Kristin Luck
The number one question posed to us at ScaleHouse by the founders and executive teams we work with is “what is my company worth?” Although we can estimate valuation ranges through methods like discounted cash flow, comparable company and precedent transaction analysis, what a company may be worth (and to whom!) is highly nuanced. Markets and buyers are in constant flux. Rather than worrying about the valuation of your business today, we encourage firms to focus on growth via the following four strategies that historically drive higher valuations, regardless of market fluctuations.
1. Demonstrate Recurring Demand
Is your product or service “sticky”? Do you have repeat buyers or licensing agreements that guarantee revenue over a specified period?
The more you can show that demand for your product or service isn’t just a one-off purchase and that buyers are willing to commit to buying again and again, the higher the value of your revenue.
In a services business and struggling to figure out a recurring revenue model? We can help.
2. Proprietary Mojo
Everyone thinks their business is unique as a snowflake but in truth it’s challenging for most business owners to define what truly differentiates them from their competitive set. If your elevator pitch could easily be used by a competitor then chances are you have some work to do. Warren Buffet calls this “defining your competitive moat.” True differentiation creates defensibility which is of high value to both investors and buyers.
3. Large Addressable Market
To be clear, a large addressable market does not mean trying to be all things to all people. Defining a niche that’s large enough to scale is paramount. Buyers often look for businesses that serve markets with macro tailwinds that drive market expansion.
4. Profitability (or a clear path to it!)
Although we certainly see firms sold that aren’t profitable, an argument can be made that a company’s value is nothing more than its expected future cash flows discounted at its cost of capital to their present value. Unless you’re in hyper-growth mode, profitability is a major factor in implied value. To quote Peter Cohan in Inc. “Growth used to matter more than profitability, but investors aren't buying it after WeWork's implosion.”
Interested in an outside perspective on the value of your company or a potential target? Curious what synergies might already exist in your portfolio and need pro-forma financials for a potential target? Looking for an objective analysis of historical financial performance? Need a scenario or sensitivity analysis for a potential acquisition?
From pro-forma creation and analysis to valuations and analyzing investment return, consider ScaleHouse an extension of your internal finance team. With over 35 combined years of experience in private equity, investment banking and corporate finance, we have a unique understanding of the financial analysis needed to ensure you’re working toward the right valuation metrics. Not sure you are? Reach out to us.