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June 10, 2024

Did You Know?

Only 10% of businesses that focus solely on revenue growth achieve significant value at the point of sale. This fact highlights the crucial distinction between growth and value in the business world.

In today’s competitive landscape, growth often takes center stage. Many entrepreneurs gauge their success by the number of employees they manage or the rapid increase in revenue. Founders aspire to be featured in lists that celebrate businesses based solely on their growth metrics. However, if your ultimate goal is to sell your business to a strategic acquirer, focusing indiscriminately on revenue growth might not enhance your company's value. In some cases, it could even diminish it.

The Strategic Acquirer’s Perspective

Strategic buyers—those who typically offer the highest price—are on the lookout for unique offerings they cannot easily replicate. They value the distinctive products or services that would take too much time or money to develop independently. Interestingly, adding too many unrelated offerings can make your business less appealing to these acquirers.

Consider the story of Michael Lieberman, co-founder of Datastay. Datastay revolutionized how brake manufacturers catalog their design drawings through its specialized product lifecycle management software. Lieberman was deeply entrenched in the brake manufacturing industry, knowing key executives personally and being a prominent figure at industry trade shows.

When Autodesk, a billion-dollar company known for acquiring indispensable software tools across various sectors, saw Datastay's dominance in the brake industry, they recognized a strategic opportunity. Autodesk offered Lieberman ten times the revenue for his nine-employee company. This extraordinary offer was made because Lieberman had maintained a laser focus on his core offering: product lifecycle management software for the brake industry.

Had Lieberman diversified his product offerings to include various software solutions for brake manufacturers, he might have diluted the core value that made Datastay so attractive to Autodesk. Although expanding into other industries might have seemed lucrative, it would have weakened Datastay’s stronghold in the brake industry and opened the door to competition.

The Difference Between Private Equity and Strategic Acquirers

Private equity firms typically base their valuations on a multiple of your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). In contrast, strategic acquirers evaluate your product or service based on its potential value within their existing operations. Strategic acquirers are usually larger and better resourced than their targets. They don’t need you to diversify; they want that one puzzle piece that fits perfectly into their grand picture. The more focused and specialized your offering, the higher the premium they are willing to pay.

Key Takeaways

  1. Focus on Core Competencies: Maintain a strong focus on your core offerings rather than diversifying too broadly. This makes your business more attractive to strategic buyers looking for unique capabilities they can integrate into their operations.

  2. Understand Your Buyer: Differentiate between the perspectives of private equity firms and strategic acquirers. Tailor your business strategy to align with the expectations of your desired buyer.

  3. Value Over Growth: Remember that indiscriminate revenue growth can sometimes detract from the inherent value of your business. Strategic acquirers value what they cannot easily replicate, so focus on building and maintaining that unique offering.

In conclusion, while growth is undoubtedly important, it's crucial to balance it with strategic value creation. By concentrating on what makes your business unique and indispensable, you can position yourself for a lucrative acquisition when the time is right.

Business Value Amplifier - Sept 18
Wendy Brookhouse

Wendy Brookhouse

FOUNDER OF BLACK STAR WEALTH™

Wendy has been getting people to their financial goals faster and easier than before for over a decade. She has known what it’s like to control cash flow from childhood, where her first job was raking blueberries for ten cents a pound.

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