Whatever stage your business is at – and particularly if you are at a growth stage or thinking about exit – you will be looking to add value to your business and to promote its success. Contrary to popular belief, the traditional method of valuing a business used by accountants, namely earnings before interest, taxes, depreciation, and amortisation – EBITDA – with its focus on increasing revenues, is not necessarily the yardstick by which your business will be valued.
In reality, there is no single formula to valuing a company on exit that can be used to precisely value every private business. The seller will want to drive the price up, and potential buyers will want the opposite. Although there are relatively easy ways to value certain parts of the business – such as stock, fixed assets (land, machinery, equipment etc.), there will very probably be a sizeable intangible element to the value of a business.
Intangible elements would include “goodwill” – this could comprise trademarks, and the reputation of the company, and other intellectual property. Such assets are notoriously difficult to value, and in many cases will come down to how keen a potential buyer is to acquire your business. If there is a strategic fit, a buyer might pay a significant premium to acquire your business. So, it’s worth planning your exit strategy carefully, and starting with some advice on IP would be a good idea.
Examples Of A Good IP Strategy
Instagram is an example of a company which was acquired for a sum well beyond its “market value” at the time. Facebook reportedly acquired Instagram in April 2012 for $1 billion because Instagram already had a built-in user base, which Facebook’s own planned photo sharing app lacked. By purchasing Instagram, Facebook acquired a foothold in the photo sharing market, and at the same time squashed a threat to its own dominance in photo sharing. Essentially, the valuation was based on Instagram’s intangible assets, namely goodwill and intellectual property, and its strategic fit for Facebook.
Similarly, Facebook’s acquisition of Whatsapp for $21.8 billion was largely driven by the large user base WhatsApp enjoyed. The purchase price achieved was also a high one as Facebook was competing with Google to purchase the company.
These examples demonstrate that synergies within businesses can result in a valuation which is far higher than the company turnover or traditional methods of valuation might suggest. There is an element of the qualitative, rather than the quantitative, when assessing a company’s sale prospects, and if there is a competitive bid (as in the Whatsapp scenario) this tends to push the valuation even higher.
Strategic protection of your intellectual property and goodwill is fundamentally important whatever the basis of the valuation. It is best to secure your IP protection sooner rather than later, as IP is foundational. It can make the difference between a successful sale and a potential buyer or investor walking away. Here is a video which explains more about IP.
Your IP Real Estate
Maybe you are a local business serving a loyal customer base, or you are not in the technology space but rather selling goods and services. Whilst the above examples of a strong valuation, not based on turnover, involve technology companies, most companies now interface with technology at some point. We are living at a time when any company, even your small business, could learn from these examples, and be savvy about how to increase its value.
At the very least you will have a website to promote your business and all businesses increasingly have an online dimension. Many businesses become successful by offering an effective way of enabling consumers to buy from them online. For example, Victoria Plum made bathrooms available to order on the web, and in less than 15 years has built up a business worth millions.
Another example of how an effective online offering can lead to a huge valuation is Skyscanner, which is a global online metasearch engine that enables people to find comparisons for flights. It was founded in Scotland in 2001 by three IT professionals. Following various rounds of investment and expansion over the years, and with 50 million monthly users, it has recently been sold to Chinese travel giant Ctrip for £1.4 billion. A large portion of its valuation on exit will have been attributable to its intangible assets, namely its brand, goodwill and effective algorithms. That is why the website has become so successful.
As the web and technology become more important in our lives, it means intellectual property and technology law are inevitably critical areas on which modern businesses need advice, especially if they are aiming to succeed in some way using technology.
Use IP To Increase Your Valuation
So, if you are looking for ways to improve your business value, consider developing a product that meets your customers’ needs, rather than just focusing on increasing sales and other revenue generating activities.
We have fixed price IP services that can support your business and secure its intellectual property.