How to Maximise the Value of your Business – Part 5 – Size Isn’t Everything

An article by Peter Watson, Prism Corporate Broking

There has long been an understanding in the business world that market share and profitability are related.  For this reason it is the stated objective of many larger businesses to be the number one or number two in their chosen markets.

For smaller business this may or may not be achievable (though with good segmentation you may be surprised at the share that is possible) but what is clear is that a focus on a particular market is likely to generate better results than a scattergun approach.

Market share can also be relevant when it comes to selling your business, but to what extent are size and sale value related?  Exit multiples (that is a valuation based on a multiple of e.g. profits) are generally anticipated to increase with company size.  But is this really the case?

Our own experience is that whilst there is some evidence of a relationship between exit multiple and turnover, the relationship is not that convincing and the variability is high.

The key is RISK not SIZE.  Many smaller businesses have a high risk profile and this limits their valuation.  The other key element is GROWTH POTENTIAL which can to some extent offset the risk.  This explains the very high prices sometimes paid for technology start-ups. For example the recent investment in Square  – the mobile apps payment company started by Twitter co-founder Jack Dorsey ,which valued the company at over $3bn. This for a business that only launched their service in May 2010!

That said we rarely see great results when an owner-manager decides to embark on a growth strategy shortly before exit.  The result is often a reduction in profits without commensurate growth.  Instead, identify at an early stage the risk factors that you can control and address them – then size needn’t be a barrier to a successful exit.