You make decisions every day on the direction of your business, but while you work hard to scale your revenue, are you also scaling your equity value? Or could that value be eroding behind your back? Smart scaling is all about having confidence that your decisions are safeguarding that value in the future, and increasing the likelihood of a successful sale.
It is important to consider the future buyer and M&A market appeal of your business, and how your decisions will attract or repel those buyers. When you make decisions there are always trade-offs; understanding what buyers are interested in can help when making the strategic decisions to guide your business and grow your equity value.
Understanding what will interest future buyers
Consistency and pipeline build equity value
- When you sell your firm, the buyer must have confidence in your future forecasts
- There are two ways of giving them that confidence: consistency and pipeline
- A consistent history of growth, usually a minimum of 3 years, and a strong forward pipeline, will make a buyer more likely to believe in your future growth
What makes a firm attractive to buyers?
- It is generally true that a larger firm is more attractive and commands a higher price
- Buyers like focused propositions that they can integrate easily into their portfolio of offerings, preferably backed by strong IP
- It is important to build something that will get buyers excited, such as propositions that are differentiated from the competition and command a premium price in the market
A failed deal can be damaging
- Closing a deal takes time, typically around 6-9 months, but if the deal falls through it can waste time and energy, and be distracting for you and your top people
- So you want to avoid the wrong turns and pitfalls on your scaling journey that can raise ‘red flags’ and turn off potential buyers
Smart scaling to become a firm that attracts buyers
Below are four potential options to scale your firm, they can all be the smart choice, but which to do and at what time will be different for every business. If we take our buyer lens and apply it to these options, we can see there are benefits and risks associated with all of them.
- Smart scaling is all about growing revenues and profits while also building your equity value
- Buyers like firms with critical mass that will ‘move the needle’ when integrated into their firm
- But size is not the only consideration, not all revenue is created equal
- Consistent performance and focused propositions are valuable to buyers
- Thinking about how a buyer would view your business can help to guide you in making the right decisions, to ensure you are ‘smart scaling’ your equity value
By Adam Blatchford, Senior Analyst, Equiteq
This blog is condensed from a more in-depth article that you access here.
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