When potential acquirers first evaluate your business, most will quickly categorize it into a specific industry. This initial classification can significantly impact the value they place on your business. Some industries are inherently perceived as more valuable than others, and if your business is placed in a less favorable category, it can be challenging to change that perception.

When Jeremy Parker was raising money for Swag.com, he ran into investors who were left with the impression that Swag.com was a simple distributor of promotional products, which is an industry plagued by low valuations.

Parker tried to make the case that Swag.com was more than a middleman, but investors weren’t buying it. They lumped Swag.com into the promotional products category and offered Parker a low single-digit multiple of EBITDA for a slice of his business.

Parker regrouped and began positioning the business as an e-commerce play with an unforgettable domain name, world-class merchandising, and one of the most elegant direct-to-consumer (DTC) buying experiences online. Investors began to see the company differently. No longer a simple distributor of “trinkets and trash,” Swag.com began to be seen as a technology company and a digital commerce leader. Instead of a low single-digital multiple of profit, Parker attracted an acquisition offer valuing his $30 million company at a healthy multiple of revenue.

Once an acquirer has categorized your business into a particular industry, it can be challenging to shift that perception. If your business doesn’t fit neatly into their preferred categories, it can be difficult to change their initial impression.

Additionally, acquirers often compare your business to others within the same industry. If they have already placed you in a less favorable industry, they might use lower benchmarks and valuation multiples from that industry, making it harder to argue for a higher valuation. Furthermore, the initial narrative you present about your business can stick. If this narrative places you in a lower-valued industry, subsequent efforts to reframe your business may be met with skepticism.

How to Look Like a Valuable Business

To ensure your business is categorized favorably from the start, consider these strategies:

1. Clear Positioning: Clearly articulate your business’s value proposition and industry position. Avoid ambiguous descriptions that might lead to misclassification. Be explicit about where your business fits and why it should be valued accordingly.
2. Highlight Industry Trends: Emphasize positive trends in your industry and how your business is positioned to capitalize on them. Use data and market analysis to back up your claims and shift perceptions.
3. Put Your Best Foot Forward: If your business spans multiple industries, highlight the most favorable one. Demonstrate how your company leverages the strengths of high-value industries and downplay associations with lower-value ones.
4. Leverage Third-Party Validation: Use endorsements, industry awards, and analyst reports to support your positioning. Third-party validation can lend credibility to your claims and help shift acquirer perceptions.

When selling your company, perception is everything. The category investors place your business in can make or break the deal.

Who does the selling inside your business?

If you’re involved, your business will be less valuable than if you weren’t. Investors and acquirers are reluctant to invest in a business where the owner is the rainmaker of the company.

The team at the Value Builder System™ analyzed more than 70,000 businesses, and the data revealed that companies that can sustain a three-month absence of the owner ​are more than twice as likely to receive a premium acquisition offer​ (defined as greater than 6x pre-tax profit). In other words, to maximize the value of your business, you need to get other people doing the selling.

Easier said than done.

Why Employees Can’t Sell Like the Owner

Unsurprisingly, most young recruits struggle to sell at the same level as the founder. In addition to having experience on your side, you also have a built-in advantage over your young reps based on your job title.

Founders often sell by offering customers a great experience, which is believable coming from you. After all, you are the expert in your industry, you control who works on each project, and, if something goes wrong, a customer always knows they can call you to fix it.

When junior salespeople try to use your company’s reputation for customer service as a selling point, it often sounds like a hollow promise. That’s why Matt Dixon, the author of The Challenger Sale, suggests you arm new salespeople with the answer to a simple question: “Why should your prospects buy from you?”

There’s just one catch. The answer can’t have anything to do with the customer service you provide.

To figure out your answer, keep in mind that a great selling proposition includes three elements. It must be something that:

1. customers care about;
2. makes you different; and
3. is believable.

Arm your salespeople with a compelling point of differentiation, and you’ll have given them the raw material they need to sell without you, making your business more valuable in the process.

Most founders aim to boost sales, but prioritizing top-line growth can attract low-quality revenue, potentially reducing your company’s value.

To an acquirer, revenue quality varies. They prioritize future revenue predictability, valuing recurring income from contracts and subscriptions higher than one-off sales. Consequently, firms with recurring revenue often command a revenue-based valuation, whereas businesses reliant on transactional revenue are usually valued based on a multiple of EBITDA.

Why Mike Winnet Turned Google Down

Mike Winnet provides an excellent case study on the importance of prioritizing the right kind of revenue.

Winnet started U.K.-based Learning Heroes after recognizing that most e-learning programs were long and boring. He saw an opportunity to transform the industry by selling large companies a subscription to his short, engaging, animated training courses.

Although his company was growing, it was still thirsty for cash. Winnet was drawing a salary of just £500 a month when he received a lucrative offer from Google. The giant search firm offered Winnet £90,000 to create a custom course for them. The course would have taken his team just three months to develop, and Winnet would have welcomed the injection of cash. 

But Google’s offer was a one-time transaction and didn’t sit right with Winnet, who was trying to build a company based on recurring revenue. “I know loads of people who would have taken that £90,000 contract, but we didn’t because it didn’t fit the model. We used to have a sign on the wall that said, ’Does It Make the Boat Go Faster?’ and if the decision didn’t make the boat go faster, we wouldn’t do it.”

Not only was Winnet concerned Google’s offer would slow their journey to becoming a subscription-based e-learning juggernaut but he also knew the one-off nature of the revenue had the potential to undermine the value of his company in the eyes of potential acquirers.

Winnet started Learning Heroes with the intent of selling it within three years for £10 million. He knew he would need to position the company as a product-based subscription business to garner such a premium offer.

Winnet understood that a simple service company doing one-off projects, like the one Google was offering, would be lucky to garner an offer of one times revenue. In contrast, a subscription-based product company could command a much higher valuation from an acquirer. 

By accepting the Google project, Winnet would have run the risk of appearing to be a project-based consultancy and accidentally falling into the service business category in an acquirer’s mind.

In the end, Winnet’s discipline paid off when he accepted an acquisition offer from Litmos of £8 million, representing roughly four times his revenue at the time.

Had Winnet been viewed by an acquirer as a traditional service company, he would have likely been offered a quarter of what he received.

Rather than focusing exclusively on revenue growth as a goal, owners that sell for the highest multiples tend to concentrate on growing value, even if that occasionally comes at the expense of short-term sales.

We live in a business world where growth is worshipped. Entrepreneurs measure themselves by how many people they employ. Many founders dream about making lists whose sole criterion is revenue growth.

However, if your endgame is to sell your business to a strategic acquirer one day, indiscriminate revenue growth may not result in a commensurate spike in your company’s value; in some cases, it may even detract from it.

Strategic Buyers Value What They Cannot Replace

Strategic acquirers—the buyers that usually pay the most—are looking for something they can’t easily do themselves. They covet that unique offering that would take too long—or cost too much—for them to duplicate. But the more extraneous offerings you add, the less valuable you become in their eyes.

Take Michael Lieberman, who co-founded a software company named Datastay. It revolutionized how brake manufacturers cataloged their design drawings through its product lifecycle management software. Datastay became synonymous with the brake manufacturing industry. Lieberman was on a first-name basis with almost every brake manufacturing executive in the industry. He was the man to know, the one who hosted dinners at trade shows—he was the guy.

Then Autodesk entered the picture, seeing Datastay as their gateway to the product lifecycle management software market. Autodesk, a billion-dollar serial acquirer renowned for software tools indispensable to designers and builders across various sectors, acknowledged Datastay’s dominance in the brake industry and saw the potential to market Datastay’s product lifecycle management software across the myriad industries Autodesk served.

Autodesk offered Lieberman an extraordinary ten times revenue for his nine-employee company.

Had Lieberman prioritized broad revenue growth, he might have diversified his offerings to the brake manufacturers, diluting the core value that attracted Autodesk. Brake manufacturers need all sorts of other software, but Lieberman remained disciplined and focused exclusively on product lifecycle management tools.

Lieberman could have branched out to other industries, but spreading his attention to other industries would have weakened his connection to the brake industry and invited competition. Instead, he stuck to his knitting: Make the world’s best product lifecycle management software for the brake industry.

Private Equity and Strategic Acquirers See Things Differently

Unlike the private equity acquirer that usually bases their valuation on a multiple of your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), the typical strategic acquirer is trying to calculate what your product or service offering is worth in their hands.

The typical strategic acquirer is much larger and better resourced than the companies they target. They don’t need you to diversify for them. Instead, they want the company that has the one puzzle piece they want, and the less diversified that offering is, the higher the premium they’re prepared to pay.

If you’re looking to attract an investor or an acquirer one day, expect them to dig into your sales and marketing process.

If you’re a company that sells to other businesses, an investor will want to know where you get your leads from and how much each costs you to generate. They’ll want to know what technology you are utilizing to support your sales team. They’ll want to understand how your sales reps get meetings and how many appointments a good rep has each week. They’ll want to know the close rate of a high performer and how it compares to an average performer.

The investor’s questions aim to gauge the scalability of your sales model under significantly higher investment rather than simply to assess your past performance. Acquirers love stumbling over a business where the main constraint to growth is capital. They fall over themselves for a company that has an efficient sales engine that needs more fuel (i.e., money). Most investors have lots of capital but struggle to find businesses with a sales system that won’t collapse under the weight of more money.

How Gregg Romanzo Built a Sales System

In 2004 Gregg Romanzo started an old-school freight brokering business. Most freight brokers are nothing more than a handful of people arranging shipments in return for razor-thin margins, but Romanzo realized his sales model had the potential to grow into something much bigger.

Romanzo’s model involved hiring high-potential people with a relatively modest base salary of between $40,000 and $60,000 per year and teaching them the business from scratch. He armed them with a computer and access to the best scheduling software and tied their variable compensation to the gross margin of the jobs they booked. Romanzo knew if he could get a rep to clear $100,000 per year in total compensation, he would be able to keep them for the long run.

Romanzo took his very best talent—the top one or two percent—and built a team around them so they could earn even more. This cohort of salespeople could clear three, four, or even five hundred thousand dollars in an exceptional year.

Since Romanzo paid a relatively low base salary and his people didn’t need a lot of equipment, he was able to hire a lot of salespeople. By the time he sold his company, he had 200 employees, 190 of which were salespeople. That’s 95% of his headcount dedicated to sales.

How does that compare to your company? If you have a winning formula, you think would hold up if you doubled or quadrupled your sales team, consider monetizing the sales model you’ve created. Either hire a lot more reps or show a deep-pocketed investor or acquirer how durable your sales model is and how all you need is their capital to grow it.

One of the eight factors that impact the value of your company is something the team at The Value Builder System™ refers to as “The Switzerland Structure,” which emphasizes the importance of business independence. It cautions against excessive reliance on any single entity, whether suppliers, employees, or customers. While many business owners recognize the risks associated with dependency on a high-profile customer or employee, the hazards of anchoring to a single supplier are often overlooked.

Supplier dependency comes in many flavors, but the most pernicious is a dependency on a single marketing supplier for sales leads, such as a dominant e-commerce site or social media platform.

6 Ways Marketing Supplier Dependency Cuts Your Value

1. Increased Risk Exposure: Sole reliance on one platform exposes a business to risks of sudden policy, fee, or algorithm changes. Such negative alterations by the platform could significantly impact the business’s sales and profitability. Client Relationships
2. Lack of Diversification: Over-dependence on a single channel is perceived as a vulnerability, while a diversified sales approach suggests resilience and adaptability, appealing attributes to both investors and acquirers.
3. Limited Growth Potential: Exclusive reliance on one platform can restrict a company’s growth opportunities. Investors typically favor businesses with multiple channels for growth. Being bound to one platform can limit a business’s potential for expansion.
4. Brand and Customer Relationship Limitations: Operating primarily through a third-party platform may lead to limited customer interaction, hindering the development of a strong brand identity and customer loyalty, both highly valued by investors.
5. Negotiating Power and Autonomy: Dependence on a platform like Amazon can reduce control over crucial business aspects, such as pricing and customer service. Investors may view this lack of autonomy as a strategic weakness.
6. Perception of Innovation and Independence: Businesses demonstrating innovation and independence are often more attractive to investors. Over-reliance on a single platform can create an impression of a lack of these qualities.

How Chad Maghielse Improved His Score on the Switzerland Structure

Chad Maghielse’s company, Pets Are Kids Too, originated with a simple spray to help improve his dog’s breath and swiftly expanded to over $2 million in sales with a 35% profit margin within three years, relying solely on Amazon. Recognizing the risks of this dependence on the e-commerce giant, Maghielse embarked on a path of supplier diversification.

Maghielse expanded to another e-commerce platform, Chewy.com, and launched his own online store. This strategy reduced Amazon’s share of his sales to 65%, while Chewy and his store contributed 30% and 5%, respectively. A significant reduction in his business’s platform risk and an increase in its appeal to potential buyers resulted from this strategic shift.

Thanks in part to Maghielse’s diversification strategy, Pets Are Kids Too was acquired in a deal that valued the company at three times its EBITDA, with a substantial portion paid up front. Maghielse’s journey highlights the critical insight that diversification not only shields against market volatility but also enhances a business’s overall value.

Embracing the Mentality of the Swiss

Reducing your reliance on a single marketing supplier not only bolsters your company’s market resilience but also notably increases its value. Adopting a Swiss-style mindset, which values independence and strategic autonomy, is more than a tactical move; it is a key strategy for achieving sustainable growth and boosting the value of your business in the long run.

In the competitive third-party logistics (3PL) sector, Jay B Sauceda turned Sauceda Industries into a standout business, ultimately reaching $14 million in sales before being acquired by Cart.com.  

His secret weapon? His core values: “Yes, And,” “Explore More,” and “Give a Sh!t.”

Talent Recruitment

Sauceda found his first significant opportunity with Howler Brothers, the digitally native purveyor or stylish and rugged outdoor gear whose leadership related to Sauceda’s core values.

Sauceda’s values weren’t mere posters on a wall but embedded into job descriptions, ensuring new hires were aligned with the company ethos. “Yes, And” fostered constructive dialogue, “Explore More” encouraged initiative, and “Give a Sh!t” signaled a commitment to quality.

In the fiercely competitive landscape for hourly workers, Sauceda utilized job ads as both a magnet and a filter. His distinctive ads read:

“We’re looking for someone who gives a shit about their work, gets annoyed with coworkers who don’t pull their weight, wants to level themselves up in a big way and cares about being somewhere long enough that people remember their name.”

Such postings instantly distinguished Sauceda Industries from the mundane listings of competitors, drawing talent aligned with the company’s dynamic culture.

Employee Training and Metrics

New hires were introduced to Sauceda’s values through dedicated training programs. Performance evaluations considered not just revenue metrics but also the embodiment of Sauceda’s core principles. Employees who exemplified “Yes, And,” “Explore More,” and “Give a Sh!t” found themselves rewarded and recognized. Their Slack channel was full of praise for team members embodying their core values.

Creating a distinctive culture was crucial for Sauceda. He recalls, “Our values lived in our daily interactions, whether it was an employee going above and beyond for a client or in our collaborations.”

Client Relationships

The core values extended to client interactions, offering criteria for long-term partnerships. A cornerstone example was Howler Brothers, whose alignment with these values set the stage for both parties’ success. Sauceda emphasized, “When a client fits naturally with our core values, the collaboration is far more likely to be fruitful.”

A Valuable Company

Leveraging this values-centric model, Sauceda Industries grew from a 3,000-square-foot office in 2013 to a sprawling 126,000-square-foot facility with 150 employees by 2020. “We bootstrapped all the way to the top,” Sauceda asserted, attributing the company’s fast, self-funded growth to its value-driven framework.

In the competitive 3PL landscape, Sauceda Industries didn’t just serve clients; it built relationships based on shared values. Through strategic recruitment, impactful training, and a vibrant work culture, these core values helped pave the way for a business that thrived, achieving $14 million in sales before it was acquired by Cart.com in 2021.