The Metric More Important Than Profit

September 13, 2020 Mac Lackey

Do you know what the following news making headlines have in common?

  • Yammer is sold for $1.2 billion
  • Tumblr fetches $1.1 billion in acquisition
  • Postmates exits for $2.65 billion
  • WhatsApp sells for $19 billion

The answer isn’t their size (BILLIONS), although that is a powerful statement and similarity as well. Do you know?

Before I give you the answer I want to go back to basic business and make a likely obvious statement: 

As an entrepreneur you know that profits and cash flow are the lifeblood of your business. 

These profits are what pay the light bill and give you the fuel to scale your company and pursue your vision. Cleary important stuff. 

When you are talking to smart business minds they will always circle back around to the various things that define this critical component of your business – you’ll hear Net Income, Profit, Earnings, EBITDA and so on… Yes, these are the lifeblood of your business, HOWEVER there is something so much bigger and so much more important. 

As a matter of fact, not having it could COST you millions of dollars in lost potential. 

Back to our little quiz at the top. What do these companies have in common? 

 

Answer: None of these deals were financial transactions. 

They were not acquired as a multiple of EBITDA or a multiple of revenue. They were acquired for a very different and very important reason. 

What is this amazing thing that matters more than profits and led to these eye-popping deals? 

Strategic Value. 

In the case of acquisitions, Strategic Value is quite simply what your company represents to a prospective buyer.

 

The Metric That Matters More Than Profit Is Strategic Value

I am super passionate about this because it costs so many entrepreneurs a life changing amount of money. It is such a common misconception as entrepreneurs are growing their businesses and even worse when they start considering exits that they should be selling for EBITDA (or revenue) multiples.  

WRONG, WRONG, WRONG.

The massive exits listed above, and every single one of my six personal exits was based on the strategic value the company offered to a buyer. The buyers (Microsoft, Google, Yahoo, Facebook) in the examples above didn’t need these companies for their earnings. They didn’t really care about their revenue… As a matter of fact, the largest of them all (WhatsApp, at $19 billion dollars) barely had any revenue at all. Their value was STRATEGIC…. And strategic value far, far exceeds financial value in almost every case.

A hypothetical example to illustrate the point:

First, imagine you have a small children’s shoe company. You create a clever design and brand called, Zipster. Families love buying them. Kids love wearing them. Let’s say you are generating $3m in revenue, and making a modest profit. 

Now there is a Chinese Manufacturer of children’s shoes. This manufacturer has the factory, skills, supply chain and resources to create amazing products. They currently manufacture for some of the biggest brands (NIKE, Adidas, PUMA, etc.). They make a 20% margin on their production of these products and generate tens of millions in revenue every month. And in addition to their contract manufacturing for these major brands, they have created their own line of shoes. Just as high quality. Just as well designed. 

The brand the Chinese company created is called Xaxpil. They command a 53% margin on these shoes when sold directly. The problem is that the “brand” Xaxpil doesn’t resonate with American or European consumers. 

To grow, this Chinese company could clearly afford to buy large competitors. They could spend hundreds of millions on expanding factory space. They don’t need cash, they don’t need distribution. They don’t need more factory space or skilled workers… they need A BRAND. 

Suddenly they realize if they put YOUR brand on their Xaxpil shoes it could be a market leader quickly. Guess how valuable your company is to this buyer? Is it four times your modest cash flow? Is it 1.25 times your $3 million in revenue? 

NO, this conversation is 100% about the strategic value you give them immediately. Your brand is worth 10x more than your cash, margin, EBITDA, design skills or anything else. This deal is based on strategic value.

When you are building your company, regardless of if you ever want to exit or not, you need to focus on building strategic value.

So if brand is an example, what are others:

  • Intellectual Property (Trademarks, Trade Secrets, Copyrights, Patents, etc.)
  • Unique Distribution 
  • Exclusive Agreements
  • Geographical Advantages (Offices, Customers, Employees)
  • Brands
  • Innovative Products, etc. (there are MANY examples)

In our program, ExitDNA, we teach entrepreneurs how to build strategic value and importantly how to not focus on just ONE piece of strategic value, but to stack as many as possible. This leads to BIG outcomes.

Now, let me be clear that I’m not saying profits don’t matter. They absolutely matter. Back to the first part of this post, they are the lifeblood of your business so don’t misunderstand me. Profits matter. Cash flow matters. 

But strategic value is like rocket fuel. It will propel you like nothing on earth. When it comes to maximizing the value of your company – in exits, or in scale, or in freedom, or, or, or…) focus on building strategic value and watch your value soar. 

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