How First Impressions Can Impact Your Company’s Value
When potential acquirers first evaluate your business, most will quickly categorize it into a specific industry. This initial classification can significantly impact the value they place on your business. Some industries are inherently perceived as more valuable than others, and if your business is placed in a less favourable category, it can be challenging to change that perception.
When Jeremy Parker was raising money for Swag.com, he encountered investors who were left with the impression that Swag.com was a simple distributor of promotional products, an industry plagued by low valuations.
Parker tried to make the case that Swag.com was more than a middleman, but investors weren’t buying it. They lumped Swag.com into the promotional products category and offered Parker a low single-digit multiple of EBITDA for a slice of his business.
Parker regrouped and began positioning the business as an e-commerce play with an unforgettable domain name, world-class merchandising, and one of the most elegant direct-to-consumer (DTC) buying experiences online. Investors began to see the company differently. No longer a simple distributor of “trinkets and trash,” Swag.com began to be seen as a technology company and a digital commerce leader. Instead of a low single-digital multiple of profit, Parker attracted an acquisition offer valuing his $30 million company at a healthy multiple of revenue.
Once an acquirer has categorized your business into a particular industry, it can be challenging to shift that perception. If your business doesn’t fit neatly into their preferred categories, it can be challenging to change their initial impression.
Additionally, acquirers often compare your business to others within the same industry. Suppose they have already placed you in a less favourable industry. In that case, they might use lower benchmarks and valuation multiples from that industry, making it harder to argue for a higher valuation. Furthermore, the initial narrative you present about your business can stick. If this narrative places you in a lower-valued industry, subsequent efforts to reframe your business may be met with scepticism.
How to Look Like a Valuable Business
To ensure your business is categorized favourably from the start, consider these strategies:
- Clear Positioning: Clearly articulate your business’s value proposition and industry position. Avoid ambiguous descriptions that might lead to misclassification. Be explicit about where your business fits and why it should be valued accordingly.
- Highlight Industry Trends: Emphasize positive trends in your industry and how your business is positioned to capitalize on them. Use data and market analysis to back up your claims and shift perceptions.
- Put Your Best Foot Forward: If your business spans multiple industries, highlight the most favourable one. Demonstrate how your company leverages the strengths of high-value industries and downplay associations with lower-value ones.
- Leverage Third-Party Validation: Support your positioning with endorsements, industry awards, and analyst reports. Third-party validation can lend credibility to your claims and help shift acquirer perceptions.
When selling your company, perception is everything. The category investors place your business in can make or break the deal.
