At the time it wasn’t quite so obvious, but now I realize that I was incredibly fortunate to spend the first part of my career in small-market mergers and acquisitions.
Turns out it’s an arena where one can acquire an incredible depth and breadth of business knowledge. On an almost daily basis, I was learning about the successes and failures of an endless variety of businesses, how they overcame obstacles and ultimately what those businesses were worth and how the transactions were structured.
After assessing and valuing literally hundreds of businesses over a decade, I began to notice an interesting pattern emerge. There was in inverse correlation between a company’s scope — the breadth/focus of what it does — and the multiple of EBITDA used to establish its selling price.
This correlation infers that our instincts as business owners and much of traditional business theory could be doing more harm than good. The customary method of growing our business through diversification in order to mitigate risk is patently false.
To put it more simply, when it comes to your business: The less you do, the more you’re worth.
And here’s why.
These companies that “did less,” or had a very narrow focus, tended to be able to communicate their brand and what they did more simply. As a result, they were generally viewed as experts in their industry. They also tended to grow faster, have less debt and spent less money on marketing. And because they transacted for a higher multiple, the owners had more money in their pockets when the companies sold.
Conversely, those companies that “did more,” or had a very broad focus, generally had higher gross revenue but their profitability was less stable. This was because they had to manage multiple product or service lines, diverse customer segments, multiple sales channels and more complex infrastructures. They were less agile, and when everything was said and done, the ownership generally received a lower net payout when the companies sold.
To be effective, ignore your business survival instincts. Instead of diversifying what you stand for in the market, simplify and narrow your scope. “Do less” in the mind of your consumers and expect a higher return when it comes time to sell.