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How Earnings & Unique Assets Grow Valuations

Ed Marsh Consilium Global Business Advisors | February 4, 2015

What if you knew with near certainty which prospects would actually buy and when?

And what if the blocking and tackling of revenue growth not only boosted valuation based on higher projected earnings, but also created a strategic asset that impacted valuation even more significantly?

Will you love the valuation more than you love your company?

If you’re a business owner reading Axial content you’re somewhere on your journey toward a corporate transaction of some sort.  Maybe you’re just beginning to consider sources of additional capital, or maybe you’re close to selling your business.

The fundamental question is invariably valuation.  After all, a meager valuation substantially reduces your likely interest, while a generous valuation increases the appeal (and overcomes other concerns!)

And valuation is a vexing blend of art and science.  There is no clear answer – after all, if there were, there would be neither ‘market’ nor need for advisors.

Known assets, liabilities & risks

Investors, appraisers and bankers use common methodology to arrive at valuation.  The present value of future earnings, discounted for various factors, is combined with assets. Liabilities are netted out and adjustments for risks and opportunities are applied.

And evolution in business models challenges traditional valuation formulas.  For instance sophisticated analysis of the scope and defensibility of an IP portfolio is common even for small companies now, just as successor liability becomes a more important exposure to scope as global business grows amid intensified FCPA enforcement.

It’s an evolving, but well defined process.  And it often results in a relatively consistent range of outcomes.

Sales, pipeline & trends

The core component of valuation is always projected earnings.  And as a transaction nears, the opportunity to impact revenue declines.  Market trends, sales cycles and other factors contribute to a 6-18 month “flash to bang” delay between activities and results.  Project earnings are also a transaction barrier.  According to statistics from the “KPMG 2015 M&A Outlook Survey” in the January Mergers & Acquisitions, up to 36% of deal makers identify challenges in “forecasting future performance” as the biggest barrier to deal success.

Potential sellers (that means everyone!) should strategize, plan and execute consistently to build revenue – it’s simply good business; and it’s the most important driver of an enticing valuation.

But impressive earnings don’t need to be the result of a concerted revenue strategy; instead they could end up being a ‘byproduct’ of a unique, core, strategic asset for which buyers will pay a premium!

The premise: Using targeted content

Sounds fanciful you’re probably thinking.  And based on traditional revenue growth models (even as recently as a couple years ago) it would have been.  However as buyers have adapted their behaviors (now typically 70% of the way through their buying process before they’ll speak to a rep) they have created a new opportunity for sellers.

Sure, sales teams are frustrated that buyers now lurk in the internet shadows, limiting opportunities for direct “selling” contact.  Buyers’ behaviors, though, are much less guarded in those shadows as they focus on selfishly satisfying their own research and education needs.  That creates direct opportunities (engage them by providing the sort of information which they will readily consume in the shadows) and indirect (observe unfiltered behaviors and develop incredible insight.)

But, to capitalize on these opportunities, sales teams need to have better insight into the behavior of their customer. “Big data” isn’t new, and of course SMBs don’t have NASA level data processing or teams of analysts.  So how does this apply in practice?

A nuanced understanding of optimal buyers and companies’ buying journeys allows you to build a framework of resources to support each buying role – with specific information appropriate to the context of their perspective, and stage in the buying process.

For instance, maybe you provide a service which helps reduce factory absenteeism.  Suppose a shift supervisor or HR manager (neither of whom has any purchasing authority) researches solutions to absenteeism and stumbles across your thought leadership.  Intrigued by your insight, they decide to learn more.

You know from experience that an actual sale of this sort involves a difficult collaboration between functional silos.  HR will have to embrace the idea; plant management will have to bless it; IT can’t object; CFO will have to allocate funds; and line leaders will have to actually implement for success.

Those that most acutely feel the need, and bear the consequences of inaction, typically have no purchasing budget authority.  Yet those that can kill or bless the project are neither focused on it nor accessible to your sales team.

The solution is to create ‘content’ that speaks to each group based on their perspective by role and responsibility.  Provided as a series of resources for the internal ‘champion’, your expertise empowers them by proxy to engage their colleagues toward your mutual goal.  In other words you provide the virtual sales tools the the HR manager can use to bring the rest of colleagues along toward a purchase.

That makes sense.  No one argues with the concept (although very few actually execute it well) but here’s where it gets interesting.  As you observe enough of these interactions you’ll develop incredible insight.  Here’s a hypothetical example:

  • companies with >$75M revenue (or <375 employees, etc.) are 59% more (or less) likely to actually buy
  • when the HR manager successfully convinces IT (or finance, etc.) to engage, a sales becomes 34% more likely
  • when HR subscribes to receive additional articles, they read 2 of your whitepapers on absenteeism related topics within 3 weeks, IT reviews implementation FAQs and someone with a finance title attends a justification webinar, you know that 62% of the time a sale will close within 45 days
  • If the prospect is in a high unemployment region, and requires primarily unskilled labor, you only close 4% of projects – but in areas of <5% unemployment or prospects in high skill/highly regulated industries you close >50% of projects

Obviously your specific insights will vary, but this is representative of the type of intel which even small & medium size businesses can rapidly develop, and then continuously refine.  This insight allows you to scale growth with reduced sales resources by focusing reps on the projects which they will impact – with specific actions, at the precise time and place in the process to close deals.

Ironically prospects’ determination to avoid sales reps by using the internet ultimately provides you greater insight than you had traditionally.

Unique (and valuable) assets

But what’s the insight worth?  How does better buyer understanding constitute an asset?

There are a number of implications to valuation:

  • predictable and accurate forecasting to reduce uncertainty discount of future earnings stream.  Scott Maxwell, founder of VC firm Open View Partners, even weighs accuracy of forecasts as an inverse proxy for overall investment risk.
  • a business process that is replicable and represents unique, industry specific IP including buyer behavior pattern insights
  • above trend revenue growth (future earnings)
  • project pipeline as an asset to which a specific value can be confidently ascribed
  • methodology for optimal allocation of biz dev resources across segments (industry, product, geographic, etc.) based on a granular understanding of outcomes
  • intangible but valuable ‘thought leadership’ recognition
  • other consequential ‘assets’ such as ‘reach’ (volume of blog subscribers, social media followers on relevant channels and number/frequency of citations of your work)
  • effective production resource leveling based on a ‘real’ forecast

Analysts valuing your company may not instinctively understand the importance of these insights – just as you won’t fully until you see them in action. You’ll have to develop the language, case studies and anecdotes to articulate and illustrate how each has, and will, impact revenue.

You’ll also need to consider the strategic value of this capability.  All suitors will value higher, more predictable earnings.  But if, even as a minority player in an industry, you develop a revenue growth model which is uniquely scalable, effective and replicable, that by itself could merit a higher multiple for a strategic buyer.

“How” could trump “How much”

The bottom line is that what’s good for business, in this case, is also good for business valuation.  Companies that understand, strategically embrace and relentlessly execute effective digital marketing will simultaneously create revenue and a unique, valuable asset.  An insightful business process, built on accruing specific, actionable B2B behavioral market intelligence, will drive earnings and distinguish especially valuable enterprises.

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