Growth vs Value: Not all Revenue Growth is Equal

Growth vs Value: Not all Revenue Growth is Equal

With 2021 already underway, many of you will be looking to cover the revenue gap resulting from Covid. Many of you will be looking for the “fastest” way to plug the gap or grow the business.

Will it mean introducing and/or cross selling new products and services to existing customers? Will it mean finding new customers or even entering new markets? Will it be a combination of several or all the above?

How you focus your growth may have a profound impact on the value of your business.

As is well known, a profitable company with faster growth will be worth more than a similar profitable company with little to no growth. That would suggest growing the revenues is the easiest way to grow the value of the company. 

The reality is a bit more complicated as seen in an analysis of nearly 60,000 owners who completed their Value Builder ScoreTM questionnaire.

  • The Average company on the Value Builder system who has received an offer from an acquirer was offered 3.5 times their pre-tax profit.
  • Companies that had a historic growth rate of 20 percent or greater were receiving offers of 4.3 times pre-tax profit or nearly 23 percent more.

So far so good.  This seems to back up the argument that growth means more value.

However, a significantly higher bump in multiple came with those companies that claim to have a strong niche in providing a unique product or service for which they have a virtual monopoly.

  • Niche companies enjoyed on average offers of 5.4 times pre-tax profit, or roughly 54 percent more than the average companies, and nearly 26 percent more than the fastest growth companies.

Focusing on your Niche: Rewards and Challenges

Chasing all types of revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines.

However, there can be two drawbacks:  First, you offer a wide range of products and services without any deep expertise in any of these products and services.  This leaves you open to a competitor who can dominate you on service quality and credibility. Second, a wide range of products and services can just confuse your customers and lead them to look elsewhere.

For example, if you wanted braces would you go to Dr. Fred who promises that he can do everything from braces, eyeglasses, pediatrics, podiatry and even open-heart surgery or Dr. Chris, certified orthodontist and that is all he does? Would you go to Dr Fred for anything on his list?

When it comes to selling your business, a niche product or service that you dominate or master is much more appealing than having a mile wide but inch thick breadth of services.

After all, when a strategic acquirer buys your business, they are often buying something they cannot easily replicate on their own.

A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.

Focusing on a niche is not easy.  It requires a great deal of discipline and of course risk (if the niche is not viable).

Focusing on your niche is one of many areas where the long-term value of your business can be at odds with short-term profit. For example, do you sacrifice the bottom line in the short term so you can invest in new technology, or hire a head of sales to enhance the niche?

The long-term return should be greater, but do you have the stomach to make that tradeoff, or would it be easier to forego the investments to make the short-term profits look better?

Valuable companies with niche products and services find a way to deliver profit in the short term while simultaneously focusing their strategy on enhancing the drivers of the value of their business.

Where do you stand?

You can find out where you stand by getting your own Value Builder Score, and see how you compare on the eight key drivers of company value, by taking our 13-minute survey.