If you are the owner of a small software business, I’m sure that you have paid particular attention as the news hits of another peer company selling at a very high valuation in relation to their revenue and profit. And after you roll your eyes or shake your head with envy, you quickly do the math on the potential sale price for your business at the same multipliers. Following that is the brief daydream about what that sale would mean for you, your family and other stake-holders. And of course, that luxury purchase you have always denied yourself that would also be enabled by the sale.
You probably wouldn’t be human, if you didn’t take part in this ritual. But alas, the daydream is brief and you are quickly brought back to reality. And reality might include asking the question, once again, of what your company is currently worth and what would warrant a higher valuation. The easy answer, as always, is sustainable revenue growth and related profit. And of course those are worthy goals for all enterprises, but there are other factors that could be worth exploring.
Some thoughtful brainstorming about what would earn (yes, I said earn) your company a higher valuation multiplier would be the most constructive and possibly lucrative thing to do. So, let’s consider four steps, or questions, that we could ask and explore the answers that might lead to a breakthrough value creation strategy for your business:
1. What are the companies that would likely benefit most by owning your business and what are their strategic initiatives? If you find some commonality here, the plan might include moving your company in a direction where it could add more value to the achievement of the business goals of your possible suitors.
2. What is driving growth in your industry and how is your business positioned to leverage those drivers? So, for example, Cloud and SaaS are big growth drivers in many segments of the software industry. And smaller software companies whose expertise and offerings would enable larger companies to move more quickly into Cloud and SaaS, would surely garner higher valuations in today’s market.
3. What would possible suitors not like about your business? To truthfully answer this question might require a qualified third party analysis. But such an effort might reveal some relatively easy fixes that could make your business more compelling and valuable to possible acquisition partners in a short period of time.
4. What would a potential buyers perception be of the health and growth of your business if they simply visited your web site? Many companies who have an acquisition strategy start their evaluation process with simple steps like reviewing your web site and how you talk about solutions and customers, looking at your social media presence and how others talk about you, and assessing your financial viability via tools like Crunchbase. An agreed set of messaging that is consistently executed across all these platforms means a potential buyer gets the message you would want them to hear – loud and clear.
So, the next time a peer company sells at a high valuation, let’s raise a glass in congratulations to the owners of that business. Then think about the questions they may have asked themselves on the valuation front a year or two ago and the actions they likely took to earn a higher valuation. Finally, and most importantly, let’s then role up our sleeves and get to work on our valuation. And of course, it is okay to also spend a minute dreaming about that luxury purchase we will make when we are the ones making the news of another high valuation sale.