How Your Business is Perceived Can Drive Valuation

The initial impression customers have of your business often influences how much they decide to spend with your company. This is well known, but have you ever considered how first impressions affect the way potential investors value your business?

When raising capital, investors’ initial perception of your business significantly impacts their valuation, influencing both the equity you’ll need to give up for growth and the company’s value when selling.

Presentation of Your Business

How you present yourself is important, and how you present the value of your business is essential. When you plan to sell your business, you understand your KPIs, what makes your KPIs work, and what makes your business valuable, including how your performance metrics compare against your competitors.  Having strong financials, such as strong EBITDA (earnings before interest, taxes, depreciation, and amortization) is great; presenting them well is critical to the sale of your business.

Jeremy Parker’s experience raising money for is a good example of how perception can drive value. Investors initially perceived as a simple distributor of promotional products. Despite Parker’s efforts to position the company as more than an intermediary, investors weren’t convinced. They categorized with other promotional product companies, offering Parker a low single-digit multiple of EBITDA for a stake in his business.

Parker re-strategized, presenting as an e-commerce platform with a memorable domain name and a world-class, elegant, direct-to-consumer buying experience. This shift in perception transformed from a simple distributor to a technology company in investors’ eyes. As a result, Parker received an acquisition offer that valued his company at a healthy multiple of revenue.  When it comes to raising funds or selling your business, optics matter significantly, and how investors categorize your business in their minds plays a crucial role.

How You Present Yourself

Your professionalism is as essential as how you present your business. A buyer deserves respect from a potential seller. People presenting themselves as too casual undercuts its company message about being serious about the sale. This means dressing and acting professionally when meeting with a potential buyer. Keep your remarks about business, not your personal life. Buyers respect personal diligence and professionalism in deciding whether to buy.

How Investors Perceive Growth – – Balance Between Revenue and Valuation Goals

Companies are often tempted to grow top-line revenue to diversify their business but this diversification can backfire when a company is considering a sale.  Investors typically prefer businesses that concentrate on dominating a specific product or service rather than diversifying into various unrelated offerings. A diversified portfolio may lead investors to perceive your business as unfocused, which can result in a lower valuation. If your business has expanded beyond its strategic core offering, potential acquirers may focus on your least valuable division and apply that multiple to your entire organization.

It’s essential to prioritize your goals: Do you aim to grow your business by increasing revenue or enhancing its value? While these objectives are related, they require different strategies. Pursue diversification if your primary goal is to boost revenue. However, if you’re striving for a more valuable company that could potentially be sold, maintaining a clear focus is crucial.

The Alibaba Discount: How Diversification Can Hurt Your Valuation

When Chinese internet giant Alibaba was considering a sale they were operating a multi-divisional organization. Investors often discount businesses like Alibaba, as they are compelled to purchase assets they may not be interested in. They frequently apply the lowest value multiple of a particular business to the entire group of companies. Amazon faces a comparable situation. The Bloomberg Intelligence Unit estimates that Amazon’s cloud storage division, AWS, could be valued at $2T to $3T as a standalone business. However, as a collection of assorted services, from e-commerce to audiobooks and cloud storage, Amazon’s entire market capitalization is less than half (around $1 trillion) of what Bloomberg analysts believe just one of its divisions could be worth as a standalone.

How did Alibaba manage this perception? Just before going to market, they announced its intention to split into six separate businesses. In the two weeks following the announcement, Alibaba’s market value increased by $19 billion. Why would investors welcome such a move? Alibaba consists of a range of businesses resembling those of, including e-commerce, logistics, and cloud storage. Before the announcement, Alibaba was valued at just ten times their earnings forecast for next year, yet each business as a standalone will fetch a much higher multiple.

The Bottom Line

With any sale of your business, personal professionalism, financial presentation of your business, and focus are essential to making good impressions on buyers. Conduct yourself professionally, and be knowledgeable about your company’s finances. As a seller, you should have a coherent business with a clear sense of where you belong in the market and what future value you give to a prospective buyer. All these are fundamentals you should remember when considering selling your business.

Have additional questions on how to enhance value for your business? Contact our team of experts today!


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