The first impression customers have of your business often influences how much they spend on your product or service. It's a well-known fact, but have you ever thought about how first impressions affect how potential investors evaluate your company?
At Olemera Financial Services, we help business owners build the value of their business, improving its longevity and profitability into the distant future. We use a number of advanced tools to evaluate where your business stands in the eye of the stakeholder or potential acquirer and help you develop strategies to minimize shortfalls and strengthen weak points within your company.
During a fundraiser, the initial perception of your company by investors greatly affects its valuation, impacting both the capital you need to devote to development as well as the value of the company when you eventually sell it.
Take Jeremy Parker's fundraising experience for Swag.com as an example. Investors initially viewed Swag.com as just a distributor of promotional items. Despite Parker's efforts to position the company as more than just an intermediary, investors were still unconvinced. They ranked Swag.com among other promotional products companies and offered Parker a low-single-digit EBITDA multiple for his stake in his company.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's operating performance and profitability.
An EBITDA multiple is a valuation ratio that is commonly used to estimate the value of a company. It is calculated by dividing the enterprise value (EV) of a company by its EBITDA. The EV represents the total value of a company, taking into account its market capitalization, debt, and other factors.
Parker changed strategy and launched Swag.com as an e-commerce platform with a memorable domain name and a premium, elegant direct-to-consumer shopping experience. This shift in perception has transformed Swag.com from a simple distributor into a technology company in the eyes of investors. As a result, Parker received a takeover bid that valued his company at healthy earnings multiple of $30 million.
When it comes to raising money or selling a business, looks matter, and how investors view your business in their minds matters a lot.
Speaking of misclassifications in investors' minds, Chinese internet giant Alibaba recently announced plans to split into six separate companies. Within two weeks of the announcement, Alibaba's market value increased by $19 billion. Why should investors be happy with such a decision? Alibaba is made up of a number of companies similar to Amazon.com, including e-commerce, logistics, and cloud storage. Prior to the announcement, Alibaba was valued at just 10 times its forecast earnings for next year, but only one company is likely to post much higher earnings.
Investors often discount companies like Alibaba because they are forced to buy assets they may not be interested in. They often apply the lowest value multiple of a particular company to the group as a whole. Amazon is in a similar situation. The Bloomberg Intelligence Unit estimates that Amazon's cloud storage arm, AWS, could be worth $2 trillion as a standalone company.
However, because it's a collection of diverse services, from e-commerce to audiobooks to cloud storage, Amazon's total market cap is less than half (roughly $1 trillion) of what Bloomberg analysts put for just one hold its business areas. This could be valid on its own.
Investors generally prefer companies that focus on dominating one product or service rather than focusing on distinct, unrelated offerings. A diversified portfolio can lead investors to perceive your company as unclear, which can lead to a lower valuation. The same principle applies if you decide to sell your business.
When your business appears scattered, potential buyers can focus on the least valuable department and apply that multiplier to your entire business.
Prioritizing your goals is very important: do you want to grow your business by increasing sales or increasing its value? Although these goals are related, they require different strategies. Aim for diversification if your primary goal is to increase your income. However, if you want to build a more valuable business that could potentially be sold, it's important to have a clear goal.
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