When you put together next year’s financial plan, will 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.
At the Value Builder system, we looked at thousands of businesses and found that the average company that had received an offer from an acquirer was 3.5 times their pre-tax profit. If we looked at the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.
However, the real bump in multiple came when we isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.
Nurture your niche
To offer a wide range of products and services is common practice among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. This growth adds to your shirt term cash flow and profits, but it does not add much company value. When a strategic acquirer buys your business, they are buying something unique that would be difficult or costly to reproduce.
Larger companies place less value on the revenue derived from products and services that you have in common. 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. Large and established companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy that.
Focusing on your niche or core product 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 training, new staff or new technology as they could reduce 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 value of the business.