How the Right Business Model Can Improve Business Valuation
Selling your business is a deeply personal decision. When the time comes, owners understandably want to maximize their closing value. After all, they’ve committed years and perhaps a lifetime to building a successful company.
One often overlooked driver of business value is the business model. Finding qualified buyers is a significant undertaking, and simplicity is your friend. You might know what your business does, but can you explain it to a potential buyer? An easily understood introduction to your business is key. That’s where your business model comes in.
Your Business Model: A Unique Value Driver
What’s special about your business? When you have to defend your answer to a buyer, it can be difficult. You must be able to show why your unique product, model, customer base, or service offers significant value that the buyer can get nowhere else. Ideally, you should make it easy for the buyer to envision a way to fit this model into their current operations. Some things you need to be able to address include:
- How you stay competitive when technology renders one of your products obsolete.
- How you stay competitive when someone else offers a similar product.
- Which aspects of your operations offer unique value.
Don’t be too vague, and avoid excessively technical explanations. The goal here is to sell a buyer on what’s working with your business. They shouldn’t think it’s so easy that anyone can do it, but they also should not think that your business is so complicated there’s no way they could take it over.
The Value of Intellectual Property
If your model includes intellectual property, this is a key part of your pitch. Stay simple at first, but help the buyer understand that your process or IP is an entry barrier.
Know that honesty is important, so don’t overstate the value of your IP. Know also that you don’t have to, and shouldn’t, give all the details away at once. The M&A process is one of progressive disclosures, and an NDA with a clear disclosure schedule protects everyone’s interests.
Is Your Business Model Trendy?
There are many effective ways to run a business. Investors prefer some to others. Subscription-based models, including auto-renewals and subscription boxes, are increasingly popular. Brick and mortar shops are less popular. So consider whether there are things you can do to capitalize on current trends, build new revenue streams, or set up automatic revenue. You don’t have to change your entire model. Merely making a few tweaks is often sufficient.
Keep it Simple
The old adage about KISS is popular for a reason. It works. Buyers don’t want to be slammed with a lot of complicated information. They don’t want a three-hour pitch. They want highlights. Then, if they want more information, they can ask. A few enticing highlights can build interest, create a sense of intrigue, and give buyers just enough information to help them decide whether your business is a good fit. Defining your business model is the perfect exercise for pitching your business to buyers.