By Christine Comaford
All too often banks, potential investors, and creditors will determine a company's value based on financial statements. This is a mistake. Financials don't come close to telling the true story. Sure, they present the tangible value. But what about the intangible value? Company valuation is emotional—a company is worth what an acquirer will pay, what the market will pay, what the interested parties perceive. We see evidence of this frequently when companies with a trickle of revenue are acquired for gushing millions or even billions of dollars.
Maybe you aren't planning on raising financing, securing a credit line, being acquired, or one day going public. You still need to continually boost the value of your company. A higher-value company has more options. It gets the right partners, preferential terms, and often a more glorious future. There's an art to value-boosting, and I am going to tell you how to do it. First, know the facts:
• Company valuation is emotional.
• Intangibles often matter more than tangibles.
• You can't build value if your business isn't enticing.
• You should always be selling: to financiers, customers, strategic partners, staff, and strangers.
I've used some or all of the following seven value-boosters to quintuple the value of my clients' companies and my own. These value-boosters have also worked for companies such as Google, Microsoft, YouTube, and many, many more.
1. A killer team and a killer business plan (see BusinessWeek.com, 2/20/07, "Make Your Financing Pitch Sizzle").
2. A hot board of directors and/or advisory board (see BusinessWeek.com, 2/1/07, "Don't Go It Alone: Create an Advisory Board").
3. Specific strategic alliances. An LOI (Letter of Intent) with a partner ain't gonna cut it. You need a binding contract spelling out exactly what the terms of your deal are. Clarify how many widgets they will buy/distribute/co-market, the time period, as well as what happens if they default on the agreement.
4. New sales channels. Distributors, value-added resellers, outside sales forces, affiliates, joint-venture partners—all boost the value of your company. Of course, you'll track the performance of your sales channels. Use the affiliate tools in your online shopping cart to track the performance of your online sale channels, and use your accounting system or sales force management software (see BusinessWeek.com, 8/17/07, "Customer Relationship Management Software") to track all others.
5. Product line extension. Let's assume you sell a supercool widget. What's next? Son of Widget? Platinum Widget? Widget Extraordinaire? Map out your future product lines so financiers, partners, and staff can see where you are headed and how you plan to get there.
6. Intellectual-property (IP) portfolio. Protect your corporate jewels! A patent portfolio can be worth gold. A friend of mine sold his company for $425 million (with about $30 million in trailing revenue) because he had locked in so many patents. That's what the acquirer bought. They didn't give a hoot about the business.
7. Compelling prototype of product. This is key when you're in the zero or near-zero revenue range, as you'll see below. People need to see/touch/feel what the product will be like. Then they can envision your fabulous future.
Consider this. A professional services firm with an initial value of $2 million hired me to help boost its value. The trouble with services firms is they are often valued at only revenue times one. So we beefed up the board and advisers (adding $1 million in value), helped nail down strategic alliances ($3 million), mapped out a line of "productized" services ($2 million), and developed new sales channels ($2 million). Six intense months later, the firm sought financing with a respectable pre-money valuation of $10 million and closed the financing in three months.
Then there is the example of the Internet promotion company I started with no revenue. Before seeking financing, my team and I had to answer the question: How do you make an idea into a hot commodity? The solution consisted of pulling in a rocking team and coming up with a hot business plan (adding $1 million in value), developing a compelling product prototype ($1 million), locking in killer alliances ($1 million), and building an IP portfolio ($2 million). We took its value to $5 million in four intense, somewhat sleep-deprived months. Then we raised $2.5 million in financing with a pre-money value of $5 million, and a post-money value of $7.5 million. The $2.5 million invested bought one-third of the company.
Value is about potential. Potential today, potential tomorrow. The main reason you keep building value in your company, in tangible and intangible ways (and as I've shown you, the "intangible" ways often do have dollar values attached to them!), is because a high-value company gets the financing it wants on the terms it wants. It also gets multiple acquisition offers at fabulous terms. The high-value company gets the alliances, the staff, and the opportunities it wants, too.
Remember, you are selling the future as you are selling the present. The present must look promising for the future to be potentially glorious. What are you doing to boost the value of your company today?
By Christine Comaford