So far in this series, we have covered how to maximize your business’s valuation and how to optimize your bookkeeping and operations ahead of a transaction.
But on the strategic side, leaders should also ask themselves: how should I manage my business to build the best possible reputation in the marketplace? How will that reputation affect my chances to attract capital investment opportunities? And what steps can I take to build a stronger reputation and position the business well in this area?
To answer these questions, here are six insights that will help you nurture a healthy marketplace reputation.
All revenue growth is “good,” but unpredictable, inconsistent periods of growth that don’t follow a long-term trend will not help your business earn a strong valuation. Business setbacks can occur and you need to be able to explain those, but investors (at a minimum) are looking for three years of increasing revenue. The highest valued businesses grow revenue above 20% per year.
Executive teams should look at how to build a strong and steady growth track record that showcases their business’s consistency in terms of long-term revenue trends and ultimately, profitability. With proof of a steady upward trend over time, you can substantially increase your business’s valuation in the eyes of prospective investors.
An important metric investors often look at is your Net Revenue Retention (NRR) Rate. NRR is the percentage of recurring revenue retained from existing customers in a defined period, including expansion revenue, downgrades, and cancels. For a SaaS or technology business, strive for a NRR above 100% and you will attract attention.
Prospective investors also look at the growth and quality of the customer logos that you serve. Are logos growing consistent with your revenue growth? Are the logos well known customers in their respective verticals? One of the most common slides in an investor deck shows logo growth over time, so expect that it will be looked at.
Have you captured most of the opportunity share in your primary verticals? Or do competitors still pose a significant challenge within your business segment? Are you consistently winning sales over your primary competitors? Finally, are you following a “land and expand” strategy (strategy consisting of a small sale followed by earning more business and bigger deals across different departments and projects within the same customer)?
These questions will inevitably come into focus for investors researching new opportunities to pursue. By earning (and successfully defending) a significant market share in your segment, your business can stand out to investors during their ongoing assessments.
If your executive team determines that your growth potential is slowing down in your primary verticals, then it’s time to begin exploring new business verticals. To start this analysis, you will need to consider how your solutions meet other business segments’ existing needs. Is there any potential overlap? How large is the total addressable market (TAM) for your products and services if 100% of the available market is achieved?
By assessing your prospective fit in different segments, you may discover your solutions have broader appeal beyond the markets you currently serve. If you expand the verticals you sell to and the TAM, investors will see a much larger addressable market and thus more upside in putting capital into your business.
Stable, predictable revenue generation is one of the first indicators that capital investors will spend time analyzing, and is one of the most important in any market environment or vertical.
If more of your company’s revenue comes from one-off product or services sales, there is no guarantee that you will continue generating new business at the same rate. Those one-time sales have to be resold every year just to stay even, much less grow. But with a strong recurring revenue model (enabled by your subscription and usage-based service offerings), you can achieve reliable growth that enables your business to scale efficiently. And the ability to scale is something investors value greatly.
Investors value recurring revenue at higher multiples than one-time revenue. Sophisticated companies convert one-time sales into recurring, subscription revenue. Look for opportunities to do this and you will be rewarded by the market.
Seems obvious, right? You’d be surprised how even a slight lapse in strategic oversight can affect your business’s bottom line. For businesses immersed in capital raising rounds, any negative business reporting that comes up will raise an immediate red flag with prospective investors. If you do have negative business events in the history of the company, it is much better to get those items out early in the process than having them drip out over time.
Even while your executive team engages in this meticulous process, make sure you have the right functional leaders and resources in place to continue executing at a high level. Maintain the same aggressive, hard-working mindset and approach that positioned your business to earn new investment opportunities in the first place. Don’t take your foot off the gas when you are close to the finish line.
When you are ready to pursue outside capital for your company, it’s time to assess the different types of investors that might be interested in your business. To complete this process, your executive team will need to analyze the differences between strategic and financial buyers.
Mercer Capital classifies financial buyers as “investors interested in the return they can achieve by buying a business.” Simply put, this investment type will appeal more to executives that wish to retain control over day-to-day operations. They will face more scrutiny to deliver results to their new investors, but will be able to put the new capital to use to take their businesses to the next level.
On the strategic buyer side, Mercer Capital identifies these investor types as those “ interested in a company’s fit into their own long-term business plans.” In short, strategic buyers are typically larger companies interested in taking significant stakes or acquiring your business outright, usually with controlling interest. Generally speaking, strategic buyers offer high valuations and may look past prior execution issues compared to financial buyers. But your fit with their existing business is a key driver of success.
If your management team is staying with the company, look for the opportunity to maintain a meaningful minority ownership stake post transaction, which is typically in the range of 15% to 40%, particularly when a financial buyer is involved. As the company continues to grow, your team will benefit again with the next sale, most likely at a higher valuation. Investment bankers call this scenario a “second bite at the apple.”
Ultimately, the stakes couldn’t be higher with your assessment of both capital investment types. But before entertaining any investment discussions, your team will need to nail down the right fit between these options. To arrive at this decision, you will need to understand what you want your business to be to you, or if necessary, seek outside counsel from relevant experts for qualified outside opinions.
These suggestions can help your business nurture its standing marketplace reputation, build a strong valuation, and ultimately attract capital investment opportunities.
To discuss these leadership insights and how your billing and back office systems fit into the equation, contact our team today.
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