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Value vs. Growth – How a potential investor looks at your company and what you can do about it

by on October 1, 2014

Planting investments

When you look at your company do you see value or do you see growth?

Investors and potential acquirers look at your company from a certain perspective.

One may be looking for value.  The other may want to invest in growth.

Let’s be clear, potential acquirers are really investors.  They’re just making their investment in the form of an acquisition.

Do you see what they see?

Value vs. Growth

First, let’s clarify the difference between “Value” and “Growth” investing – it is frequently misunderstood.

In general, all investing is about Value.  Regardless of the investment strategy, investors and acquirers are trying to buy businesses that are mispriced – that is, their shares are priced below their intrinsic value. The key difference between traditional “growth” and “value” investing is the reason for the mispricing.

In the case of “growth investing” the market underestimates a company’s growth potential. For example, it might price-in growth at 50% for 5 years, while in reality it turns out to be 100% for 10 years. If the investor recognizes this incorrect assumption it has discovered a growth investment opportunity.

In case of “value investing” the market often overestimates problems and/or risks. For example, the market expects a company to go bankrupt but it recovers and returns to profitability. If the investor recognizes that other investors mistook temporary problems for permanent problems or misjudged their severity it has discovered a value investment opportunity.

Value investing, therefore, is an attempt to profit from inefficiencies and excessive worries.

What Value Investors are looking for

Second, let’s clarify what Value Investors are looking for, and when I say Value Investors I’m specifically referring to Private Equity firms as they are more likely to invest this way than strategic acquirers, though that is changing.  (That’s material for another blog post)

  • Value investors look for situations where they believe the rate of decline is slower than what the market believes and invests in the incumbent.
  • Growth investors look for situations where they believe the rate of decline is faster than what the market believes and invests in the disruptor.

Value Investors are looking for opportunities where the market believes in the “Persistence of Status the Quo” with a specific company but they see something that the market doesn’t.

Value investing means buying $1 assets for $0.50.

Value Investors make changes to the business in order to generate returns that are materially better than the cost of capital.

There is some short term financial engineering that produces increased value to the business.

But the big return comes from leveraging the company’s strategic assets to generate a valuation premium.

Valuation Premium

What is a “Valuation Premium”?

According to Divestopedia, a valuation premium refers to the excess in value that a buyer (or investor) estimates for a company compared to its peers in the same industry. Buyers (or investors) will typically review comparable transactions as part of their due diligence prior to completing an acquisition. This review provides a range of multiples that is being applied to most transactions. If the buyer (or investor) is willing to pay above or at the high end of this range, it means the target company has compelling attributes to justify a valuation premium.

Buyers pay a valuation premium for many reasons. However, these reasons usually fall into the following five categories:

  1. The company has specific barriers to entry that make it increasingly difficult for additional competitors to enter the market;
  2. The company has consistently delivered higher margins than its competitors, and has earned higher returns on investment;
  3. The company has a specific proprietary technology that is difficult to replicate and/or is patented giving it a major competitive advantage;
  4. The company is a particularly good fit with the buyer, either because its services open up new market opportunities, or because the management team perfectly fits the buyer’s growth plans; and
  5. The company has access to customers that the buyer does not, and there is an opportunity to leverage off this customer list to cross sell the services or goods that the buyer sells.

Understanding competitive advantages or “moats” therefore becomes incredibly important to value investors.

Do you see your company the way a PE firm does?  

Do you see where there are short term changes that can be made to do more with what you’ve already deployed and realize the benefits in 1 or 2 quarters?

Do you see how you can leverage your strategic assets to obtain a competitive advantage so you can command a valuation premium?

Change your perspective and look at your company the way a PE firm does.

If you want to learn how to see your company the way a PE firm does and make the changes yourself so you can get a higher valuation, contact me to for a quick chat about the Valuation Amplification Process.  

Learn What a VC is Looking For

Need Help Understanding what a VC looks for when evaluating the companies they might invest in?

Download the VC Due Diligence Checklist and learn what they want from you.  https://www.therevenuegroup.net/vc-due-diligence-checklist

Upcoming Course Launch: “How to Build a Company a VC Will Want to Invest In”

We are about to launch a new online course that will help entrepreneurs learn the best methods for building a fundamentally sound company; a company that a VC would want to invest in.

Help us tailor the course by letting us know what issues or questions you have about securing VC funding.  Please take the survey here:  https://www.therevenuegroup.net/course-survey

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From → Strategy, Valuation

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