Growth vs. Value: The Balancing Act for Entrepreneurs

In the world of business, growth is often treated as the ultimate measure of success. Entrepreneurs frequently evaluate their achievements based on the number of employees they’ve hired, or the rapid expansion of their revenues. Many founders dream of seeing their companies on lists that highlight their top-line growth, believing that a constant upward trajectory is the key to building long-term value.

However, when the end goal is to eventually sell the business to a strategic acquirer, focusing solely on revenue growth may not always be the best path. In fact, prioritizing indiscriminate growth could even undermine the very value you're trying to build.

Strategic Buyers Look for What They Can’t Easily Replicate

Strategic buyers, who are often willing to pay the highest premiums for a business, seek out companies that offer something they cannot easily replicate. These buyers are typically looking for a unique product or service that would be too expensive or time-consuming for them to develop on their own. The more you diversify your offerings or spread your resources across different areas, the less distinctive your value proposition becomes—and in turn, the less attractive your company may be to these potential buyers.

Take the example of a small company in the software sector that developed a specialized tool for a niche market. The company’s product became widely recognized and respected within that particular industry, to the point where the founder built strong relationships and a reputation as a go-to expert. Over time, a much larger player in the software industry—known for acquiring smaller companies—took notice of this business’s success and saw an opportunity to expand their portfolio with a unique offering.

This larger company was already dominant in other markets but lacked a specialized solution in the niche this smaller company had cornered. Rather than seeking to diversify its own offerings, the larger company valued the smaller business’s ability to provide that one critical tool they couldn’t easily develop themselves. As a result, the smaller company was offered a substantial acquisition price, several times its annual revenue.

Had the founder chosen to aggressively expand the product line, branching out into other areas of software, the unique value that attracted the acquirer might have been diluted. The company could have grown in revenue, but it would likely have lost the distinctiveness that made it so attractive in the first place.

The Private Equity vs. Strategic Acquirer Perspective

The way private equity firms and strategic acquirers value a business can differ significantly. Private equity investors often use financial metrics, such as a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), to determine the company’s worth. They typically prioritize financial stability, operational efficiency, and the potential for scalable growth.

In contrast, strategic buyers are more focused on what a company can bring to the table in terms of enhancing their own business. A strategic buyer is usually much larger and better resourced than the companies they acquire, and they don’t need you to diversify. What they want is a unique piece of the puzzle that will fit into their broader strategy. The more specialized and focused the offering, the more valuable it becomes in their eyes, often leading to a higher premium at the point of acquisition.

Conclusion: Focus and Discipline in Building Value

The key takeaway for entrepreneurs is to remain disciplined and focused on what makes your business unique. While growth is important, it should not come at the expense of the core value that attracts strategic acquirers. By honing in on a niche and becoming indispensable within that area, you increase the likelihood that a strategic buyer will see your business as the missing piece they’ve been looking for—leading to a more valuable acquisition.

In the end, the path to building long-term value may not always align with the pursuit of broad, indiscriminate growth. Instead, it may require focusing on what you do best, keeping your offerings unique and specialized, and strategically positioning your business for the future.