Growth vs Value

Growth vs. Value

In today’s business landscape, growth is often seen as the ultimate measure of success. Entrepreneurs frequently gauge their achievements by the number of employees they manage, and many aspire to be featured on lists that celebrate revenue growth. However, if your long-term goal is to sell your business to a strategic acquirer, pursuing unchecked revenue growth might not translate into a proportionate increase in your company’s value. In some instances, it could even diminish it.

Strategic Buyers Value Uniqueness

Strategic acquirers, who are typically willing to pay the highest prices, seek something they can’t easily replicate. They are drawn to a unique offering that would be too costly or time-consuming to develop on their own. However, the more extraneous services or products you add to your business, the less attractive you may become to these buyers.

Consider the example of Michael Lieberman, co-founder of Datastay, a software company that transformed how brake manufacturers managed their design drawings with its product lifecycle management software. Datastay became a household name within the brake manufacturing sector, with Lieberman personally connected to nearly every key executive in the industry. He was the go-to person, the one everyone knew and wanted to network with at industry events.

Then came Autodesk, a billion-dollar company known for its indispensable software tools used by designers and builders across various industries. Autodesk recognized Datastay's dominance in the brake industry and saw an opportunity to expand Datastay’s product lifecycle management software across the numerous sectors it served. As a result, Autodesk offered Lieberman an impressive ten times Datastay’s revenue for his nine-employee company.

If Lieberman had chased broad revenue growth, he might have expanded Datastay’s offerings to include other software products for brake manufacturers. However, this would have diluted the core value that made Datastay so appealing to Autodesk. Instead, Lieberman remained focused, dedicating his efforts to making the best product lifecycle management software specifically for the brake industry.

Expanding into other industries might have weakened Datastay’s stronghold in the brake sector and attracted competitors. By sticking to his niche, Lieberman preserved the unique value that Autodesk was willing to pay a premium for.

Private Equity vs. Strategic Acquirers: Different Perspectives

Private equity firms typically base their valuations on a multiple of your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). On the other hand, strategic acquirers are more interested in what your product or service is worth in their hands.

These strategic buyers are usually larger and better resourced than the companies they acquire. They don’t need you to diversify your offerings; instead, they want the company that provides the one unique piece they need. The more focused and less diversified your offering, the higher the premium they are likely to pay.