BlogTHREE Value Drivers That Will Tank Your MSP and IT Firm’s Value.
Valuating your company is a complex and rigorous process that requires a certified expert.
Valuating your company is a process that requires an expert.
You want a specialized expert, a ninja, someone that’s done the work and fought the good fight so that YOU can benefit. When looking for help in determining your value and how to grow your IT firm, it can be hard to know where to start and who to trust. The valuation process is an unavoidable one if you plan on selling or merging your IT business.
When you’ve spent the past 30 years head down, running your business with your hands deep in the detail guts of it all, it’s important to have an experienced guide to help you pull back and take stock. Because at some point, you’ll want to sell your business so you can move on to the next stage of your life, whatever it is. To do that, you’ll need to prepare in advance.
There’s many value drivers to consider but let’s focus on the top THREE drivers that pose the biggest challenges for business owners:
- Monopoly Control
- Hub and Spoke
- Growth Potential
Monopoly Control
The Monopoly Control attribute measures the distinctness, uniqueness, and exclusivity of your business. Basically, how unique are your company’s products from your competition? Having Monopoly Control makes your business more valuable. So, it’s in your best interest to commit to a specific product, service, or bundle that does one thing really well. Then, make your offering so irresistible that an acquirer will stop at nothing to get their hands on it. By selecting and further developing your unique offer you will increase your competitive advantage, profitability, and cash flow.
At the end of the day, Monopoly Control is about differentiating your firm in the marketplace. The more your specific solution addresses your ideal buyer’s needs, pains, and desires, the more leverage you’ll have in setting your prices.
For example, one of our clients ran a business that sold a customizable legal service digital product to law firms of a specific size. Since he understood the major pain points of law firms so clearly and his product addressed their needs so well, purchasing his offering was a no brainer. The law firm’s customers trusted our client because of his knowledge of the legal industry and because his product made their jobs easier. Even though he charged a premium price for his offering, they were willing to pay it.
Monopoly control is all fine and good if you have an inherently distinctive product or service. But what if, despite your expert knowledge, you’re offering just isn’t that unique? If you find yourself without a specialized offering, focus on what makes buying from your company extraordinary.
One sure-fire way to differentiate your company is by delivering outstanding customer service. Yes, yes, I know. Many companies claim to offer stand-out service for their clients. The key here is to “productize” your service. In other words, transform your service from a subjective feeling you want people to experience when they buy from you, into an objective promise they can point to as a reason they are a customer. We call this creating your Competitive Defense Shield. Companies that attain Monopoly Control, differentiate themselves via their product, and “productize” their services have the capacity to grow 2-3 times their industry market rate. We’ve witnessed this happen for many of our clients.
Hub and Spoke
The Hub and Spoke value driver measures the extent to which your business can thrive without you. Essentially, can your business run smoothly without you? In order for your company to thrive without you, you’ll need to stop acting as the “hub” to the “spokes” of your employees. Otherwise, they won’t be able to operate in your absence. Not only is this a time suck for you, but it threatens the future of your company. Acting as the business hub is common among most MSPs and IT firm owners. It can be challenging to let go of running your day-to-day operations. Yes, it can be tedious and costly to train other staff to take on these additional responsibilities. However, your business will be unable to scale and grow unless you do.
If you’re looking to sell your business in the next 5 years, make addressing this value driver a priority. It will be next to impossible to sell your company for a good price unless you do. Most business buyers are hesitant to buy when a firm ranks low on the Hub and Spoke value driver because they don’t want to be stuck with the difficulty of transferring knowledge. It also frees you up to decide if, when, or for how long you want to remain with your company under new owners once it sells. So, be sure to capture your knowledge and turn it into repeatable processes.
Growth Potential
The Growth Potential attribute reflects the extent to which you think your business can grow in the future by selling more products and services to your existing customers or by acquiring new customers quickly.
The greater your Growth Potential, the more an acquirer is willing to pay. In rare cases, an acquiring company may even buy a business that scores low on a variety of attributes but ranks high on Growth Potential. This may seem counterintuitive at first. However, a buyer may be able to leverage their own assets to compensate for your company’s gaps enabling them to quickly metabolize your company’s growth potential This type of transaction is known as a “strategic sale” and is quite common.
Growth Potential and Monopoly Control strongly complement each other. By achieving Monopoly Control to charge a premium for your product or service, you inadvertently increase your firm’s Growth Potential. Once your Growth Potential is dialed in and your profit increases, you will see a rise in your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) metric by 10 to 15%. For example, let’s return to our client we mentioned earlier, who sells a product to law firms. By intentionally addressing all three of the value drivers we discussed today, he was able to achieve a 28% EBITDA and continuing to grow it by 30 to 40% year over year.
Are you ready to determine your value and get ready to sell your MSP and IT firm? Contact us to learn more or get started.