Growth vs. Value: 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.

We looked at the research from 5,364 business owners who have completed their Sellability Score questionnaire. Those that had received an offer from an acquirer on average had their business valued at 3.5 times their pre-tax profit. Digging further we reviewed businesses with a historical growth rate of 20% or greater. Their multiple of profit improved to 4.3 times pre-tax profit, a premium of 20%.

However the real improvement in multiple came when we isolated those companies that claim to have a unique product or service, for which they have a virtual monopoly. These niche companies enjoyed average offers of 5.4 times pre-tax profit! This is approximately 50% more than the average offer and 20% per cent more than even fast growth companies.

Nurture your niche

Growth companies often chase “bad” turnover by offering a wide array of products and services. Growth is often more easily achieved by selling more things to your existing customers, so you just keep adding complimentary product and service lines. However when a strategic acquirer buys your business, they are buying something that is not easy to replicate.

Furthermore large acquirers will place less value on sales derived from products and services that you both 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.

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 Sellability Score, and see how you compare on the eight key drivers of sellability, by taking our 13-minute survey here:

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Paul Dodgshon is a Regional Partner in Business Partnership, who have been helping business owners sell their businesses since 1979. You can learn more about Paul here.