Professional baseball scouts can get excited about a lanky 15-year-old lefty even though he has never faced a serious batter in his life. The scout sees what the young sophomore could be, not what he is today.
In much the same way, one of the drivers of your company’s value is its Growth Potential: how quickly you could grow in the future. Over at The Value Builder System™, when we measure companies on all drivers that impact their value, professional services firms usually score low on Growth Potential because it’s virtually impossible to scale a people business quickly.
By contrast, software companies usually score the best on Growth Potential because their application usually works just as well whether they have ten subscribers or ten thousand. Short of having to spin up another server or two, a software business can snowball almost overnight, which is why they tend to outperform on Growth Potential and often attract eye-popping multiples.
The Growth Potential PetSmart Saw in AllPaws.
To illustrate how your company’s Growth Potential impacts your company’s value, let’s take a look at a software application called AllPaws. In 2013, on the heels of building a successful online dating application, Darrell Lerner decided to apply his experience in the dating industry to pet adoption. AllPaws allows users to find a pet based on various criteria critical to people considering adopting an animal.
Lerner was a whiz at attracting new users to his application. He bought Google Ad Words and managed to get his cost per click down to 5 cents. It only cost AllPaws $1 to win a registered user for his site. Given how efficient he was at acquiring users, it didn’t take long before Lerner was driving more than one million visits per month. AllPaws had 1.5 million registered users and ranked in the top 100 of all lifestyle apps on Apple’s App Store.
That’s when Lerner attracted the attention of PetSmart. PetSmart is one of the largest retailers/e-tailers in the pet care industry and could see how quickly they could grow their sales by having unfettered access to Lerner’s 1.5 million users. At the time, AllPaws was generating around $1 million in annual revenue, and Lerner’s goal was to get an acquisition offer for at least $3 million, which was why he was so happy when PetSmart acquired AllPaws for a whole lot more.
The lesson? Your historical revenue is essential, but acquirers are buying the future. To drive up your business’s value in their eyes, paint the picture of how quickly your company could grow in their hands. Learn more about your company’s growth potential here.