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Monday, July 13, 2015

What is Company Scalability – Really?


So your banker is asking you if your company and its technology is “Scalable.”

Well of course,” you reply, “we have both large and small customers.  Our products scale just fine.”

But, while this is a good thing it is only part of the answer.  In the IT world, scalability is about numbers of users (ok I greatly over simplify here for the purposes of this blog), and without this capability developing a meaningful business is a non-starter.

But in the world of M&A what investors also need to know is does the company represent a platform for growth.  In this context consider three things:

  1. Is the technology extensible to other application areas (in addition to number of users) or is it one and done? There is a fine line here between focusing on a single area and proving value, versus attempting to prove multiple applications simultaneously.  For new companies getting to economies of scale and proving solution value is critical, but having the next series of opportunities formulated (ideally with some initial proof points) establishes future opportunity for growth.   More than once I have seen a company purchased for its current applications, only to find in five years the technology being even more valuable in a different domain they had no reasonable sight of in the acquiring company when acquired.
  2. Companies that have created business models that are capable of scaling rapidly and profitably are more valuable than businesses that grow revenues and expenses in a linear fashion. Businesses that can generate exponential sales and profits on incremental investments are highly valuable.  The operational excellence that allows a Company to scale more quickly correlates to institutionalized best business processes and supporting systems that are understood, documented, repeatable and transferable.   Goods example of highly scalable models are SaaS models and online information services that sell the same contact across a growing customer base.   This is the growth story.  Simply put companies with higher growth, 20% plus depending on the domain,  (as well as repeatable revenue) are more valuable than low growth companies.
  3. And finally, the ability for a smaller company to “scale up” is critical to a larger buyer. One key component of that is talent, both at the management level and below.   This is typically addressed with the right retention/incentive programs, but for situations where a Company is in a highly specialized area where recruit new talent is difficult. When acquiring a technology company, the buyer is often acquiring foundation domain expertise as well.  When this is the case, do everything possible to show how you can help them grow, based on your skills and knowledge of the market, technology, and ability to attract others like you within the domain.  Want to sell and leave quickly, sure, ok, but be prepared to leave money on the table. 

The bottom line?  When selling your company, be able to articulate how you’re going to double in size over the next three to five years pointing to the resources you’ve put in place to execute that value creation plan.  This is all about having a strong strategy for future value creation that reflects a strong understanding of where your market is headed, identifies where your company fits into the broader industry trends and communicates how your Company should be thought of in this broader context. When we take a company to market, yes we focus on what the company is today, but we also spend significant effort articulating how the company can scale and where it can be in the future.  Do a great job on this (as well as the basics), making believers out of your prospective buyers and it can help you maximize your opportunity.

For more discussion on this and other topics critical to selling your company.  Feel free to download our latest white paper : Achieving Exceptional Multiples in the Sale of Your Company.

 

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