All posts by Biz2Beach

INTRODUCTION

A Louisville business owner in her early 60’s in the software/services industry was looking to sell and begin her retirement. She had created and operated a successful company that employed 50-100 people and sustained rapid customer and revenue growth. She felt the company was in great shape and ready to be sold. A private equity firm expressed interest in the business and she decided to sign a LOI.

The initial impression customers have of your business often influences how much they decide to spend with your company. This is well known, but have you ever considered how first impressions affect the way potential investors value your business?

When raising capital, investors’ initial perception of your business significantly impacts their valuation, affecting both the equity you’ll need to give up for growth and the company’s value when selling.

Take Jeremy Parker’s experience raising money for Swag.com as an example. Investors initially perceived Swag.com as a simple distributor of promotional products. Despite Parker’s efforts to position the company as more than a middleman, investors weren’t convinced. They categorized Swag.com with other promotional product companies, offering Parker a low single-digit multiple of EBITDA for a stake in his business.

Parker re-strategized, presenting Swag.com as an e-commerce platform with a memorable domain name and a world-class, elegant, direct-to-consumer buying experience. This shift in perception transformed Swag.com from a simple distributor to a technology company in investors’ eyes. As a result, Parker received an acquisition offer that valued his $30 million company at a healthy multiple of revenue.

When it comes to raising funds or selling your business, optics matter significantly, and the way investors categorize your business in their minds plays a crucial role.

The Alibaba Discount: Why Diversification Can Hurt Your Valuation

Speaking of being categorized incorrectly inside the minds of investors, recently Chinese Internet giant Alibaba announced its intention to split into six separate businesses. In the two weeks following the announcement, Alibaba’s market value increased by $19 billion. Why would investors welcome such a move? Alibaba consists of a range of businesses resembling those of Amazon.com, including e-commerce, logistics, and cloud storage. Before the announcement, Alibaba was valued at just ten times their earnings forecast for next year, yet each individual business as a standalone will likely fetch a much higher multiple.

Investors often discount businesses like Alibaba, as they are compelled to purchase assets they may not be interested in. They frequently apply the lowest value multiple of a particular business to the entire group of companies. Amazon faces a similar situation. The Bloomberg Intelligence Unit estimates that Amazon’s cloud storage division, AWS, could be valued at $2–3 trillion as a standalone

business. However, as a collection of various services, from e-commerce to audiobooks and cloud storage, Amazon’s entire market capitalization is less than half (around $1 trillion) of what Bloomberg analysts believe just one of its divisions could be worth as a standalone.

Focus or Diversify? Striking a Balance Between Revenue and Valuation Goals

Investors typically prefer businesses that concentrate on dominating a single product or service rather than diversifying into various unrelated offerings. A diversified portfolio may lead investors to perceive your business as unfocused, which can result in a lower valuation. The same principle applies when you decide to sell your company. If your business appears scattered, potential acquirers may focus on your least valuable division and apply that multiple to your entire organization.

It’s essential to prioritize your goals: Do you aim to grow your business by increasing revenue or enhancing its value? While these objectives are related, they require different strategies. Pursue diversification if your primary goal is to boost revenue. However, if you’re striving for a more valuable company that could potentially be sold, maintaining a clear focus is crucial.

To learn more about our program and see how we can help you prepare for the sale of your business go to www.Biz2Beach.com

However, the key to this transformation lies in setting yourself apart through innovation and the development of intellectual property (IP).

The Value of Developing Your Own IP

Look at the story of Miles Faulkner, the founder of Blended Perspectives, a reseller specializing in Atlassian products, which offer software solutions for large teams. Faulkner’s story provides a blueprint for how to punch above your weight when selling a business that distributes or resells other companies’ products.

Driven to create a more valuable reseller, Faulkner set his sights on creating a product of his own: the Marketplace Analytic Research Service, or MARS. This tool is designed to guide Atlassian users in selecting the most appropriate aftermarket apps to supplement their Atlassian software.

While Blended Perspectives still made the lion’s share of their money by reselling Jira and Confluence licenses, MARS provided Blended Perspectives with a unique selling proposition, separating it from the multitude of other Atlassian resellers and, in the process, enhancing its appeal to prospective clients. MARS also rendered Blended Perspectives an attractive acquisition target for Contegix, a larger reseller of Atlassian products.

At the time Contegix acquired Blended Perspectives, observers may have wondered why the larger firm didn’t simply lower its prices temporarily to attract Blended Perspectives’ customers. However, for Contegix, the acquisition was not just about growing market share; Blended Perspectives brought a differentiating element to the table.
By owning MARS, their intellectual property, Blended Perspectives was more than just a distributor in the Atlassian ecosystem. This point of differentiation gave Contegix a compelling reason to acquire the firm far above what would typically be paid for a distributor, underlining the value of creating unique products and services in a highly competitive marketplace.

How a Parts Distributor Became a Valuable Company

Another example of someone who went from middleman to eight-figure business is Mahul Sheth. Sheth started VMS Aircraft in 1995 as a distributor of airline parts. He offered a “one-stop shop” for airlines and their maintenance crews to find parts and accessories.

VMS was the local distributor and survived on gross margins of 22–23%. It was a subsistence living, and Sheth was determined to build a more valuable company. He decided to evolve his value proposition from just being the local warehouse for distributing other people’s stuff to a sophisticated provider of advanced materials. Sheth chose to focus on the materials that airlines need to be stored and handled meticulously. If the safety of your metal tube flying 300 people 40,000 feet in the air is determined by the quality of a seam of metal, you want that steel to be handled carefully. You also want the sealant that joins the sheet of metal kept at a temperature that maximizes its adhesiveness. You may also want your rivets stored with the same care a surgeon uses to put away her scalpel after performing life-saving surgery.

Sheth invested in a clean room that minimized dust at his facility. He bought dry ice containers so certain materials could be stored in a cold environment, maximizing their effectiveness. He also repackaged materials into smaller containers so that an airline that only needed a small amount of a particular material didn’t need to buy an entire tub.

Sheth’s evolution from simple reseller to value-added provider fueled his gross margins to 60–70%. Along the way, Sheth attracted a French company that wanted to enter the U.S. market. Rather than set up shop to compete with Sheth, they realized VMS had created a unique offering with a layer of value-added services that would be difficult to imitate. They decided to acquire VMS for 7.4 times EBITDA.

In Conclusion

If you’re a business owner operating in a highly competitive field like distribution, it’s crucial to pinpoint your unique selling proposition and dedicate resources to developing your own intellectual property. These strategies not only augment your business’s value but also strategically position it for potential acquisition down the line.

To learn more about our program and see how we can help you prepare for the sale of your business go to www.biz2Beach.com

Last month, Darden, the owner of the Olive Garden restaurant chain, announced it was acquiring Ruth’s Chris, the legendary American steakhouse, for $715 million, implying a valuation of around one times last year’s annual revenue, or about ten times their adjusted EBITDA for 2022.

Not bad for a giant company, but Ruth’s Chris’s value was likely hindered by its lack of recurring revenue.

Comparing Ruth’s Chris to another traditional business with recurring revenue demonstrates the power of automatic customers. For instance, Waste Management, a private garbage collection company that disposes of trash for clients through long-term contracts, trades at over three times its annual revenue.

Two companies in traditional industries, have nothing to do with software, yet one trades at one times revenue while the other fetches three.

Recurring Revenue: Not Just for Software Companies Anymore

Many people consider recurring revenue to be exclusive to software companies, but traditional businesses can also reap the benefits of creating recurring income streams. For example, let’s look at Gamal Codner, the founder of Fresh Heritage, a line of men’s grooming products that began with beard oil for softening facial hair prior to shaving.

Codner used Facebook ads to acquire customers at a cost of around $15 each. However, with an average order value of $30, there was little margin left to support his expanding operation. Recognizing the need for change, Codner decided to broaden his product line by introducing additional grooming offerings and launching the VIP Club, a subscription program for men wanting automatic shipments of Fresh Heritage products.

A Subscription Program That Goes Beyond Just Discounts

Codner conducted an in-depth survey among approximately 500 customers and made an intriguing discovery. He found that his target customers were less captivated by discounts and more attracted to the empowering notion of being an alpha male in their respective fields. The insightful results from this survey perfectly aligned with Fresh Heritage’s inherent goal of building a distinct brand that appealed specifically to growth-oriented men, those that were keenly focused on boosting their self- confidence.

Subsequently, to incentivize men to join the VIP program, Gamal moved beyond merely offering financial incentives such as discounts. He strategically created a sense of community and belonging

by emphasizing membership in a group of like-minded individuals, all striving for personal excellence. To nurture this sense of community, Gamal established quarterly local area meetups, providing valuable opportunities for members to network and share experiences. These empowering gatherings soon evolved into a significant driving force, steering new customers toward the experience offered by Fresh Heritage’s VIP program.

Converting Customers into Subscribers

Gamal continued to acquire customers through Facebook advertising, and instead of relying on one- time purchases, he successfully converted them into subscribers, significantly increasing their lifetime value. The average order value also surged to over $60, and with the subscription program expanding to 3,000 members, Codner’s EBITDA margin grew to 40%.

That got the attention of BRANDED, an aggregator of digitally native, direct-to-consumer brands that made Gamal an acquisition offer he couldn’t refuse in 2022.

Recurring revenue will make your business more valuable. As the example of Fresh Heritage demonstrates, you don’t have to be in the software business to create an annuity stream. Find out what your customers crave on an ongoing basis, and you will have the raw material for a subscription offering.

To learn more about our program and see how we can help you prepare for the sale of your business go to www.biz2Beach.com

Do your customers ever ask that you personally get involved in their account?
If so, one of the best things you can do to improve the value of your business (and your life) is to get your employees to treat your customers as well as you do. That’s easy to say but hard to do, which is why the story of Ian Fraser is so instructive.

A former pro golfer, Fraser got his start in business by helping elite golfers find the perfect clubs as a master fitter at TaylorMade Europe.

When Fraser launched his own club-fitting business, he quickly realized the necessity of teaching his club-fitting expertise to his employees if he aimed to elevate his company beyond a lifestyle business. Fraser used the following five-step approach to clone himself:

1. Master Your Craft on Someone Else’s Dime

Before founding TXG, Fraser had already dedicated most of his professional life to golf. He began playing at 15, and within three years, he had become a scratch golfer. He then spent eight years at TaylorMade Europe, working in various club-fitting roles where he collaborated with some of the biggest names in the PGA in Europe, including Colin Montgomerie, Gary Woodland, Eduardo Molinari, and Chris Wood. In his final role with the company, Fraser designed and operated the TaylorMade Performance Lab at Scotland’s world-famous Turnberry golf resort.

Fraser describes himself as “underpaid” while at TaylorMade, but he was content to accept a below- market wage because he had a vision for the company he wanted to start. He knew the insights he was gaining at TaylorMade would assist him in building TXG.

2. Think Like Nobu

Fraser drew inspiration from Nobu, the five-star restaurant chain partly owned by Robert De Niro. Fraser argued that when you visit one of the 50 Nobu restaurants worldwide, you never question who the chef is that night. Nobu has established the benchmark for five-star dining, so you’re assured that regardless of the chef or location, you will have a fine dining experience.
Fraser utilized the Nobu example to communicate his vision to his team of club fitters.

3. Hire for EQ, Not IQ

Fraser aimed to establish a customer experience company that happened to fit golf clubs, as opposed to a golf-fitting business that offered good customer service. That’s why he prioritized EQ over IQ when hiring TXG staff. “I can teach you to fit a golf club,” Fraser argues, “but I can’t teach you to be a good person.”

Fraser implemented a behavioral interview question to identify the right candidates. He presented potential interviewees with a scenario that offered two choices: one that would benefit the client and another that would provide short-term gains to the company at the expense of the client. Candidates who opted for short-term profit over doing what was right for the customer were eliminated from consideration.

4. Teach Your Employees Through Osmosis

Most golf-fitting studios are private offices where the fitter works one on one with a player. Fraser, however, wanted to observe his apprentices at work and wanted them to learn from his interactions with clients. Therefore, he designed his location with three open-concept bays. He worked from the middle bay so his apprentices could overhear his client interactions and he could listen in on their client conversations as well.

Fraser contended that being physically close to his employees accelerated their learning curve more than any other technique he tried.

5. Broadcast Your Expertise

Fraser established a YouTube channel where he provided club-fitting advice for free. The channel amassed 216,000 subscribers. Fraser understood that only one percent of his subscribers would ever step foot in a TXG store, but the channel reinforced TXG’s reputation as the world’s best club fitters. Additionally, it transformed his marketing strategy from a cost into a profit center as the channel generated over $300,000 per year in advertising revenue, which Fraser reinvested in growth.

When asked if he was concerned about divulging his “secret sauce” in the YouTube videos, Fraser referred to celebrity chef Gordon Ramsay. He reasoned that Ramsay shares his recipes in cookbooks, but this doesn’t make people any less likely to visit his restaurants.

By implementing an innovative hiring process and utilizing a creative teaching approach, Fraser succeeded in expanding Tour Experience Golf (TXG) to a team of 14 employees, developing a YouTube fan base of over 200,000 subscribers, and generating revenue exceeding $3 million.
In 2022 TXG was acquired by Club Champion, the largest club-fitting company in the United States, with more than 100 locations.

To learn more about our program and see how we can help you prepare for the sale of your business go to www.biz2Beach.com