“Run your business like you’re going to own it forever and run your business like you’re going to sell it tomorrow.”
Every entrepreneur knows that when you build a business, you will exit, at some point.
Whatever your timing or reasons, it’s always good to keep on top of what makes your company valuable. And that means knowing what’s hot in your industry. One way to do that is to read industry news, reports and analysis.
What Makes Your Company Valuable?
Knowing trends helps you tweak your company to appear more attractive and to clearly articulate your differentiators. It’s sort of like reviewing recent comps in your neighborhood before you put your own house on the market. And it can provide great tips for running your business smarter in the meantime. Here’s how to do that.
How to Glean Insights from M&A Reports
An array of investment banking firms produce periodic reports about what’s going on in your industry, including trends, M&A events, and macroeconomic challenges. While it’s likely that the companies on those lists are massively larger than your company, there remains an abundance of information around key industry metrics, valuation, and technology shifts.
Those investment banking reports are a great source.
In running my company, I’m on the email list of two industry-specific investment banking firms (consulting) that provide deeper insights into my industry because this is essentially all they do.
I read their materials on a quarterly basis. One of these banks recently published an article, in their research and analysis, about how they’re seeing a positive valuation trend for consulting companies that have strong “intellectual property” compared to their peers. To me, this was extremely informative for AVL’s strategy and how we were determining our priorities.
There are strong bankers in many industries: food and beverage, manufacturing, etc. The key is to find which groups publish good materials.
These reports will provide you with great nuggets that keep you focused on the horizon. For instance, for within CPG ecommerce, we have seen that firms over $20 million in revenue seem to have higher M&A multiples than those below $20 million. That is, the market is willing to pay a premium for companies that achieve revenues above $20 million.
This knowledge has definitely influenced the strategy of one of AVL’s clients. Consider these questions:
- What trends are you seeing right now?
- What acquisitions happened recently? What was the motivation behind those buys?
- What’s being sought in the industry right now?
- Are trends going more vertically integrated? Or are they going more horizontal? Different verticals or deep into one vertical?
- Who’s buying to get customers?
- Who’s acquiring companies like yours?
80/20 Rule: Revenue Drives Value in Smaller Companies
If you are a smaller company, then revenue is likely your prime valuation metric.
Because if you’re acquired, the buyer is probably going to fold your business into an existing one. Profitability is less relevant because they’re going to move all your back-office operations into their existing operations (synergies). Thus, revenue (particularly solid, reliable, predictable, and/or repeatable revenue) is probably 80% of the equation.
With that said, the other 20% counts for other stuff like employee tenure and loyalty, systems, intellectual property, market niche, and customer base that can create incremental value. These factors should not be ignored!
You need to develop a sort of equation that answers the question: What makes your company valuable? Then, determine whether you are focusing on those things.
Look at Your Company with a Buyer’s Eyes… Now
When you are smart about what’s transpiring, you can go into that due diligence sales process with more industry knowledge. And run your company smarter in the meantime. For me, with my company AVL, we’re not thinking of an exit strategy or anything like that. But I run it like the quote at the top of the article recommends.
I run my company like I’ll own it forever and like I’ll sell it tomorrow.
How do you do both at the same time? Ask yourself, “What creates value in the minds of the market?” That’s where I get my compass bearing. I look to industry reports for those value equations in terms of what is being sought
Right now, for instance, in the consulting world, buyers are looking for strong consultant relationships. So we could look at our team and the relationship between our team and the company. And of course work on client longevity.
Industry knowledge allows me to keep an eye on the horizon from time to time and not get caught in the weeds of what’s going on in my business.
When you know those metrics then you can watch the factors a potential acquirer would be looking for when they come knocking. You never know whether that might happen one day, so it’s best to be prepared.
New Trends Also Make for Better Business
In another example for professional services companies, industry reports have recently talked about a firm’s intellectual property. For the thousands of these companies in many industries—financial consulting, engineering services, etc.—so much of this business is between the ears.
It’s easy to think that success is just a matter of how smart the people are that work for you.
Some large management consulting firms I know of are huge gatherings of really smart people, but often the firm itself has not developed any intellectual property per se.
They don’t have a “secret sauce” or unique methodology or anything like that.
These reports would help the owner of such a business to prioritize building a unique methodology, “the AVL way” or “the AVL playbook” or “the AVL financial model.” We’ve definitely put that into our lexicon as a result of this industry trend.
We are making sure that we have our own intellectual property and can show a potential buyer our system.
In food and beverage right now, there are certainly some trends within 3PLs. There are big trends within e-commerce in terms of the mix with retail. Knowing industry trends helps you stay up to date. Ingredients and what’s going in with packaging is hot right now, for instance, in terms of waste, recyclability, and plastics. You can find out how certain consumers are reacting to plastics in their packaging for your product.
A business owner could improve by asking, “I wonder if my 3PL or my co-packer can help me source something other than plastic so we can have a more eco-friendly wrap. That will help me be more attractive on the shelves to consumers. And it will make my business look good for buyers as well.” In food, even ingredient sets can trend, so those reports can keep you informed.
All these tips do add up. Yes, running your business is your main focus. At the same time, it’s important to watch the horizon by getting your hands on some M&A reports and keeping up with relevant industry trends.