Why scalability is important

True understanding of a business can be demonstrated most successfully when the seller can demonstrate future, hopefully early, potential to a prospective buyer. By TOM McKASKILL.

By Tom McKaskill

The value to the buyer in a strategic sale is created through the exploitation of some asset or capability acquired in the purchase. Using this to best advantage is the secret.

 

To release the value of assets or capabilities, the buyer of a business needs to deploy the product or service throughout their organisation or through their distribution channels. The faster that can be done, the quicker the buyer releases the potential profits from the acquisition.

What does this mean for the seller? Basically, the more easily and quicker the buyer can exploit the inherent potential of the acquisition, the more it is worth to the buyer – if you look at the investment in terms of the present value of a stream of future earnings.

The basic premise is that larger and earlier profits generated from the acquisition are more valuable than smaller and later profits. If you translate this into the value of the acquisition, it is obvious that the acquisition is worth more to the buyer at the point of acquisition if the benefits can be released earlier.

The opposite side of this argument is clearly that the business is therefore more valuable and therefore can be sold for a higher price.

Following this logic, the seller can best prepare the business for sale by recognising the need of the buyer to quickly integrate the new acquisition and then rapidly deploy the acquired asset or capability. Thus the more easily the products or services can be scaled, the more able the buyer is to exploit the acquisition potential.

The seller should thus examine the business to ascertain what it would take to dramatically scale up the appropriate strategic value asset or capability. So, given unlimited resources, what should the product or service look like at the point of acquisition? How should the business itself be structured to provide the best launch platform for integration and then scalability of the strategic asset or capability?

Scalability might involve many aspects of the business. For example, documentation, monitoring systems, specialised equipment, training aids for salespersons, demonstrators, installers, available capacity, lining up suppliers and distribution channels. Ask yourself — what would need to be done to scale the activity by 50 to 100 times?

Part of the task of the business owner is to work out which corporation can best exploit the acquisition. In doing so, the entrepreneur is identifying which corporations have the capability, capacity and experience to best exploit the opportunity presented through the acquisition.

The entrepreneur should then proactively set about presenting this opportunity to the prospective buyers so that they can evaluate it. In bringing the opportunity to their attention, the entrepreneur should articulate what steps he or she has taken to ensure that the acquisition is well prepared for scaling the acquired asset or capability. In this way the entrepreneur is also showing the buyer that he understands the potential of the acquisition and also how much it is worth.

The final part of the puzzle in ensuring that the entrepreneur gets full value for that potential is to ensure that he has several potential buyers lined up for the time when he wishes to trigger a sale.