As a tech entrepreneur, it’s easy for you to see the value and potential of your company. You have the vision. You put in the long hours to create an incredible product. But how do you communicate to skeptical buyers the intrinsic value of your company?
Buying a business is risky. It’s even more risky when the business being bought has little or no profit. However, high profits often aren’t the main concern in these transactions. Buyers buy the future—they want to see the potential for strong growth and future profitability. While each buyer will assess the value of your company differently, they all will generally consider these three characteristics.
- Revenue Quality: Not all revenue is created equally. In tech, a “revenue pyramid’ can be used to describe the quality of revenue that a company earns. At the top of the pyramid is the highest quality revenue: hosted, subscription SaaS. In this model, recurring revenue is high and thus the least volatile. Customer churn is generally lower and profit margins tend to be higher because the product/service is very scalable. Towards the bottom of the pyramid is service revenue which is non-recurring and thus the most volatile. Profit margins tend to be lower because services are more labor-intensive and depend on the availability of personnel, reducing scalability. Other forms of revenue, like hardware or resales, can rank even lower.
- Competitive Advantage: Buyers love to see a product or service that is differentiated, not easily imitable, and creates a sustained competitive advantage in the marketplace. If the company looking to be acquired has no real sustainable competitive advantage, their future growth prospects diminish dramatically. A lack of competitive advantage may be overlooked, though, if synergies between buyer and seller themselves create a competitive advantage.
- Growth & Disruption: Again, buyers don’t need to see huge profits to make an acquisition. They do want to see fantastic growth in the past and need to believe in future growth. Corum annually identifies ten trends in tech that are disrupting markets. Sellers with products or services in one of these trends tend to enjoy higher valuations because buyers can really see the strategic value in the acquisition. Future growth and profitability are much more likely if the seller is offering a product/service that is highly disruptive.
Operating environment, assets, capabilities, situation, leadership, view on the marketplace and more differ with every buyer. The value that one buyer sees in a seller may not be shared by another. With that being said, just about all potential buyers will place more value on a company with excellent revenue quality, a sustainable competitive advantage, and strong prospects for future growth – something that you, the seller, will want to highlight and communicate.