At my former company we used to get a lot of gifts from suppliers around this time of year. When the boxes of chocolates came in, I'd go straight for the milk chocolate pieces and leave my colleagues with the rest.
I know the dark chocolate is better for my heart but I find it too bitter, the pieces of fake fruit caked in sugar are too sweet and I can't stand the ones with the cherry syrup inside. To me, it's milk chocolate or nothing, which is why any box of chocolates I'm given is only ever half eaten and I've never bought a box of Pot of Gold for myself.
Your Business Is a Box of Chocolates
When it comes to its value, your business is just like a box of chocolates. Hopefully there are pieces of your company that will be irresistible to an acquirer, but there will likely be parts of your company an acquirer could do without. You end up with too many undesirable pieces when your growth strategy is to cross sell your existing customers more and more things. The further you stray from the core product or service that makes you different, the more revenue you gain, but the less desirable your company becomes in the eyes of an acquirer.
Unfortunately, just like the chocolate company, you're going to want to be paid for your entire company but an acquirer may only be interested in paying for part of it. The part of your business they will want is your product or service they cannot easily replicate, but if it is buried within a sea of products they already offer, or services they already provide, they may walk--because nobody likes buying the whole thing if all they really want are one or two parts of it.
WhatsApp Acquired For $19 Billion
Facebook bought WhatsApp because WhatsApp had a messaging platform that was growing by a million users a day. That's impressive on its own, but what was more alluring to Facebook was that WhatsApp users were sending 600 million photos every 24 hours. That's a lot of content bypassing the world's largest photo album. Facebook could easily have replicated the technical specifications of the WhatsApp platform, but they could not easily replicate 600 million photos a day.
That's why wee little WhatsApp, with a collegial group of 55 employees, was acquired for $19 billion dollars.
That's not a typo; I meant to use a "b" in front of the "illion."
For Facebook, WhatsApp was a nice clean deal--a box full of milk chocolate pieces. From the beginning, WhatsApp never set out to compete with all of Facebook's features. They didn't try to create a sprawling social network with thousands of apps and add-ons. All they did was try to create the best possible mobile-phone-based messaging system.
When an acquirer looks at your business, will they see one thing they cannot do without or a hodgepodge of services and products--some of which they already offer; others which they do better than you do--along with one or two jewels? If they see a lot of padding surrounding your killer product or service, don't expect to garner a premium multiple when it is time to sell.
When we analyzed the offers that businesses using The Value Builder System receive, they are 42% higher (5.3 vs. 3.7 times pre-tax profit) if their primary product or service is something for which they have a differentiated market position. Companies selling commodities on price alone get a deep discount from a buyer.
Two Ways To Differentiate
There are two ways to differentiate your product or service: one is to build a better mousetrap, which is what WhatsApp did. The other is to peddle a parity product while differentiating your offer with superior marketing.
Ask yourself if a Nike T-shirt is any different than a generic one you can buy at a discount store. The materials are the same and they are probably both manufactured at a factory in a far-off continent; yet we pay twice as much for the one with the NIKE logo on it because they have done a great job making us believe their products are different.
It can be tempting to grow your business by cross-selling your existing customers more and more stuff, until you're hawking commodities relying on your friendship with the customer rather than a differentiated market position. That may be an efficient way to grow your top line revenue, but it is also a fast way to shrink your company's value.