Building Value: Market Position

Building Value: Market Position

Are you a big fish in a small pond? Have you become the preeminent supplier in your market niche?  If so, it can be a good news/bad news situation for a potential acquirer.

The good news is that you likely have good name recognition and great penetration in the market, both desirable attributes.  The market values your products/services and you have probably figured out how to serve that market profitably.

The bad news is that your growth potential may be limited.

What Acquirers Want

What an acquirer wants depends upon the acquirer.  Some buyers want revenue growth potential and they value that higher than current market position.  They might prefer a market challenger rather than a market leader, if they believe they can add the ingredients needed to become the market leader.

On the other hand, some acquirers value a strong or leading market position.  They want profitability, recurring revenue, and perhaps see opportunities to increase profitability through synergies.  They might also want a business that is a reliable source of cash which can help to fund other investments.

A strong market position combined with growth potential is often the best of both worlds, but you need to understand your prospective buyer and market your company to appeal to the buyer’s objectives.

Elements of value:

  • Revenue growth potential
  • Profitability growth potential
  • Cross-selling opportunities
  • Strong positive cash flow


Maximizing the Value of Your Market Position

Market strength is never a bad thing either from an operational perspective or from an enterprise valuation perspective.  We would never advise a client to turn down an opportunity to become the market leader in any part of their business, so long as they maintain profitability and don’t have to sign away future growth potential.

  • Maintain potential for growth – Don’t neglect R&D. A strong pipeline of new products and/or new prospective markets ensures that you avoid a cap on your potential.
  • Maintain profitability – Don’t trade profitability for market share. Make sure that customer contracts offer you the ability to maintain a reasonable profit margin.  If you have to make concessions to win an important customer, or to enter a market, ensure that those contracts have limitations which will allow you (or an acquirer) to negotiate more favorable terms within a reasonable time horizon.  If you are building a cloud or SaaS (software as a service) company, getting to sustained profitability can be a difficult balancing act. On the one hand, entrepreneurs want to achieve massive scale and get as many customers as possible in a hurry. But young, growing companies have to manage their cash and focus on a business model in which costs will be lower than revenue once they reach a certain size. There may be a temptation to scale up too early and burn cash so fast that the company can’t keep up with growth and get to an acceptable level of profitability.
  • Build strong customer relationships – If you are a trusted supplier then your customers are more likely to consider new products launched by you or by a prospective acquirer.


Bottom Line for the Entrepreneur

Your market position is part of the value of your business, so you should:

  • Build a strong market position
  • Continually develop new channels for growth
  • Maintain profitability
  • Be very careful about trading profitability for market growth
  • And when it comes time to sell your business:
    • Get good at telling your story so that you highlight the advantages of your market position for a prospective buyer
    • Find a buyer who sees the most value in your market position


In this series of articles, the Austin Dale Group will distill some of the lessons learned from our many years as M&A and Strategic Growth Advisors to emerging and mid-market technology companies.  We will review what acquirers want and how these key factors can have a dramatic impact on the value of a company to shareholders and acquirers.