Growth vs. Value

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.