.5x pre-tax profit.
This multiple improved to an average of 4.3x pre-tax profit after isolating those businesses that had a historical growth rate of 20% or greater. As expected, higher growth companies commanded a higher multiple than their slower growth counterparts. This multiple jumped even further to an average of 5.4x pre-tax profit when those companies that claimed to have a unique product or service for which they have a virtual monopoly were isolated. These niche companies enjoyed an average multiple that was 50% more than the average companies and 20% more than the higher growth companies.
What is your growth plan for the next three to five years? Will your growth come from selling additional products and services to your existing customers or finding new customers for your existing products and services? The answer may have a profound impact on the value of your business.
Nurture your niche
Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding supplementary product and service lines, often at the expense of your core strengths or market niche.
Keep in mind that a strategic purchaser for your business is looking to acquire something they cannot easily replicate on their own. A purchaser will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.
These same purchasers, however, may be willing to pay a large premium for access to a new or proprietary product or service that they can sell to their existing customers. Larger, mature companies have customers, systems and distribution channels, but they sometimes lack innovation. As a result, many choose a strategy of acquisition as a way to buy their innovation.
Focusing on your niche is an area where the long-term value of your business can be at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The value seeking company finds a way to deliver profit in the short term while simultaneously focusing their strategy on a finding and exploiting a niche that will drive up the value of the business.
You can increase the value of your business by documenting your historical growth and developing a sound growth plan. If you want to supercharge your value, however, your growth plan should focus on creating a virtual monopoly in your marketplace by developing and securing your industry niche.
To find out how sellable your company currently is and what you need to tweak to improve its sellability, take Sellability Score via the questionnaire on our website. You can complete the questionnaire here http://sellabilityscore.com/vsp/jason-kwiatkowski.
To see if you qualify for our VSP Exit Starter Program or to find out the value of your business, contact us at www.vspltd.ca.