Six important qualitative factors that will influence the value of your business

Dominic Monkhouse

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Wondering how ‘sale-ready’ your business is? You may have a clear exit plan with PE or VC backing. Or your business might be privately owned, and you’re working on increasing its value. Either way, understanding the factors that influence sale-ready value is useful.

Exit planning has always fascinated me. My experience scaling Peer 1 taught me so much about the levers to pull to increase value. In 2013, we sold the business, realising the highest multiple for a hosting company ever achieved. 

It’s a topic I frequently discuss with guests on my Melting Pot podcast. I recommend listening to my conversations with Robert Chapman from Firebrand, Rob Belgrave from Wirehive and Neil Marley from New Signature. All three talk about their exits. Also, don’t miss our podcasts with corporate finance people Daniel Domberger and Daniel Havercroft. Both discuss the UK technology sector and what, in their opinion, drives multiples.

Last week, I blogged about the measurable, quantitative factors at play in valuation. Here, I’m moving on to look at the broader qualitative factors that will influence the value of your business. It all boils down to the story you tell. And, like all good stories, you need to understand your audience. Once you know your potential buyer’s identity, you can tell them why your business is a good fit.

1. Strategic coherence

Value is about much more than assets and balance sheets. It’s what your business can do for a potential buyer. At Peer 1, we bought NetBenefit, and, on paper, it looked like we’d paid 14x EBITDA – a high price. But we could see £2 million of synergies, meaning we’d only paid 6x. When we exited a few years later, this NetBenefit transaction alone contributed 17 cents to the buy price of our shares. After the acquisition, we’d managed to get £2 million of cost out of the business. 

Having a solid niche will help enormously. Can you articulate the jobs to be done and why a customer hires your company over a competitor? Are you clear on the total addressable market? Can you show how the opportunity here is to take some investment and grow? This could be through organic growth or acquiring other products and services in a sector.

One of our clients that’s still privately held is T-Tech. They’re an MSP that now focuses heavily on the accountancy sector. It wasn’t always so. When they were a generic MSP, they were worth £2 million. This grew to £6 million when they focused on accountancy – a great example of how expertise can attract a premium.

So if you’re serious about selling your business, build some IP around how you do what you do. If you’re a Jack of All Trades, you’re less likely to be a high-value strategic acquisition target. 

2. Quality of execution

To attract a high multiple, your business needs to be well-run. This is where the execution systems we put in place for our clients are helpful. 

As part of articulating their story to prospective buyers, our clients can say, ‘We’ve been working with Monkhouse & Company over the last three years. Here is where we started, and this is where we are now.’ No need to go back and reconstruct things because all the evidence is already there. They can show a One-Page Strategic Plan, BHAG and three-year goal. There are clear metrics and proof of tracking and improvement. This includes three years’ data on employee engagement, Net Promoter Score and the different segments of their business. If churn is low or high in certain places, this is known, understood and being managed.

Don’t underestimate how robust this evidence can be. It tells a buyer that the next three years will extend what’s already been achieved. This contrasts with the usual straight line and hockey stick predictions we often see in IMs. 

3. Culture

Two significant qualitative factors are at play in Culture that will influence the value of your business. The first is the quality of your Executive Team. As CEO, you may or may not stay after exit. But any potential buyer is going to need a good management team in place to run the business. At the very least, every one of them should be A-Players, and evidence should support this.

Second but equally important is whether your business is an employer of choice. Can you attract and retain great talent? No one wants to see talent bleeding out of the business, particularly if it’s a services business where execution is linked to people. Is your business stable? Are your people settled and happy?

There’s data you can show to evidence a thriving culture. Third-party validation awards such as Sunday Times’ Best Places to Work’ can work well. A good Glassdoor rating is invaluable. If you use Gallup Strengths or Friday Pulse to measure staff engagement, you can benchmark data to show how you compare to other companies of the same size in your industry. This will enable you to tell a convincing story with context to any potential buyer.

4. Platform for consolidation 

Could you build a platform for M&A? One of our clients that operates in the HR space is doing precisely that. They raised money and acquired another company last year to build an HR platform. Others, like Wirehive, sold to Pax8 to be part of their platform. And New Signature was sold to Cognizant because it was building a global Microsoft cloud brand.  

If you can work out who might acquire you, then you can focus on the things that matter to them and leave the things that don’t. New Signature had a BHAG to create ‘the best Microsoft partner the world had ever seen’. When Cognizant wanted to build a global Microsoft cloud practice, they saw that New Signature had been Microsoft Partner of the Year twice. So they bought them to give them market credibility in Microsoft. 

Look at where you might fit into the ecosystem and develop your niche. We talk about positioning when I’m helping clients with their tactical sales and marketing plans. I tell them they need between 2 and 10 competitors. This will give them around 2000 targets, and their organic growth can be high enough to attract a buyer’s attention. Either they can acquire you because they need your core skill in their platform, or you become a platform that they can tag other businesses onto. Both give great potential for scaling. 

5. Market growth

Are you in a high-growth or slow-growth market? It amazes me how little clarity people have on why clients buy from them, not their competitors. Even worse, how little people know about their market. What’s your growth rate? And what’s your market’s growth rate? How do these compare? 

Let’s say you’re in Public Cloud today. That market is growing 20% year over year. You’re going backwards if you’re not growing at the same or better. If you want to do well in this market, you should be growing 100% year over year because then your market share is going up relative to the market.

Perhaps you have a slow growth piece of your business. You might see a synergistic or parallel marketplace growing faster than your market, and you spot the strategic coherence. You don’t need to have transitioned all your revenue but just need to have done something there. People like to see hotspots with potential. 

6. Exit routes

How easy will it be to acquire your business? This is often down to the nature of your ownership structure. How many shareholders do you have? How quickly could you get a deal done? 

Some of this comes back to strategic coherence. If you’ve got 27 revenue streams, finding someone who values all of them will be hard. And it will be a much more complex sale. Much better if you do one thing amazingly well in a fast-growing marketplace. If your organic growth is high, your business will be easier to sell, even if it’s not making any money. 

Greg Crabtree’s ‘Simple Numbers 2.0’ book is worth reading here. He has a concept of launch capital that ensures you’re telling a coherent story. So often, people say they’re not making much money because they’re investing in growth. That’s going to make your business harder to sell. Greg suggests you deliberately ringfence any spending, particularly when funded out of cash flow. Then you can work out your return on investment. Every time you run an initiative, track how much you’re giving it, how long before you kill it and when you might invest more. Future buyers will appreciate this articulated story.

Written by business growth coach Dominic Monkhouse. Find out more about his work here. Read his new book, ‘Mind Your F**king Business’ here.