Business Strategy

The more easily a buyer can replicate what your business has to offer, the lower the price they’ll be willing to pay. If you create a business that’s difficult for the buyer to replicate, you’re more likely to receive top price. To do this, develop the aspects of your business that are difficult for buyers to reproduce, such as strong relationships with customers, trade secrets, proprietary processes, long-term customer contracts, and patents. Next, I’ll describe the main aspects of your business model that you can improve to enhance the desirability of your business and, therefore, its value.

Branding

You know how good your company is, but will your buyer? When selling your business, it’s essential to communicate to buyers what makes your business special. To do this, organize and have on hand any customer testimonials, credible customer lists, case studies, awards, or any other recognition your company has received, including any involvement your company has had in community programs. Having this information organized and easily accessible offers demonstrable proof from third parties that your value proposition is attractive to customers in the real world and helps convince buyers that your business represents a sound investment.

Competitive Edge

Buyers are in the market for a business with a competitive advantage that’s sustainable and difficult to replicate. For this reason, you should consider how your business is different from its competitors. If your business has low barriers to entry and is a “me too” product or service, the lack of a competitive advantage may turn many buyers off, especially if they feel they can easily replicate your business. Personal relationships aren’t a competitive advantage, while proprietary technology, as well as economies of scale and brand recognition, can be. A competitive advantage should be summarized in an objective statement and should be difficult for competitors to replicate. The stronger your competitive advantage, the more your business will be worth.

Scalability

Buyers also look for a business that’s scalable and has the potential to grow quickly. Financial buyers love a business that has infrastructure in place but whose full potential hasn’t been tapped. This scenario usually involves an owner who’s burned out or hasn’t built effective sales and marketing systems, but has operational systems in place that allow the business to quickly scale once sales and marketing are ramped up. 

If you want to sell your business for the maximum amount possible, focus on building a business that’s scalable. You do so by developing systems, processes, and documentation that can remain stable as your business experiences rapid growth. If you lack experience building scalable systems, consider consulting with an expert who’s familiar with the most commonly used systems and software in your industry. Alternatively, consider hiring a COO to help you build a management team and infrastructure that improves your business’s scalability. Doing this will dramatically improve the value of your business.

Product Concentration

Product concentration is the degree to which your business is dependent on a specific product or service. For example, if you own a manufacturing firm and 90% of your revenue is generated from manufacturing one product, your business is considered to have high product concentration. 

How much product concentration will buyers tolerate?

Generally speaking, high product concentration isn’t a concern for most buyers. Buyers are much less concerned with product concentration than they are with customer or staff concentration. 

When Product Concentration Is a Problem

Whereas customer concentration can be boiled down to a certain number that buyers may be willing to tolerate – let’s say more than 20%, for example – the degree to which buyers will tolerate product concentration varies depending on the business and industry. The risk of product concentration is considered on a collective basis and can’t be boiled down to a specific number. The buyer will assess the risk associated with product concentration based on the underlying risks of your product. What’s the typical lifespan of a product in your category? How susceptible is your product or service to obsolescence or innovative solutions? 

Product concentration is considered a risk in industries that have a high degree of innovation and new product development, or if your product is susceptible to technological obsolescence – in other words, if a new product is likely to outseat your existing product. 

I sell many businesses in which 100% of the revenue is generated from one product or service. In most cases, this isn’t considered an issue by the buyer. At the same time, I’ve encountered online businesses in which a single product generated over 50% of revenue and that one item was marketed solely through one channel, such as Amazon. In this case, high product concentration made the business unsalable. 

Mitigating Product Concentration Risk

Product concentration risk can be reduced if your buyer plans to integrate your product into a wider suite of their existing products. In most acquisitions, buyers often plan to add your product to their existing product line and distribution network, which can result in increased revenues. This enhances their existing customer relationships since they can offer a wider suite of products. It also simplifies operations for the end-user as they have fewer relationships to maintain. Additionally, this can serve as a vehicle for the buyer to establish new relationships by opening doors to new customers who have a need for your product. Collectively, a situation like this changes the buyer’s perspective from one of mitigating risk to one of capitalizing on opportunity. By focusing on opportunity, you take the buyer’s focus off risk. 

Regardless, every business is unique. It’s the big picture that buyers consider, not isolated risks. Product concentration isn’t always an issue. If you’re unsure, an experienced investment banker or M&A advisor can often determine if product concentration is likely to be perceived as a risk factor in your business by buyers. 

Distribution Channel Concentration

Distribution channel concentration is the degree to which your business is dependent on a specific distribution or marketing channel. For example, if you have a tech or online business and 90% of your revenue is generated from Facebook ads, your business is considered to have high distribution channel concentration. 

How Much Concentration Buyers Will Tolerate

Ideally, your sales and marketing methods should be diverse, and your business shouldn’t be dependent on any single channel. If you own the channel, all the better. Buyers are concerned with distribution channel concentration to the degree to which that distribution channel is considered unstable. 

About 10 years ago, I encountered a business owner whose business was shut down overnight because of an issue he had with PayPal and eBay. His business went from generating seven figures to grinding to a halt in less than 24 hours. He lost everything. His business was entirely dependent on eBay and PayPal. And due to a dispute, they shut down his account, effectively destroying his business and forcing him to lay off all his employees. His fate, and the fate of his business, were in the hands of a monolithic bureaucracy that couldn’t care less that he was now destitute. His disputes fell on deaf ears, and his situation remained bleak. Unfortunately, there was nothing I could do to help. 

These types of riches-to-rags situations are far from rare. I’ve encountered other business owners who lost everything overnight – in some cases, wealth that took decades to build was vaporized in an instant. 

Reducing Distribution Channel Risk

The best antidote to distribution channel concentration risks is to eliminate any dependencies your business has on third parties. If you’re dependent on Amazon, Facebook Ads, Google Maps, Yelp, or other marketing channels, strategize to see what you can do to eliminate these dependencies. A change in the ranking algorithm of one of these channels can have a disastrous effect on your business overnight if you’re dependent on them. In some cases, as an alternative, it may be possible to sell your company to a buyer who already has a diversified array of distribution channels. If they purchase your company, your business would then have access to these distribution channels after the closing, and the risk would be much lower as a result.

The Founder’s Role

To further exacerbate this risk, founders are often the technical experts or inventors and lack sales, marketing, or business development experience. If this describes you, work to develop exposure and credibility for your company in your industry – become a cited and published expert in order to cast a favorable light on your company. Build social media traction and industry or institutional thought leadership. Develop a wide variety of proven advertising tactics and materials to eliminate potential dependencies on marketing channels.

Sales Team Concentration

In addition to marketing channel diversity, you should build diversity across your sales team. Do you have any salespeople on your team who generate a majority of your revenue? If so, it’s possible this individual may intentionally jeopardize the sale and blackmail you for a large sum in exchange for their cooperation with the transition. Think this is unrealistic? I’ve witnessed this situation play out more times than I can count on both hands. Even if this doesn’t happen, buyers will view this as a major source of risk and downgrade their valuation as a result. To counter this, work to build a diverse sales team and implement retention bonuses with your key salespeople to ensure they’ll remain with the business after the sale.

If you create a business that’s difficult for a buyer to replicate, you’re guaranteed to increase the value of your company.

Action Steps

• Branding: Organize and have on hand any customer testimonials, credible customer lists, case studies, awards, or any other recognition your company has received.
• Competitive Edge: The stronger your competitive advantage, the more your business will be worth. Strategize what you can do to create and document a competitive advantage that’s difficult to replicate.
• Scalability: If you want to sell your business for the maximum amount possible, focus on building a business that’s scalable. Consult with an industry consultant or hire a COO if you lack expertise in building scalable systems.
• Product Concentration: Reduce your product concentration only if you suspect it will be an issue for buyers. Consult an experienced deal-maker if you’re unsure.
• Distribution Channel Concentration: Reduce your dependency on distribution channels if you believe any of your channels represent high risk for the buyer.