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The 4 P’s of Business Valuation

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How can business owners increase the valuation of their business prior to an M&A transaction or business sale?  Mirus recently collaborated with other Boston-area trusted advisors (including a leading accounting firm, law firm, and commercial bank) to gather 40 business buyers and sellers for a roundtable discussion of proactive steps CEOs and owners can implement to increase enterprise value during the exit planning process.

Our roundtable discussion was framed by the 4 P’s of investing:  Product, People, Potential, and Predictability.  These strength of these four factors within a business enterprise predict the future success of the entity (and are not to be confused with the 4 P’s of marketing – product, price, promotion and place – which focus on driving demand and sales for a product or service, rather than driving companywide valuation).

A business with a unique, differentiated, and defensibly-positioned Product is able to command a premium price, and thus a higher profit margin, than its competitors who offer generic me-too products.  Business owners seeking to increase the value of their enterprise are well-advised to look for “blue ocean” strategies:  don’t focus on your competitors; instead, focus on product (or service) innovation aligned with utility, price and cost to become the first mover into profitable untapped markets, thus driving enterprise value.

Even with a strong product or service offering, a business needs strong People at the senior management level to generate attractive offers when seeking a liquidity event.  Seasoned acquirers and investors “bet the jockey, not the horse.”  A company led by a skilled, experienced and empowered management team will command a higher sale price than one led by an overinvolved owner.  Talking with a prospective client recently, I asked him “To what do you attribute the firm’s strong sales growth over the last two years after many years of flat results?”  “Me!” he replied.  Somewhat taken aback, I asked for clarification. He laughed and said, “I meant, I finally got out of the way and let my managers manage!”

Buyers look for Potential when evaluating acquisition targets, paying more for companies operating within a large total addressable market.  At Mirus we’ve recently seen strong valuations for businesses in healthcare services, outsourced business services, software, and natural & organic foods – all areas where macroeconomic trends are creating widespread demand and opportunities as industry tailwinds propel rapid business growth.

Predictability is the fourth factor impacting transaction valuation:  a company that generates recurring revenue commands a higher value than one with lumpy and variable income.  Long term contracts, subscription pricing models, and strong brand equity are among the ways businesses can generate consistent and predictable revenue streams.  Steve Belkin, founder of affinity-group marketing pioneer Trans National Travel Group, learned this lesson early in life:  “Growing up, I realized that all of the downtown skyscrapers were occupied by annuity businesses,” he once said in a speech to the Small Business Association of New England (SBANE).  “The phone company, insurance companies, banks.  When I wanted to start a business, I knew it had to be something that would generate repeat revenues.”

Business buyers seek acquisition opportunities that offer strong growth opportunities with low downside risk.  Applying the 4 P’s of investing to examine and reposition your business in the years leading up to your planned M&A transaction will increase the likelihood of an exit that exceeds your expectations.