Your Company’s Value Builder Score
Caution: Do Not Poke the Giant
Here is an interesting story. On June 1, 2011, both Floyd’s Coffee Shops in Portland, Oregon way up north in the USA, were busier than usual. The regulars were elbowed out of the way by new customers visiting the store for the first time to redeem their coupon and get $10 worth of coffee for $3!
This tempting offer was made because Floyd’s had been picked as the first-ever Google Offers “deal.” Google Offers is the company’s first baby step into the world of “social buying” style promotions where a special, limited time offer is made by a business hoping that the deal will spread virally and thereby introduce a new legion of customers to their business.
Google, of course, did not invent the deal-of-the-day category; they were goaded into it after their generous $6 billion dollar offer to buy Groupon was turned down.
Now Groupon felt the pinch after thumbing their nose at one of the world’s most valuable companies. According to compete.com, Groupon’s traffic went from 33.7 million unique visitors in June 2011 to just 18.3 million unique visitors in January 2012. That’s a drop of almost half inside less than a year. Not surprisingly, Groupon’s stock was also down around 25% since its IPO in 2010.
Over-playing your hand
The moral of the story is to be careful not to over-play your hand when being approached by someone who wants to buy your company. Buyers usually have deep pockets and, while you may think your business is unique, never underestimate the resolve of a big company with lots of cash.
They do have an alternative to buying you: they can simply compete with you.
Typically when they make the decision to walk away from the negotiation table they do not leave empty-handed. They come away with new-found insight on how you run your business, what works, and what flops; so they have an enormous head start to launch a competitive company.
And it doesn’t just happen in Silicon Valley. Take a hypothetical example of a home security company generating $500,000 per year in profit (before tax) installing and monitoring home alarms. One day a big alarm company comes along and says they want to buy the business and they’re willing to pay four times pre-tax profit. The alarm company owner turns up his nose and demands six times earnings.
Now the suitor has a choice. They can try to negotiate with the owner, but that would undermine the economics of the model they’ve used to buy hundreds of similar alarm companies across the country, or they can simply hire someone to start an office to compete with him.
Let’s say they pick door number two and hire a young, aggressive manager. They guarantee him or her $200,000 a year in the first 12 months on the job while building the business. You have not only lost the opportunity to sell your business; you’re now competing against a young, motivated rival with a parent company who has an extra $1,800,000 ($2,000,000 withdrawn offer minus the $200,000/ year salary for their manager) they didn’t use to buy you and they’re putting it towards helping your new competitor build their business.
If you’re lucky enough to be approached by a big company who wants to buy yours, remember they are usually not choosing between buying you or buying your competitor. They are often choosing between buying you and setting up shop to compete with you.
Curious to see what your business is worth and how you might improve its value to both strategic and financial buyers? Just send an email to info@TheExitStrategyGroup.com.au and we’ll send you a link to complete a Value Builder questionnaire which will give you your score on the key value drivers in your company.
ADDENDUM: The Google Offers service had several iterations, the last being Offer extensions being provided in AdWords, allowing businesses to distribute promotions through their AdWords campaigns, so offers were discoverable when searching for a business, brand, product or service.
In March 2014 Google announced it would be shutting the service down.
Groupon has survived a very rocky start. Its share price as at March 8, 2016 is US$4.76. It was offered for US$18-$20 at its IPO.
Six Little Things That Make a Big Difference to the Value of Your Company
With the Summer Olympics coming up in Rio in August, I’d like to reflect back on some of the big events of the 2010 Winter Olympic Games in Vancouver.
In the Men’s Downhill race at Whistler, for example, the winning time of 1:54:31 was posted by Didier Défago of Switzerland. The time among medalists was the closest in Olympic history, and while Mario Scheiber of Austria posted a time of 1:54:52 – just two tenths of a second slower than Défago – he finished out of the medals in fourth place.
In ski racing, one fifth of a second can be lost in the tiniest of miscalculations. And when it comes to selling your business, markets can be equally cruel. Get everything right, and you can successfully sell your business for a premium. Misjudge a couple of minor details and a buyer can walk, leaving you with nothing.
Here is a list of six little details to get right before you put your business on the market:
- Find your lease. If you rent space, you may be required to notify your landlord if you intend to sell your company. Read through the fine print and ensure you’re not scrambling at the last minute to seek permission from your landlord to sell.
- Professionalize your books. Consider having audited financial statements prepared to give a buyer confidence in your bookkeeping.
- Stop using your company as an ATM. Many business owners run trips and other perks through their business, but if you’re planning to sell, these “treats” will artificially depress your earnings, which will reduce the value of your company in the eyes of a buyer by much more than the value of the perks.
- Protect your gross margin. Oftentimes, when leading up to being listed for sale, companies try to grow by chasing low-margin business. You tell yourself you need top-line growth, but when a buyer sees your growth has come at the expense of your gross margin, he or she will question your pricing authority and assume your journey to the bottom of the commoditization heap has begun.
- If you’re lucky enough to have formal contracts with your customers, make sure your customer contracts include a “survivor clause” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wriggle out of their commitments to your business. Have a lawyer check the language to ensure it has teeth in your jurisdiction.
- Get your Value Builder Score. Take 13 minutes to answer the Value Builder questionnaire now. You’ll see how you performed on the key drivers of company value and you can identify any gaps you need to fill before taking your business to market. Just send an email to info@TheExitStrategyGroup.com.au and we’ll send you a link to complete the questionnaire.
Like competing in the Olympics, selling a business can be an all-or-nothing affair. Get it right and you will walk away a winner. Fumble your preparation, and you could end up out of the medals.
A Blood Pressure Test for Your Business
When was the last time you had your blood pressure tested?
Taking your blood pressure is one of the first things most doctors do before treating you for just about anything. How much pressure your blood is under as it courses through your veins is a reliable indicator of your overall health; and it can be an early indicator of everything from heart disease to bad circulation.
Does it tell the doctor everything they need to know about your health? Of course not, but one powerful little ratio can give the doctor a pretty good sense of your overall well-being.
Likewise, your Value Builder Score can be a handy indicator of your company’s well-being. Like your blood pressure reading, your company’s Value Builder Score is an amalgam of a number of different factors and can help a professional quickly diagnose your company’s overall health.
Predicting Good Outcomes Too
When a doctor takes your blood pressure, they not only rule out possible nasty ailments; they can also use the pressure reading to forecast a healthy life ahead. Similarly, your Value Builder Score can predict good things for the future. For example, based on more than 10,000 business owners who have completed their Value Builder Score questionnaire, we know the average multiple of pre-tax profit they are offered for their business when it is time to sell is 3.7. By contrast, those companies that have achieved a Value Builder Score of 80+ are getting offers of 6.6 times pre-tax profit.
In other words, if you have an average-performing business turning out $500,000 in pre-tax profit, it is likely worth around $1,850,000 ($500,000 x 3.7). If the same company improved its Value Builder Score to 80+ while maintaining its profitability of $500,000, it would be worth closer to $3,300,000 ($500,000 x 6.6).
Are you guaranteed to fetch 6.6 times pre-tax profit if you improve your Value Builder Score to 80? Of course not. But just like blood pressure, one little number can tell you and your advisor a whole lot about how well you are doing; and we can then prescribe an action plan to start maximizing your company’s health – and its value down the road.
Heart disease is called “The Silent Killer” because most people have no idea what their blood pressure is. People can walk around for years with dangerously high blood pressure because they haven’t bothered to get it tested. The first step on the road to health is to get tested. If you have a great score, you can sleep well at night knowing you have one less thing to worry about. If your score is not where it should be, then at least knowing your performance can get you started down the road to better health.
If you’re interested in getting your Value Builder Score, just send an email to info@TheExitStrategyGroup.com.au and we’ll send you a link to complete the questionnaire.
Five “Strategic” Ways To Sell Your Company
Do you remember the news from 2014 when Facebook acquired the Internet messaging service WhatsApp for $19 billion? It represents the largest-ever acquisition of an Internet company in history.
WhatsApp is a pearler, for sure. The messaging service allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks. This can save people who travel, or who live in emerging markets, hundreds of dollars a year, which is why WhatsApp is adding one million new users per day.
At the time of the acquisition in February 2014, WhatsApp had some 450 million users. Their business model is to charge users a subscription of $1 per year after their first full year of service. Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue. Why would Facebook buy WhatsApp for a number that is somewhere north of 40 times revenue?
Nobody knows for sure what is in Mark Zuckerberg’s head, but we can only assume that at least part of the opportunity Facebook saw is the opportunity to sell more Facebook ads because of the information they glean from WhatsApp users. Global advertising giant Publicis estimated 2013 online advertising spending in the US alone was around $500 billion. Presumably Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp. There’s also the theory Zuckerberg is looking for a payment platform of some kind, which WhatsApp already has integrated.
And therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic acquisition can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting your future profits and estimating what that cash is worth in today’s dollars, a strategic buyer is calculating the economic benefit of grafting your business onto theirs.
There can be many strategic reasons a big company might want to buy yours. Here are a few to consider with examples from the US market:
1. To control their supply chain
In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million. Now Starbucks is no longer beholden to one of its suppliers.
2. To give their sales people something else in their briefcase
Also in 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper. AOL wanted to give its advertising sales people more inventory to sell and HuffPo had 26 million unique visitors a month.
3. To make their cash cow product look sexier
Microsoft bought Skype for $8.5 billion dollars even though Skype was losing money. The good folks at Microsoft must have assumed they could sell more Windows, Office and Xbox by integrating Skype into everything they already sell.
4. To enter a new geographic market
Herman Miller paid $50 million to acquire China’s POSH Office Systems in order to get a beachhead into the world’s fastest growing market for office furniture.
5. To get a hold of your employees
Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.
Most acquisitions are done for rational reasons where a buyer agrees to pay today for the rights to your future stream of cash. That’s what a financial sale is all about. However, you may be able to get a significant premium for your company if you can figure out how much it’s worth in someone else’s hands.
Curious to see what your business is worth and how you might improve its value to both strategic and financial buyers? Just send an email to info@TheExitStrategyGroup.com.au and we’ll send you a link to complete a Value Builder questionnaire which will give you your score on the key value drivers in your company.
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