Good v’s Bad: not all turnover is created equally

When you look ahead over the next 12 months, where will your growth come from? Will you find new customers or sell more to your existing customers?

The answer can have a great impact on the value of your business.

Take a look at the research coming from a recent analysis of owners who completed their Value Builder Score questionnaire. We found that the average company that had received an offer from an acquirer was at 3.5 times their pre-tax profit.  When we isolated just 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

Growth companies often chase “bad” turnover. What we mean by this is that they are chasing increased sales by selling a wider variety of products to an expanding customer base. Growth is often more easily achieved by selling more things to your existing customers, so you just keep adding complimentary product and service lines, “good” turnover. So if you can specialise exactly in satisfying your customer base, with a smaller but more targeted product range, it is to your advantage.

Furthermore large acquirers will place less value on sales derived from products and services that they already sell. They will take the view that their economies of scale mean that they are in a better position to sell the things that both of you offer.

Perhaps more importantly, they will pay more to get access to a new product or service, which they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation and acquisition is often their best route to new products and services. We see it all the time in companies like Apple, who bought AuthenTec, the company who provides their fingerprint technology.

So a clear focus on your niche is one of many areas where short-term profit and the long-term value of your business are at odds, e.g. 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 value of the business.

You can get your own Value Builder Score on our Business Partnership Corporate website, and see how you compare on the eight key drivers of business.

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This post was originally created on 25 September 2014 and subsequently updated.