Does growth potential impact business value?
As you may expect the undeniably straightforward answer to this question is a resounding YES!
Acquirers typically pay the most for businesses which have the potential to grow. In rare cases, an acquiring company may even buy a business with lots of growth potential yet performs relatively poorly on many other business attributes because the buyer sees a way to leverage some of its own assets to help the business grow much more quickly than it could otherwise grow under the current ownership. These types of acquisition are know as strategic acquisitions.
Think about growth from a numbers perspective.
Consider a business with $1m profits each year that expects to have stable earnings with no growth for the next ten years. That is it would generate $10m in profits over 10 years, obviously the earnings need to be discounted to today's value to take into account the delay in receiving the $10m over ten years but lets just keep this simple for now.
Now consider a business that generated $1m profit this year but expects to grow at a rate of 20% per year for the next 10 years. i.e $1.2m in year 1, $1.44m in year 2, $1.73m in year 3, etc.
If you were to add up all of these annual profits, the total would be $31.1m. Even prior to considering any form of discounting, it is clear to see how business growth potential impacts the value of the business. Clearly if you were choosing between the two comparable businesses the business which is forecasting growth is going to be more attractive to a buyer and more valuable.
There are essentially 3 forms of growth potential.
1. Geographic Scalability - How viable is it to establish your business in another location?
2. Horizontal Scaleability - Sell more to your existing customers
3. Vertical Scaleability - The ease of which volume can be added at minimal cost.
If you are a business owner consider the following questions for your business and then consider how your answers would be perceived by a potential buyer.
- Would you business model work in another geographic location, Brisbane, Gold Coast, or further afield, such as Hong Kong or New York?;
- Is the business model able to transcend cultural differences?
- What other products or services would your customers buy from you?
- What would you have to change in your business to enable you to handle 10 times as many customers?
- What untapped customer groups remain to be exploited?
- How can you automate your service delivery process so that smaller sales are more efficient?
- Could you franchise or licence your model to others in other locations?
- How could you grow your business as quickly as possible if money was no objective?
How you answer these questions is a key indicator of your businesses growth potential and provides some insight into how prospective buyers will view your business and consequently how growth potential impacts business value.
So here's the hot tip, if you are wondering what you business might be worth ahead of selling, start by mapping out what your future growth potential looks like. If you are able to convince potential buyers of the future growth prospects your business, your business will be much more attractive and likely sell for a higher price.
