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How First Impressions Drive Valuation

This week in Built to Sell News, we’re covering:

  • What to do if you’re stuck in an industry that attracts low valuation multiples (listen now)
  • How Swag.com grew to a $30 million juggernaut and attracted a multiple of revenue
  • The Alibaba valuation discount and how to avoid it
  • Quite possibly the cheapest trophy ever purchased to commemorate a multi-million dollar acquisition
  • How Vince McMahon turned his $1 million acquisition of WWE into a $9.3 Billion Payday

🎤 The Swag.com Story: From Middleman to Technology Company

In the world of acquisitions, first impressions can seal your fate.

When Jeremy Parker was raising money for Swag.com, he ran into investors who were left with the impression that Swag.com was a simple distributor of promotional products. 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 re-grouped and, as he told John Warrillow during their Built to Sell Radio interview this week,  began positioning the business as an e-commerce play with an unforgettable domain name, world-class merchandising, with 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. Instead of a discount single digital multiple of profit, Parker attracted an acquisition offer valuing his $30 million company at a healthy multiple of revenue.

When it comes to selling your company, optics matter, and the bucket investors put your business in their minds matters a lot.

💳 The Alibaba Discount: Why Diversification Can Hurt Your Valuation

Speaking of being categorized incorrectly in the mind of investors, last week, Chinese internet giant Alibaba announced its intention to split into six separate businesses. In the 48 hours following the announcement, Alibaba’s market value increased by $30 billion. Why would investors welcome such a move? Alibaba consists of a range of businesses resembling those of Amazon.com, including e-commerce, logistics, and cloud storage. Before the announcement, Alibaba was valued at just 10 times their earnings forecast for next year, yet each individual business as a standalone will likely fetch a much higher multiple.

Investors and acquirers often discount businesses like Alibaba, as they are compelled to purchase assets they may not be interested in. They frequently apply the lowest value multiple of a particular business to the entire group of companies. Amazon faces a similar situation. The Bloomberg Intelligence Unit estimates that Amazon’s cloud storage division, AWS, could be valued at $2 – 3 trillion as a standalone business. However, as a collection of various services, from e-commerce to audiobooks to cloud storage, Amazon’s entire market capitalization is less than half (around $1 trillion) of what Bloomberg analysts believe just one of its divisions could be worth as a standalone.

📈 Focus or Diversify? Balancing Revenue and Valuation Goals

Investors and acquirers don’t require you to diversify for them. They prefer owners to concentrate on dominating a single product or service. If acquirers get the impression you have diversified into multiple undifferentiated products and services, they will penalize your valuation. If your business appears unfocused, acquirers will often identify your lowest value division and apply that multiple to your entire company. This is yet another example of where you have to prioritize: are you trying to make your business bigger or make it more valuable? These two things are related but different. If your goal is revenue, diversify. If your goal is a more valuable company you could sell one day, focus.

First impressions and optics are crucial. To maximize the value of your business, concentrate on a single, easily identifiable business in an industry acquirers are eager to dominate.

📣 Quote of the Week

”  Investors hate conglomeration. So what do investors do? They find the shittiest part of the conglomerate, and they assign that multiple to the entire business.

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Professor Scott Galloway

📽️ Clip-of-the-Week

In this clip, Jeremy Parker reveals how he got acquirers to see Swag.com as a technology business rather than a simple distributor. 

🏆 The Trophy: How to Commemorate Your Win

Not all entrepreneurs envision selling their company and purchasing a private island in the South Pacific. Jeremy celebrated his success by buying a modest bicycle.  Listen to the man with simple tastes as he describes what the purchase means to him at the 57:30 mark of the episode. 

📈 Recent Deals

  • Back in 1982, Vince McMahan bought the WWE from his Dad for $ 1 million. This week, he sold WWE in an all-stock deal valuing it at $9.3 billion, implying a 7 x multiple on last year’s revenue and a 24 x multiple on Operating Income Before Depreciation and Amortization (OIBDA). Not sure how OIBDA differs from EBITDA?

Operating income before depreciation and amortization (OIBDA) is a measure of financial performance used by companies to show profitability in their core business activities. OIBDA excludes the effects of capital spending on fixed assets, such as equipment, and the interest expense of carrying debt.

Sometimes OIBDA may not include changes in accounting principles that are not indicative of core operating results, income from discounted operations, and the earnings and losses of subsidiaries.

Source: Investopedia

  • Marshall, the renowned maker of the Marshall amp used by legendary musicians like Jimi Hendrix, Eric Clapton, and Lana Del Rey, is set to be acquired by Stockholm-based Zound Industries.

We’re always on the lookout for inspiring entrepreneurs to feature on Built to Sell Radio, and we need your help to find them. To nominate a founder, head here.

Colin Morgan, Executive Producer of Built to Sell Radio

John Warrillow, Host of Built to Sell Radio

Daphne Parsekian, Copy Editor

Denis Labataglia, Audio Engineer

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