Growth vs. Value: not all turnover is created equally

When you look ahead, 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.

Tagrowth_stocks~001ke a look at the research coming from a recent analysis of owners who completed their Sellability Score questionnaire. We looked at 5,364 businesses and found that the average company that had received an overture from an acquirer was offered 3.5 times their pre-tax profit.  When we isolated just the businesses that had a historical growth rate of 20 per cent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 per cent 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 per cent more than the average companies, and fully 20 per cent more than the fastest growth companies.

Nurture your niche

Chasing “bad” turnover by offering a wide array of products and services is common 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. 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.

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 maximise 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 value of the business.

You can get your own Sellability Score, and see how you compare on the eight key drivers of sellability, by taking our 13-minute survey here

Comments 1

  1. Avatar for Koos Kruger

    Sharon – Thanks for your viewpoint.While I apeacpirte that it is a shame that we have so many uninsured, I also think that medicine has become ridiculously expensive, in significant part from third party payers and lack of liability reform here in the US. It is the costs that have prohibited so many from being able to afford the very insurance you speak of. Bureaucracy only increases cost and shields individuals from the reality of our present-day system, which I concur, is not ideal.But having been a military member in our own US government, I have been privy to the inner workings of healthcare in that governmental healthcare system. I was impressed by several findings: (1) the personnel that care for our military are by-and-large committed and well-trained, (2) the facilities are, for the most part, fairly good, but acquiring equipment was a nightmare due to bureaucratic approvals required and usually lagged the efficiency of the civilian sector, (3) personnel were inadequately compensated compared to the private sector, and hence hard to retain [wait times, then, were ridiculous and prioritized by active duty status (retirees often could not be accommodated)] and (4) it was nearly impossible to fire underperformers due to governmental regulations. Given this relatively small microcosm of a health care system relative to a universal system proposed by many of our presidential candidates, excluding the private sector would leave many unsatisfied at the least, and injured or without care at the worst. Should we stand for substandard universal care as the only alternative?While there is likely to be a safety-net approach to the uninsured here in the US, it would not surprise me if we eventually migrate from the bureaucratic (and expensive) system that exists today to the most common form of healthcare delivery in the world: fee-for-service.

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