If you’re wondering what your business might be worth to an acquirer, there is a simple calculation you can use.
Cost to recreate > Cost to buy
At some point, every trade buyer calculates how much it would cost to re-create what you’ve built. If they decide they could buy your business for less than the hard and soft costs of building a competitive product or service using their existing employees, then they may be inclined to acquire yours. If they think it would be less costly or less risky to create it themselves, they are likely to choose to go head to head with you instead.
The key is ensuring that you have something that is difficult to compete against; a point of difference, a unique value proposition, something that is difficult to replicate.
Making your offering difficult to replicate means focusing on a single product or service and building your value proposition around it. When you create a product that is unique and focus all of your resources into continuous differentiation of it, you have more control over the terms of transfer. Why? Because re-creating your business is harder if you have focused on one thing.
The worst strategy is to have a wide range of offerings only loosely differentiated from others on the market. Any potential acquirer will assume they can set up shop to compete with you by simply undercutting your prices one product or service at a time, slowly driving you out of business.
Take the example of C-Labs.
Chris Muench started C-Labs in 2009 to go after the growing opportunity presented by the Internet-of-Things (IoT). He began by writing custom software applications that allowed one machine to talk to another. In 2015, the industrial giant TRUMPF International entered into a strategic alliance with C-Labs, licensing their core platform and acquiring a minority stake in the company. This gave C-Labs the funds to transform its service offering into a focused product-line.
By the end of 2016, C-Labs’ product was gaining traction but C-Labs was running out of money.
The following year, TRUMPF acquired C-Labs in a seven-figure deal that could stretch to eight figures if Muench is successful in hitting his future targets. Why would a large, sophisticated company like TRUMPF acquire a relatively early-stage business like C-Labs? Because they knew that re-creating Muench’s technology would cost much more than simply writing a seven-figure cheque to buy it outright.
Selling many undifferentiated products or services is a strategy for building a business that – if it is sellable at all – will sell at a discount to its peers. In contrast, the trick to getting a premium valuation for your business is having a product or service that is irresistible to a trade buyer, yet difficult for them to replicate.
That’s one of the levers you can manipulate to increase the value of your business and the likelihood of selling. To discover which levers will make the biggest difference to the value of your business click the button below to obtain your personalised value-builder report.