How marketing builds future exit value
Business owners don’t always seek growth for growth’s sake. Founding or buying a business, building its value and selling it on is the ultimate goal for many of the businesses leaders we work with, and so it’s a key consideration for our Marketing Directors too.
But what, you may ask, has marketing to do with selling a business?
The short, glib answer is “everything”: marketing should integrate every aspect of your business’ activities, from brand vision to point of exit and beyond. The longer answer? It comes down to value.
The simple, classic formula for valuing a business is profit x multiple. When you sell a business, you’re asking for a number of years’ profit, paid up front. The multiple is the key to how many years’ profit you can ask for and realistically receive. Businesses which are just ticking along, hitting the industry standard benchmarks, can only realistically sell for an industry standard amount. A business which has actively outstripped the industry standard by adding talent, innovation and scalability - showing that it is more than a going concern and has serious potential - can push its multiple beyond the usual figure, and its owner can realistically ask for more years’ profitability in the selling price.
That’s where marketing comes in. Marketing can help your business better industry benchmark, showing potential buyers that your business’ brand, your employer brand, your products and services in development, and your potential routes to market can scale up. Marketing can show buyers that your business is worth more than the competition’s - and is therefore worth paying more to acquire.
- Part 1: Benchmarking
- Part 2: Business brand
- Part 3: Employer brand
- Part 4: New product development
- Part 5: Routes to market
- Part 6: Scalability
Part 1: Benchmarking
In 2017, Paris Saint-Germain signed Brazilian football superstar Neymar for a record sum of €222 million (about £197 million). It’s a lot more than Bristol City’s Bobby Reid, who they sold to Cardiff for £10 million. But if you compare the two on their scoring record alone (strikers, after all, are there to score goals), Reid looks like the better player, with 19 goals at Bristol City compared to Neymar’s 13 at Barcelona in the season before their respective moves.
There is, of course, a lot more to it than that. The value of a player is influenced by age, skill, experience, potential, the sheer value of their name - CIES Football Observatory claim there are 21 variables involved.
Similarly, a business’ value is about more than just profit. If you want to sell your business, you have to build value and show potential beyond this year’s bottom line. That value and potential is summed up by the multiple. Short for ‘multiple of earnings for the sector’, this figure basically expresses how many years of net profit you can realistically demand for your business when you sell. Net profit of business times Multiple of earnings for the sector = Value of business. And that’s your asking price.
Seems simple, doesn’t it? But the multiple is set by a process that’s more art than science, and a certain amount of jiggery-pokery as well.
Multiple of earnings - what does it really mean?
Most industries do have a standard multiplier - companies might usually sell for two, or four, or ten times their net profit - but whether your business will sell for that much is up for debate. Small businesses often sell for less than larger ones - they can struggle to achieve three years’ profit as their asking price, even when the standard multiple is a hair’s breadth from five.
Some businesses are unique and disruptive, creating their own categories in which there simply isn’t an established multiple. If your business puts people in positions within other firms, isn’t an agency, a recruiter, or a consultancy, it can’t be valued in the same terms.
Net profit isn’t always the best place to start. Sometimes, that figure includes items and adjustments that won’t be relevant to new owners: directors’ costs, fees paid to non-executives, exceptional bad debts or one-off expenses can all throw off this year’s profit, and prevent it from reflecting the business’ true value.
Management style also has an impact. Small to medium businesses behave differently to large corporate buyers. Business owner-operators often underpay themselves, compared to people in similar leadership roles in a corporate firm. Owner-operators also tend to create unusual costs. A trip around Europe with your co-founder might celebrate the first five years of trade and collect some amazing ideas and insights, but a corporate-owned business probably wouldn’t have spent that money. The industry multiple is influenced by all those corporate businesses, which aren’t run like yours is - it’s not a fair comparison.
And finally, there’s the question of whether the multiple itself is accurate. In truth, it’s like any other area of business: the price is set by what the buyer is willing to pay. If this year’s seen some high-profile big-money takeovers, the multiple for the sector will skew upwards. Likewise, conservative buyers drive the industry multiple down.
Essentially, this rule of thumb calculation can’t really be trusted, and each business has to be valued on its own terms. That’s why proving your business’ value begins at home: you’ve got to show your worth to the industry, rather than letting the industry dictate the terms of sale. And that’s where marketing comes in.
Benchmarking your business against others in your industry helps you understand how your business compares in terms of value. There are hundreds of factors which influence business value, from net assets to projected cash flow - but there are some where marketing can provide a particular, significant boost.
Market share: the raw number of customers you’re reaching and selling to on a regular basis
Market influence: you may not be selling the most, but are you setting the trends and leading the thoughts?
Brand positioning: the way your brand is perceived by customers and competitors will influence both profitability and the room you have in which to innovate
Profitability: potential and future income, compared to the industry standard for similarly-sized businesses
Marketing won’t add value to your business or sway a buyer all by itself - doing the work isn’t enough. Buyers want to see hard figures: the provable return on investment (ROI) that shows how much value your marketing spend delivers. If £1 spent on marketing generates £5 in profit, marketing directly increases the overall value of your business.
To show it, you need to measure and track two key metrics of marketing ROI - marketing spend as a percentage of sales, and cost per acquisition. If you make those investments, do that work, and see the impact on the bottom line, you have something concrete to show your buyers. That’s why your process for selling a business needs to start with making and implementing a growth plan.
The best basis for a growth plan is a SWOT analysis: describing the Strengths, Weaknesses, Opportunities and Threats of your business as it stands. Breaking down elements of your business into these categories will show you where to direct your efforts to ensure maximum value. You’ll be able to make the most of, say, a market-disrupting product that’s brought your business to the point where selling up has become viable, and you’ll be able to plan around, perhaps, a lack of brand equity.
A business is more than just its tangible assets. When someone buys your firm, they’re not just buying premises and product. They’re buying an identity - a name, and a vision, and a reputation. They’re buying a brand.
Consciously building your brand is best practice anyway, but it’s especially important in the run-up to selling the business. Strong brand values mean a more valuable business - one that’s coherent and directed, facing the future head-on - one, in short, that’s worth buying.
All businesses have a brand, even if they’ve made no effort to build or manage it. Your brand is the way customers (and competitors) see you. It takes in the things most of us understand as “branded” - the look and the logo - but it’s so much more than just that. It is everything from your marketing collateral to the customer experience you provide, and beyond.Everything a business does builds equity - significance and impact that attaches to the business’ name. This equity may be positive or negative - the more positive equity your brand has built up, the more value it’s adding to your business.
How does a business’ brand improve a business’ sale value?
Brand values - the core concepts which resonate through your business’ operations, messaging and customer relationships - are key to your business’ value. They affect the brand’s positioning in the marketplace - where it stands in relation to its competitors, and how well the customer in the street (or online) recognises that. They’re evident in the coverage the brand receives, especially value-added editorials and reviews that position the brand favourably against competitors or in response to customer needs.
A positive and valuable brand is an enormously powerful negotiating tool. When Tesco and Unilever fell out over recommended retail pricing in 2016, undermining share practices and infuriating the public, it was the brand equity attached to Unilever’s products - especially Marmite - that broke the deadlock. Tesco had too much to lose by not having Marmite on the shelves: they, and their customers, ended up eating the price hike.
How to build a more valuable brand
Brand building has to start at the top. You, as the owner of the business, have to know what you stand for. With this understanding in place, you will be able to outline the key qualities and benefits your brand offers. These unique selling points are the cornerstones of your brand, and you need to know them in detail and with clarity before moving on to set brand elements like tone of voice, visual identity and vocabulary.
There will always be brands with bigger budgets and more resources to hand - but your products, services and benefits belong solely to you. By spending time on honing your value proposition (a simple statement of the value you offer customers, to communicate to them why they should buy your products or services), and your marketing plan (who you’ll target and how you’ll reach them) and putting effort into quality content and networking over flashy premises and piles of brochures, you can make a limited brand budget go a long way. Pair that up with a clear, coherent measurement of your brand marketing’s results and you’ll present the most attractive possible package to potential business buyers. There’s no sense in spending more than you have to - what matters is proving that every pound you spend pays off.
Most importantly, though, brand values need to be part of how you recruit. Do potential new hires get it? Do they understand how your brand does business and why? If they don’t - don’t hire them. And that goes for everyone from the admin staff to the C-suite. If your own people don’t believe in the brand, they’ll never be able to sell it. That’s why your business brand walks hand in hand with your employer brand - and that’s our next stop on the road to the business sale.
Potential customers aren’t the only people whose opinion of your business matters. Potential hires will do due diligence. They’ll find out who you are, what you stand for, what your current and former employees are saying about you, and what it’s like to work for you.
That’s employer brand: the external appearance of a business from the employees’ perspective. It comprises how the business portrays itself, what it says on its website, what people are saying about the company online, and its recruitment activities, including how it markets vacancies.
Although the typical business value calculation only looks at revenue and profit, buyers want to see a company with a viable, dynamic culture that has great potential. They’re not just buying a place of work: they’re buying the people who work there. Having a strong employer brand will help attract and retain the right talent, and attract buyers and help seal the deal.
How does an employer brand improve a business’ sale value?
Employer brand has a huge indirect impact on selling a business. The business is valued on its turnover or profit, but the actual decision is sealed by its operations and potential. If a business is shedding talent because it’s poorly led, it’s not worth investing in - no matter how great its turnover is.
Employer branding is especially important for small and mid-sized businesses, where most employees have met, worked with and have a personal relationship with the owner - but it has an impact across all levels of all types of organisation.
The business owner or leadership team sets the tone for the business as a whole. Everyone else will be led by what the people at the top do. If they live the values, and stay visible to employees and prospects by getting involved in operations, that has a hugely beneficial impact on the company culture. If they don’t, there’s no authenticity to the brand’s claims. Employees are disengaged and disinterested, turning up and doing the bare minimum, because they’ve seen through the fakery - and business buyers aren’t interested in fakes either.
While this starts with strong leadership, brand values still need to be clearly communicated to the business at large. This is internal marketing - the same skills in PR, social media and engagement that your marketing team bring to their customer-facing activities.
How to build a valuable employer brand
Employer branding comes down to two things: creating great marketing collateral, and taking great care of your people.
In the context of the employer brand, marketing collateral means something a little different from the norm. Many businesses are great at marketing their product or service, but not so hot on marketing the business itself. Your brand’s value is reflected less by what you sell and more by who sells it - by your existing employees, who show that the business is working well day to day.
To work on marketing collateral, start by looking at what’s there already. What does your marketing material - especially your website, which is where potential employees will start finding out about you - say about you as a company?
Consider a careers page which showcases your team: real people, telling real stories about what it’s really like to work for you. Video content is another way to show your company culture - not sculpted and scripted promotional material, but something authentic that shows off the kind of personalities that work well at your business.
To get personalities worth showing off, you need to take care of your people. Offer personal development opportunities that go beyond mandatory health and safety training and updating certifications - help your people learn and grow their remit and responsibilities. Show that you invest in people and that they invest in you.
HR and marketing need to work together on this, so bring those teams together. Start with a workshop with both your marketing and HR people involved, and all the collateral you’d normally use for an external, customer-facing event, but without the business owner in the room. The goal of the workshop is to warm up your employees exactly as you would a customer, getting them out of the “it’s just my job” mindset and turning them into advocates for your employer brand.
Many small to medium businesses skip this element when they’re scaling up: they focus on product and profits, losing sight of people. All three need attention in the build-up to a sale: and once the people are engaged and ambitious, it’s time to look at where that ambition is directed.
Businesses deliver product or services to market. That’s their essential function, even when the owner’s planning to exit - which means you’ve got to spend the period building up to sale showing there’s something new in the pipeline and the business is continuing to move forward.
New product development almost defines itself. Key word: almost. It’s the process by which a new product or service is brought to the marketplace - but “new” doesn’t mean you start from scratch. It means you start by looking at where you are, and find new places to go from there - destinations you can reach with the minimum of risk.
The Ansoff Matrix places business development activities on a scale from least to most risky. Selling new products to new customers, for example, is furthest away from your current business model, an uncharted territory that carries the most risk. But developing your existing products in new markets, or selling new products to existing customers, keeps at least one foot firmly planted on trusted ground.
The difference between effective innovation and vanity projects (ego-vation?) is simple - the customer. Proper innovation offers things people (i.e. your customers) genuinely want. If you get that right, it can significantly change your fortunes and increase the value of a business.
How does new product development improve a business’ sale value?
New products aren’t necessarily of interest to future owners, but the mechanism of innovation certainly is. Markets are like icebergs - substantial, but constantly on the move. New product development illustrates the business’ ability to move with the flow, and to react to market changes.
Think about how much has changed in the last ten years. Who could have predicted a time where Alexa can organise our entire lives, where plant-based burgers ‘bleed’ like real meat and where we’d pay for goods and services by waving our mobile phones over a card machine?
Business strategists do their best to predict future trends, but there’s no guarantee these predictions will come to fruition. The ability to innovate successfully isn’t about getting it right - it’s about trying to get it right. Innovation shows potential buyers that you’re listening to the market, that you’re alert to industry trends, and that you’re firmly focused on the future. It proves that you’re passionate about putting customers first, as well as about reinforcing the strength of your brand going forward, which can give you the edge in a competitive marketplace.
New product development demonstrates to potential buyers that your business is not stagnating, but capable of innovation. You have built a talented team that keep day-to-day operations ticking along, and confident management who understand their customers’ needs and the market they are operating within.
How to build value through new product development
This is where your marketing strategy comes in. Perform a SWOT analysis on your own products, and those of your competitors, and see if that generates a new avenue your business can follow. Talk to your customers and find out what they want, and tailor your NPD strategy from those conversations.
You could start with upgrades, replacements and new models. The closer the new product is to the old, the less risk there is. Apple are kings of this business model, with hundreds queueing to get their latest products, none of which are particularly different to the old one. You don’t want to reach the saturation point when everyone who might want your product already has one. Moving with the times is essential - failing to can stop you from seeing that a particular product isn’t as popular as it once was and needs to be put to bed forever. And don’t forget the slow public demise of 1980s retail giants such as Woolworths and Blockbusters.
Developing new products - or new ways to package existing products - allows you to find the sweet spot between too safe and too risky, working with your established customer base and brand reputation to continue to innovate. Your business stays fresh and relevant, and your customers and prospects stay interested.
Of course, once you’ve created your new product or service for the customers, you need to get it to them. New product development and routes to market go hand in hand.
What makes a business worth buying? Benchmarks and brands all count for a lot, but so does the simplest element of all: the way you put a product or service in front of people who want to buy it.
Routes to market are part of marketing’s remit. To sell something, you’ve got to go where your potential buyers are: market research will tell you where that is. Once you’re aware of the routes that are available, identify the ones you’re using and the ones in most demand by your customers - then shift your efforts toward that demand. The same logic applies whether you’re selling a product, a service, or the business itself.
How do routes to market improve a business’ sale value?
If you’re not selling where your target customers are looking, and in a way that they want to be sold to, your business’ value (and profit) are limited.
To make your business attractive to buyers, you need to clearly and strategically discuss your routes to market, and look for ways to innovate and develop. It might be that your current routes are fine (for now), but that’s not enough in the buildup to sale. Buyers want to see that a business isn't complacent, content to wait for the market to change or for new competitors to emerge. They want to see you optimising revenue by developing your business: this might be testing new routes, tracking customer behaviour and encouraging feedback, monitoring what competitors are doing, or customer segmentation.
How to choose the most valuable routes to market
Think through what routes best suits your customers’ needs. By tracking customer behaviour, analysing the market and watching innovations and disruptions (such as new technologies for distribution), you can consider and select appropriate routes to pursue and expand. Your choice should, of course, be based on customer habits - where they look for products or services and how they like to buy - but also on business operations. Budget, distribution capacity and logistics all feed into choosing the right route to market.
Selling direct to the customer - whether via your own website, a bricks and mortar shop, or face to face - works well for complex offerings that require personal contact with customers. It’s a B2B classic for a reason - but it can lead to logistical expenses that you may not need.
Alternatively, you can sell indirectly, doing business via a third party - either selling them a product which they sell on at a markup or selling your services through an agency. While indirect sales can shift high volumes or secure larger contracts than a small business could handle alone, it can be slow - and it means your business is dependent on another. Your distributors or agents will be looking after their own interests, optimising for their needs rather than yours, and you’ll give up some brand control to them - so your brand will depend on their marketing.
Some businesses, particularly in B2B services, cut their costs by relying on online routes to market - PPC advertising, email marketing, and an e-commerce platform. This might be direct - selling through your own company’s website - or indirect, selling product through Amazon or services through a platform like Upwork.
Most businesses, however, end up combining different routes to market. If you’re selling a diverse range of things - services targeted at different sized businesses, for instance - it may pay to have direct sales through physical premises for your corporate clients, and an online platform for smaller to medium businesses who value agility and easy access over a firm, reassuring handshake.
If your capacity to sell can grow, so can your customer base, so can your revenue - and so can the future value of your business. Optimising your routes to market affects both net profit and the more nebulous potentials that set your multiplier - you stand to gain on two fronts if your business can scale up.
This is where everything we’ve discussed so far comes together.
Colin Mills—founder of the Liberti Group association of businesses—didn’t coin the term “scaling up”, but his book presents the clearest framework for understanding how it works.
When it’s founded, a business only has so much capacity and capital, and it’s focused on establishing and perfecting its product or service in the marketplace. No matter how great their product or service may be, many businesses hit a growth ceiling purely because something about the business itself needs to change in order to grow. How the business does business needs to change. That’s scaling up. The potential to do that - scalability - is the single biggest thing buyers are looking for in a business.
If a potential buyer can see the opportunity for growth in a business, they’re more likely to buy. More than that - if you can show potential for growth beyond your current revenue, you’re pushing at the elusive multiplier, and able to demand a higher price. This is a matter of marketing - planning your business’ growth and how you’re going to present it to buyers.
To show how your business can scale up with the best of them, you need to work on four key elements: leadership, people, process and forecasting.
The first reason businesses fail to scale is leadership. Not even bad leadership, as such - just not business leadership. In startups, the leader is often the chief innovator behind the business’ offering. They may be technically gifted in the company’s core discipline, but when it comes to business leadership or strategic development they’re learning as they go. In the early stages of a business, there’s usually a small team and the emphasis is on getting the offering out there, so this approach is OK. As the business grows, leadership becomes far more important.
How does marketing fit in? We’ve already told you: this is all about brand.
A business’ brand is guided from the top. The leadership team must establish the brand - the mission, vision and values that guide the business - and exemplify it in everything they do. Marketing can help determine the brand’s values, making sure they’re communicated effectively within the business and beyond. Internal communications, team events and brand management become more important as a team grows and builds a culture: marketing is key to all of this.
You need to hire the right people in order to grow. You’ll need expertise you didn’t have at the start, and you’ll often need to expand capacity in multiple areas at once. If you’re growing your investment in marketing, you’re trying to grow your customer base, which means you’re likely to need more salespeople, more admin people, and perhaps an upgraded CRM to handle the greater volume - which means you’ll need IT skills you might not have had before.
To attract and retain the right talent you’ll need a good employer brand. Your recruitment messaging and activities, as well as the website and what people are saying about the company online, have to show that your workplace is somewhere people want to work.
A profitable business with efficient processes is an appealing purchase that will attract a higher buying price. Businesses’ processes often happen organically in the early days - people do what works, rather than working to any great strategic plan. A focus on operations becomes imperative as the business gets bigger, but even then it can be surprising how many of these processes remain, unquestioned.
This goes for finance as much as it goes for sales and marketing, but as we’re solely interested in the latter here, it’s hard to overstate the importance of an effective marketing function within the business when you come to sell up.
To demonstrate scalability, you need a good idea of which marketing activities work for your business. Understanding how your marketing spend is paying off in real terms—Return On Investment—means you can optimise your marketing plans, and show potential buyers how increased investment in particular activities will deliver a predictable increase in results. Value comes from how well your business is performing now, and how well you can predict it will perform in the future.
Forecasting is crucial for a business that has to demonstrate its ability to scale. Why? Because managing cashflow is a more serious concern when you’re looking to grow rapidly. You have to spend money to make money, and know what’s paying off and what isn’t.
Forecasting is also crucial for businesses looking to command a higher sale price. Why? Because growth is what pushes against the multiplier, and breaks through the threshold many small to medium enterprises meet when they come to sell. If you can show how this year’s profits are predicted to grow next year, and the year after that, you can set an asking price that goes beyond this year’s performance times X.
Where is future growth coming from? Innovation, business development, talent and, of course, sales and marketing. On the marketing front, you need a watertight grasp of the important metrics: average lead time, conversion rates, average sales value and cost per acquisition, and what marketing budget you must set in order to hit these targets.
A business with a great set of year-on-year results will certainly be appealing to buyers, but one with a clear roadmap for scale is a far more appealing prospect. Buyers are looking for businesses with clear potential to grow. By focusing on these four areas, and quantifying exactly how your marketing is preparing your business to scale up, you can present them with a job half done - all they have to do is buy-in, follow your plan, and reap the rewards. That’s an attractive offer for anyone - and it ensures a commanding sale price for you.
In the lead up to a successful exit, you’ll be working harder than ever. Your business has to be running at peak performance and actively addressing its weaknesses - it needs to be the best it can be, and it needs to show that quality to the marketplace.
You’ll need to step up your efforts in sales and recruitment, marketing both what your business sells and the people who sell it. You’ll also need to market to potential buyers - setting your business against industry benchmarks and showing buyers how your business can scale beyond those benchmarks.
Marketing helps make your business more valuable than the traditional rule of thumb - net profit times industry standard number of years - suggests. Marketing presents your business not as a going concern, but a growing one. The more future value a business can demonstrate, the more it will be worth when you go to sale.
The message you need to put across is clear. You’re not selling your business because it’s on its last legs. You’re selling it because it’s worth buying.