The industry your business is in will usually establish a range of valuation multiples that your business might sell for. Whether you are at the high end or the low end of that range depends not so much on what you do, but how you do it.
Some industries are “hotter” than others. If you watch the financial news media these days, you see trendy software companies generally earn higher valuations than printing companies.
So the industry your business is in will influence its valuation.
But an industry is not just a big blob of homogenous companies. All the businesses within an industry differ in numerous ways, big and small, from their basic financial profile to their special intangible assets. When we analyze businesses in the same industry, we find major differences in valuation and selling potential.
Certain patterns emerge from this analysis, leading to common themes in the businesses that secure the highest valuations when the time comes to sell.
There are 10 big things that will make your company more valuable than its industry peer group.
1. Recurring Revenue
The more repeatable revenue you have, the more valuable your business will be to a buyer. You want customers to have to repurchase regularly.
In an ideal world, your business would have all its customers on contracts with regular payments for defined terms, like when a telecom company provides you with a fancy new phone and locks you in for a two-year full service contract.
Almost as valuable as a defined contract are auto-renewal subscriptions, like a cloud file storage service that just bills every month you until you tell it to stop. It’s almost as good when you can have customers make an “investment” to do business with you – like Bloomberg terminals.
It’s true that subscriptions are not appropriate for all industries, but if you can develop some form of recurring revenue your business will be tend to be more valuable than your competitors.
Lower on the scale of recurring revenue is consumable products or services that customers need regularly, but don’t necessarily need to get it from you all the time. A sunk money consumable is slightly better – the classic example is Gillette razor blades, where you first buy the handle, then you need to stock up on the replaceable razor blades at fairly regular intervals.
Avoid purely project-based consulting or product and services that are sold on an entirely one-off basis.
2. Something Different
Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to knockoff are more valuable than a company that sells the same commodity as everyone else in their industry.
Intellectual property can be very valuable and a business with patented technology is appealing to buyers.
If your company is growing at 20% per year, that might sound pretty good… unless the industry as a whole is also growing at 20% per year. But what if you are growing by 50% each year, while the industry in general shows only 20% growth?
Then your business is much more interesting.
Acquirers looking to fuel their top line revenue growth through acquisition will pay a premium for a business that is growing much faster than its peers.
Most strategic acquisitions are completed by companies between five to 20 times larger than their targets. Bigger companies can become a bit old and tired, and so they will often try to buy “sex appeal” through the acquisition of a “hot” young company in their industry. If you are the darling of your industry trade media, you are more likely to get a premium acquisition offer.
Imagine an oceanfront restaurant on a strip of beach where the city has stopped granting new licenses to operate. Or imagine your business does oilfield facility construction and its field offices are located within 100 km of several newly announced major projects.
If you have a great location with natural physical characteristics that are difficult to replicate, you’ll have buyers who understand your industry interested in your location as well as your business.
Acquirers pay a premium for companies that naturally hedge the loss of a single customer. Ensure no customer amounts to more than 10 percent of your revenue and your company will be more valuable than an industry peer with just a few big customers.
But don’t just think about a diverse customer base. It’s risky for your business to be dependent on just one or two key suppliers as well. So it’s good to spread your business around.
And what about your employees?
Think about the easiest people to replace and the most difficult to replace. If you are too reliant on a special employee, then you are subject to undesirable risk should they decide to join a competitor or move to Thailand.
If you’ve mastered a way to win customers and documented your sales funnel with a predictable set of conversion rates, your secret customer-acquiring formula will make your business more valuable to an acquirer than an industry peer who doesn’t know where their next customer will come from.
8. Clean Books
Properly audited financial statements give potential buyers a lot more confidence in the numbers behind your company’s operations. Companies that invest in audited statements have financials that are generally viewed by acquirers as more trustworthy and therefore worth more.
You may want to get your books reviewed professionally each year even if audited statements are not the norm in your industry.
9. A Second-in-Command
Acquirers can be discouraged if all the power and knowledge is in the hands of an owner that will not stay with the company long after it changes hands.
Businesses with strong management team, particularly a good second-in-command who has agreed to stay on post-sale, are more valuable than businesses where all the power and knowledge are in the hands of the owner.
10. Happy Customers
Being able to objectively demonstrate that your customers are happy and intend to re-purchase in the future will make your business more valuable than an industry peer that does not have a means of tracking customer satisfaction.
Like a rising tide that lifts all boats, your industry typically defines a range of multiples within you can sell your business. Since you probably aren’t changing industries any time soon, you can mostly take that range as a given.
You do, on the other hand, have a lot of influence as to where you fall in that range. Getting a multiple at the high end of the range is absolutely in your control with a proper focus on strategic thinking.
If you want to begin analyzing how you can maximize your company’s value for a sale, start with contacting the MAXIMA Group for a consultation. We focus on privately-held companies with less than $50 million in revenue that can strategically complement larger businesses. We also advise larger public and private companies on buy-side engagements.