While the Internal Valuation drivers are the foundation for any solid company, the external elements are the multipliers of a deal. While the Internal elements are “required” and can move the needle on a deal toward the higher end of normal, it is these elements that really create exceptional results. Timing, Scarcity Value, Industry Dynamics and Competitive Friction are the extreme situations that drive companies to pay extraordinary multiples for resources. For that reason and because of the huge potential impact these elements have on a transaction we refer to these elements as multipliers.
But, you ask, if they are external elements how can I impact the valuation of my company? Yes, these elements are external and cannot in themselves be controlled, but how you deal with the situation you are dealt and position yourself within the environment can have a positive impact on your valuation. By considering these external factors and with a little advanced planning and honesty with yourself about your company’s strengths and relative weaknesses, you can potentially alter course in time to maximize your return. Conversely; misplay timing, forego scarcity, fail to take advantage of favorable industry dynamics to effect change and these things can work against you and even lower your valuation. Let’s see how, taking special note of how each element plays off the others:
Timing – Where the economy is in the overall Business/Capital Markets Cycle. Where the application sits in its maturation curve. How mature the industry you are selling into is. Fit with buyer’s strategic imperatives. Impact of scarcity value.
- What to do: Sell into a rising market. Once proven, get ahead of the curve in selling the company. Seek help from multiple professionals to help you time the market and optimize total valuation = revenue X exit multiple.
Scarcity Value – Limited alternatives, whether to acquire domain expertise (application or industry), a product, or a customer base; scarcity (or not) is the engine of supply side economics, and inherently drives the price up. When a space is new and proven to the point that it has become mission critical to customer success and there are only a couple of solutions that fill the need, there will be competitive friction created.
- What to do: Create true differentiation with proven barriers to entry. Be unique. Create a new market or attack high growth markets with new ideas. Identify markets prior to developing solutions. Solve a real problem. Validate your solution with quantifiable customer case studies. Make yourself mission critical to your customers and partners so the switching costs become prohibitive.
Industry Dynamics – Is there true disruption of market forces and the market landscape as a whole? A complete new approach to solving a problem, now addressable because of newly developed technology. Substantial, even revolutionary change for the better in time to market, cost reduction, ability to innovate innovation, and/or compliance with government or other mandates, when combined with scarcity value often drives high multiples.
- What to do: Select a market with opportunity for change; whether by mandate (government or other), or significant opportunity for operational transformation. Establish a dominant position in influential customers and prove the value proposition. Expand within the initial point of sale and to their suppliers or other associates. Replicate at similar accounts and develop market pull and a substantial pipeline both in existing customers and new opportunities. Obtain documented references from both customers and other key industry influencers. Stay abreast of industry dynamics or work with advisers that can augment your big picture view so that you can be proactive vs reactive to industry changes.
Competitive Friction- Ultimately to obtain extreme multiples, there must be multiple bidders for the technology. These are well capitalized and qualified interested parties that recognize the disruptive nature of your solution. High bidders often “NEED” your solution vs merely “want” to buy it. IF your solution is truly disruptive, scarce, has created demand in the market that larger strategic bidders cannot satisfy, and the barriers to entry are high enough that replicating it internally is not an option, then exceptional multiples are achievable.
- What to do: Develop partnerships with potential acquirers early in the process so they see the direct impact of your solution on their revenue and align with your strategy as you evolve. Start slow, join partner programs (See “Partnering with an eye toward exit strategy” http://merger.com/partnering-eye-exit-strategy/ ), work your way up the ranks making strategic contacts. Resist the urge to sell too early until your solution is proven and “NEED” is established. Maintain multiple exit options, then utilize an investment banking professional to help you negotiate the best possible exit.
In the next installment of this blog I will give you a few simple questions to ask yourself to see if you truly can qualify for exceptional multiple. In the meantime for a case study and more information on the internal or external factors feel free to download our white paper on Achieving an Exceptional Multiple in the Sale of Your Company or drop me a line at boes@merger.com.
