Most owners know a visitor’s first impression influences how they feel about your business, what they say to others, whether they become a customer, and how much they spend with you.
Most owners make sure a visitor's first experience is excellent. Whether that’s the person welcoming the customer to the store, someone answering the phone, or even when they visit your website. (If it’s not, then you’re losing business).
Anyhow, have you ever considered how first impressions affect the marketability, saleability, and value of your business?
When raising capital, investors’ initial perception affects both the equity you’ll give up for growth and the company’s value when selling.
In an interview with John Warrilow earlier this year, Jeremy Parker, owner of Swag.com tells the story of his exit.
When he first listed the business for sale, investors saw Swag as simply a distributor of promotional products. He was continually on the back foot, trying to convince investors he wasn’t a middleman. But the investors weren’t convinced, and they offered Swag the same multiple of profit as other promotional product companies – a low single digit number!
Parker repositioned his business as an e-commerce platform with a unique, memorable domain name, and an elegant, industry-leading, direct-to-consumer buying experience.
That repositioning transformed Swag.com from a low-value distributer into a technology company in investors’ eyes. As a result, Parker received an offer that valued his company at $30m – a healthy multiple of revenue. Yes, a healthy multiple of revenue (by definition, an exceptional multiple of profit).
You may never have heard of Swag, but what about Alibaba?
Diversification Can Hurt Your Valuation
Alibaba is a huge Chinese internet giant founded by Jack Ma X years ago. It’s got six business units: logistics, e-commerce, cloud storage, digital commerce, media, and local services.
On 28th March this year, Alibaba announced it was going to split up the company and create separate public listings for each. Shares in Alibaba rose by 11% on the New York stock exchange that day. Within two weeks, the business’s market value increased by 19 billion dollars.
Why?
Well: two reasons. One: investors prefer focused business units – their strategy is easier to understand, their growth potential is clearer, and focused execution leads to better results. Two: when they’re forced to buy the conglomerate there are assets in the group they don’t want and won’t pay top value for. Often, they’ll value the whole business at the multiple of the least attractive business in the group.
I was hoping Alibaba would have completed the split before publishing this, so I could share the multiple differences with you. But, unfortunately, they've postponed it for unknown reasons.
So, here’s another example… Amazon.
Well, Amazon looks a lot like Alibaba – ecommerce, cloud storage, logistics etc. And, earlier this year, Bloomberg valued Amazon’s cloud storage division, AWS, at two to three trillion dollars. But… Amazon’s total market capitalisation is around one trillion dollars. Which is under half of what the Bloomberg analysts believe just one of its divisions could be worth as a standalone entity.
So what?
Investors prefer businesses that focus on dominating a niche, a single product or service, rather than those who’ve diversified into unrelated (or tenuously related) offerings.
If your business appears unfocused, with a scattered offering, investors will discount the revenue lines they don’t want, and only value you on the parts they do want.
Whilst revenue and value are related, they require different strategies. Pursue diversification if your primary goal is revenue growth (but be prepared for increasing complexity, recruitment struggles, poorer execution). Stay focused if you want a higher multiple and an easier exit when the time comes.
It’s essential to prioritise your objective: do you want to grow revenue or grow value?
If it’s the latter and you want to exit with a smile and stuffed wallet one day, give me a shout.