You’ve heard the saying “Beauty is in the eye of the beholder.” Well, when it comes to selling your company, value is in the eye of the buyer.
Of course, numeric calculations are components of valuation. At a minimum, they form a baseline from which the seller can begin to develop his or her market for acquisition. But it’s important to understand that what specific buyers value most about your business is what actually determines the price you can demand in the market.
A Tale of Two Buyers
Using a slightly oversimplified scenario to illustrate, let’s say you have two potential buyers.
The first wants to buy you because he wants to access your customer base. He already has products, but he’s looking for more market. Your customers represent a ready-made market of potential consumers for his current and future products. And he wants to tap into the profitable relationships you’ve already created. The value he places on yourbusiness will be directly related to the impact your customers will have on the value ofhis business. If acquiring your organization will increase his valuation by $8.5 million, that’s about how much he thinks it’s worth.
Now, let’s say the second buyer believes she already has plenty of the market or, at least, her need for more of the market is a second-order consideration. What she really needs is more product or intellectual property. She’s primarily interested in how your product or IP will add value to her business. As a result, she’ll use an entirely different set of criteria to determine what she’ll pay. Perhaps she determines the IP at stake is worth $10 million, and she puts forward a more lucrative offer than the first buyer.
With these two sample deals on the table, you have to ask yourself two questions:
1. Which of these two is worth more to me?
2. What do I have to do within my business to maximize each of these areas of interest?
You may find that even though the second opportunity (in this case) would generate a greater financial return to you on the face of it, it may require you to take on additional challenges or risks that the first opportunity wouldn’t.
No matter what decision you ultimately make, by evaluating your true value in these markets this way, you’re more informed about what actually drives the value of your business and empowered to make growth-oriented decisions moving forward.
The bottom line? You must consider all aspects of what your business has to offer and how you can amplify each element to meet your target buyers’ needs. That’s how you maximize your valuation: by putting yourself in front of the buyer.
Market Positioning: The Secret Value Accelerator
A second factor available to you for accelerating value is market positioning. If you’re in a low-value market, you’ll get low-value returns. Explore ways to pivot or reposition your business to a higher-value market.
For example, we worked with a regional trucking company that was worth $27 million when the two founders began looking to sell. Unfortunately, the business’s valuation was fundamentally capped because of its position in the market. The trucking industry had a valuation multiplier in the .85 or .9 range at the time.
We knew there was no way for the founders to ramp up revenue and earnings enough to overcome the .9 multiplier and get the returns they wanted. Instead, they had to find a way to change the multiplier.
Our team discovered that up to 90 percent of the company’s payload was energy-related equipment such as pumps, storage tanks, and generators. It had also invested in software that enabled greater logistical efficiency, which gave it a distinct advantage in the region.
These two discoveries gave us a number of pivot options. In the end, we chose to rebrand the business and reposition it as an energy logistics company. Day-to-day operations remained the same, but the shift into a higher-value market allowed us to list the company at a $67 million valuation.
How We Can Help
As you consider growing the value of your business, you’ll want to think about two general categories that affect value acceleration:
- Are there any internal constraints to value that, when alleviated, provide more value to your company in its market?
- Are there ways you can reposition your business — either in its current market or in another market — to increase the value of the business to a given set of buyers?
Our six- to eight-week assessment process clarifies these details and allows you to focus on growing your business while we pave the road to maximum valuation. It’s designed to not only identify what your business is worth currently, but to also pinpoint the best growth strategies for you and your stakeholders.
We’ll outline business model or go-to-market modifications to boost your return and prepare you to execute on at least one of the growth-and-exit opportunities. When it’s all said and done, we’ll review our findings and advise you on next steps.
If you’re ready to find out how to maximize your business’s value with a Valuation Growth/Strategic Exit Plan, fill out this form to request a one-hour consultation with Steve.