05 Dec A Well-Defined Business Model Can Help Improve Your Valuation
Making the decision to sell your business is very personal. When it does come time to sell, many owners want to ensure they maximize the value they receive at close. This makes sense, as many owners have spent years, and maybe a lifetime, building a successful company. An often-overlooked driver of valuation is the business model. Bringing qualified buyers to the table requires time and effort. One strategy to help garner the most attention is having a unique and effective business model.
Leonardo Da Vinci had it right when he said, “simplicity is the ultimate sophistication”. Many business owners know what their business does, but when asked by investors “how do you do it”, they are unable to respond in a clear and concise manner. This is a lost opportunity to capture an investor’s interest. Your “how does my business operate” elevator pitch should be easy to understand. Work on your pitch until you can explain it to a grade-school child. While the investors you speak with are (hopefully) more sophisticated than a grade-schooler, they will appreciate an easy to understand introduction to your business. The time for complexity and a deep-dive will come, but that isn’t a way to begin the conversation.
The Value of a Unique Business Model
What makes your business unique? That question may seem easy at first, but when you are speaking with educated investors and must defend your answer, it may become more difficult. Some owners might jump at the opportunity to describe their patented software/process/widget. While this may be important, successful ideas are often copied. Rapid changes in technology may allow another company to innovate around your patent. Technological advances may also make your product or service obsolete before you have the opportunity to sell your company.
Your unique business model should give the investor a reason to purchase your company over another viable option. Describe how your model will allow you to stay ahead of the competition. An easy to understand model that describes how you will stay ahead of the curve will make an investor’s ears perk up. When describing why your model is unique, you don’t want to come across as vague or overly complex. This may result in the true value of your business being lost on the potential buyer. That is one way to get a quick “pass”. However, a word of caution is necessary: don’t undersell your business model. Easy to understand shouldn’t be confused with “it’s so simple, anyone can do it”. Remember, investors like something unique. If anyone can do it, why should they buy your business and not simply start their own?
Business Models as IP
If your business model includes some propriety process, such as a unique may to manufacture durable goods, that should be included as part of your pitch. While you can keep it simple at the start, explaining that the process you utilize is a barrier to entry will entice many buyers.
While honesty between the parties is critical to a successful transaction, you don’t have to give everything away in the beginning. At the early stages of investor discussions, it is acceptable to state that you utilize a proprietary process in your business model. This may come in the form of, “At ABC Company, we utilize a propriety method to use ABC when manufacturing our durable goods”, without stating what ABC is exactly. Positioning this method as IP can help increase the valuation you receive from investors.
Is Your Business Model Hot or Not?
Numerous models for running a business exist. Some are more popular among investors than others. For example, investors would likely be interested to hear how your wet shaving business uses a subscription model to capture recurring monthly revenue. If you said your model involves opening brick-and-mortar shops a la Blockbuster, they may be less thrilled. Savvy investors pay attention to what models are hot and which have fallen out of favor. If your business is using a model that isn’t considered “hot”, it may be an uphill battle to convince a buyer you are a good investment.
Don’t despair if you find that your model is not what buyers are looking for. This may be an opportunity for you to re-evaluate how you operate and update your model. You may be surprised with the results from trying a new approach.
Yes, bringing Gene Simmons along would likely get you an initial meeting. However, keeping it simple silly (“KISS”) is a good approach to take when discussing your business with a potential buyer. Rehearse, refine, and rehearse your pitch some more before approaching buyers. You should be able to clearly convey how you do what you do in 30 seconds.
It is a fine line you must walk between being too vague and jumping right into the weeds. Like many things in life first impressions count when discussing a sale of your business with a buyer. A unique and well-defined business model that can be communicated clearly will garner investor attention and help you stand out from the pack. Every business owner wants a premium when they go to sell their company. Not all will get it. Those that do are prepared well before entering the market. A well-defined business model should be part of your preparations and can make the difference between meeting with investors and being met with “we’ll pass” before you even get started.