Preparing to exit
In your sales forecasts does your growth come from selling more 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 and how saleable it is.
Data coming from a recent analysis of owners who completed a Sellability Score questionnaire about exiting (5,364 businesses ) found that the average company that had received an offer from an acquirer was offered 3.5 times their pre-tax profit. When businesses that had a historical growth rate of 20 per cent or greater were isolated, the multiple offered improved to 4.3 times pre-tax profit, or about 20 per cent more than their slower growth counterparts.
However, the big increase in multiple came when companies that claim to have a unique product or service for which they have a virtual monopoly were identified. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 per cent more than the average companies, and fully 20 per cent more than the fastest growth companies.
Find and nurture your niche
Many growth companies chase “bad” turnover by offering a wide array of products and services. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.
A large company will place less value on the turnover 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.
Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation. We are particularly skilled at providing support on innovation so that you increase your sellability.
Focusing on your niche is one of many areas where the long-term value of your business is 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 truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the ability to sell the business and its value.
Like selling a house, a business is more valuable if it is prepared for sale and some of the things which might spook a buyer have been addressed. But unlike a house sale it takes longer to 'groom' a business for sale and it is easier with support. We can help