Fractional Futures

How Marketing Improves Valuation Multiples at Exit

• Paul Mills • Season 3 • Episode 10

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Fractional Futures is the essential podcast for CEOs, investors, and senior marketing executives looking to unlock the power of fractional marketing leadership.
 
Hosted by Paul Mills, Founder at VCMO, and with special guests, we'll share expert insights, provide actionable strategies and explore real-world success stories to help you leverage fractional marketing leadership for maximum impact.

In this episode

In this episode, Paul Mills and Rob Nicholls discuss how marketing can significantly enhance a company's valuation multiples at exit. They explore the importance of preparing a business for sale, the factors that make a company attractive to buyers, and the critical role of storytelling in crafting a compelling growth narrative. The conversation emphasizes the need for strategic planning, brand investment, and demonstrating long-term growth potential to maximize value during an acquisition process.

Special Guest

Rob Nicholls, Founder Rob Nicholls Consulting, CFO, Board Advisor and Angel Investor

Key Takeaways

  • Marketing can enhance valuation multiples at exit.
  • Buyers want a predictable revenue stream.
  • Most sellers don't prepare for a sale.
  • It's about maximizing the value at exit.
  • The marketing function has a huge part to play.
  • Brand investment increases margins.
  • You need to demonstrate long-term brand resonance.
  • Crafting a compelling growth story is essential.
  • Marketing needs to step up their game.
  • Understanding buyer perspectives is crucial.

Sound Bites

"Most sellers don't prepare for a sale."

"Brand investment increases margins."

"It's all about the narrative."

Contact VCMO

Thanks for listening & keep podcasting!

Fractional Marketing Leadership | Marketing Transformed.

Paul Mills (00:01.559)

Hello and welcome to the final episode of season three, where we've been exploring across this season how fractional CMOs can help SMEs and portfolio companies accelerate growth and maximize enterprise value. Today, we're diving into a topic that's top of mind for many business owners and investors, and that's how marketing can enhance valuation multiples at exit. Now while financial performance is critical,

 

marketing can play a significant role in determining how attractive a business is to potential buyers. And a well-structured marketing function, it can drive predictable revenue, create brand equity, and support a compelling growth story, all of which can contribute to a higher valuation multiple. In this episode, we'll explore how marketing can be leveraged to package a company for buyers, increase its perceived value, and tell a company, sorry.

 

and tell a compelling growth story to attract the right acquirers. Joining me today is Rob Nicholls, a strategic CFO, a non-exec director and board advisor with over 35 years of global finance experience. Rob specializes in profit maximization and value creation. And today, as with his investor hat on, he'll share his insights on how investors and CFOs and CMOs can work together to position the business for successful exit.

 

So let's get started. Rob, welcome to the show. I can see you and your golfing attire there. Are you about to tee off or you just come back?

 

Rob Nicholls (01:33.216)

I'm ready to go, Paul, actually.

 

Paul Mills (01:35.061)

Fantastic, whereabouts are you hitting your golf balls today?

 

Rob Nicholls (01:39.054)

I'm in Devon today at my regular golf course as well so I've got three guys waiting for me about two hours time.

 

Paul Mills (01:45.239)

Right, so that's an instruction to get this episode recorded quickly then. So shall we dive in then? So absolutely. And I guess for some of the listeners who may not know you, as well as being a CFO, you do invest in businesses as well, don't you? So we're looking at today's episode, you're kind of sharing both your investor insights and CFO insights, because the two are kind of linked together a little bit, aren't they, in this piece?

 

Rob Nicholls (01:50.272)

Got lots to say.

 

Rob Nicholls (02:10.574)

They're very much aligned. When I go into a business, I look very much as if I was investing in that business or selling the business or buying the business.

 

Paul Mills (02:21.879)

Fantastic. So I think The first topic I want to look at is packaging the company for a potential buyer. So I guess if you're a business owner and you're preparing for an exit, financial performance is critical, but so too is demonstrating a strong scalable marketing function. And I think what buyers want, a buyer wants a business with a predictable revenue stream.

 

They want strong customer acquisition models and they want a well positioned brand in the market. And If your marketing function can make that happen, it can enhance your company to an investor or potentially an acquirer. So Rob, we just mentioned there you invest in businesses. So from an investor's or a buyer's perspective,

 

What specific marketing factors make a company more attractive during an acquisition? And what should businesses be doing in advance to position themselves as a strong acquisition target?

 

Rob Nicholls (03:28.334)

So there's a lot to unpick here, Paul. I think the first thing is most sellers, most business owners don't prepare for a sale. They don't understand how long it will take. They don't understand what's involved in it. Likely is not they'll only do it once or twice in their lifetime. And most people have never experienced it at all. As I said earlier, I look at things from an investor's perspective. What am I buying?

 

And you'll go through a process called due diligence when you're selling or even buying a business. And one of the things you're clearly going to look at is the marketing function. You're to look at where the brand is, where the product is, where the service is in the marketplace. So there's a strong role that the marketing function has to maximize the opportunity. And to be honest, as a finance person, as an investor,

 

I'm looking to maximize the value created in a business if I'm looking to sell that business. And brand has a big part to play. The story in the marketplace, the reputation, the lifetime value of a client has a big place to play. The retention numbers, the KPIs around retention is a big factor here as well. But the first thing is, most businesses don't prepare. They don't have a strategic plan. They don't have a marketing plan.

 

And that's something that an investor is going to look at quite quickly. They're going to do their due diligence. They're going to look at your customer lists. They're going to look backwards. They're going to look at the financials quite obviously, what assets they're going to buy, what goodwill is on the balance sheet, what the P &L says, what margins they've generated. But primarily what the buyer is looking to maximize is the opportunity going forward. They don't buy the previous year's

 

financial results. They don't buy the previous year's customers, if you will. so to my mind, it's all about creating a longer process to generate revenue. So that's why SaaS businesses, recurring revenue businesses, generally have a higher multiple at exit because they've got either contractual or guaranteed or recurring revenues. And that's something that is often missed by a lot of businesses.

 

Rob Nicholls (05:48.66)

If you can generate recurring revenues, you're not just selling one product or one service this month, and it's a one-time service, that has little to no value creation in the longer term. But if you can create a buyer journey that enhances the trust and relationship you've got with a client, they're gonna buy from you on a recurring basis. Often you're gonna be able to upsell them to higher value products or services.

 

increase your margin, perhaps increase your pricing over time. That's going to create value in the business. And that's what it's about. The buyer or the investor is looking to acquire the future revenue or earning stream. They're not really that concerned with what's happened a year or two years or three years behind. But what is the business going to generate going forwards?

 

Paul Mills (06:45.119)

Absolutely, and I think an important thing to bear in mind is a buyer is not going to rely on internal marketing KPIs when they conduct that due diligence. seller might present the acquirer conversion rates, pipeline metrics, brand awareness stats, but a buyer is going to assess the marketing performance independently. They'll probably...

 

outsource it to a marketing specialist agency or an advisory business. And what they're going to be looking at instead of those kind of metrics, they're going to be looking at the market position. They're going to be looking at, what are the drivers of competitive advantage and the ability of the marketing function in that organization to drive scalable growth before assigning value to that function. And I think, you know, particularly for very early stage businesses that may only be a few years old, maybe the marketing function isn't

 

mature, might not be very well established. And what any business owner needs to know is that an acquisition process or an exit can take, know, it can be an 18 month runway there thereabouts. And so really when, if you're planning that exit, your marketing function, it must be structured to demonstrate that scalability and revenue contribution. And you've got that 18 month window to kind of position the marketing function as that

 

growth driver and you've got that 18 month window to get your ducks in the row. Otherwise you might be found out or you could potentially lose some multiples there.

 

Rob Nicholls (08:19.096)

There's a couple of things here. The good and the bad is that due diligence isn't done nearly as thoroughly or well as it used to be done. So as a buyer or seller, generally it's a cursory look. It's a cursory look at is there a marketing plan? Where's the customer list? What is the average sales value? And so on and so forth. They'll look at some decent financial metrics. They're not interested in your fluff metrics, your views, your eyeballs, the number of blogs.

 

the number newsletter subscribers you've got, they're not interested in that. And that perhaps is a good thing. But the important thing from a marketing perspective is to understand that you're about, it's about maximizing the value at exit. I've got a client that I'm going to see next week over in Wiltshire. And she has no marketing plan. There's no strategic plan, but she's got an offer for the business.

 

And I know that that offer is woefully undervaluing the business. So the buyer, the potential buyer has looked at the opportunity. They've looked at the IP in the business. They've looked at the contracts. They looked at the customers and they said, we can buy this at 50 cents on the dollar. Primarily because there isn't a strategic plan. There are no advisors. The owner in this case has been, I wouldn't say hoodwink, but she's been convinced that this is a good offer and it's on the table.

 

I'm going to go in there next week and I would suggest over the next 18 months, we'll probably double the exit value of that business. So she'll no longer be selling for a million and a half. She'll more likely be selling between three and four million. And we can increase the multiple. The other thing you've got to understand is dependent on the business or the industry you're in, that will often determine the exit multiple, either an exit multiple of EBITDA or my preferred

 

seller metric is an exit multiple of sales. So if you're doing a million pounds worth of sales, you know, a two times equity might mean you can exit for 2 million. But I've got industries and businesses that are doing three, four, five million. And if I can get an eight to 10 times multiple on either EBITDA, preferably on sales, maybe a four or five or six times exit multiple of sales.

 

Rob Nicholls (10:41.678)

we're going to generate a whole stack of value for the owner. And this is where having your ducks in line, having a strategic plan, having a marketing plan, having a financial plan, having advisors around you to counsel you and advise you that that's not a good thing to look at. We need to focus on that. We need to invest in the brand. We need to invest in distribution, whatever that investment needs to be is.

 

That narrative has to be owned by someone. There's no reason why it shouldn't be owned by the marketing head, the CMO. It could be, it often isn't, is often led by someone like myself as the CFO or the CEO. But it's all about the exit multiple. It's all about valuing the business at the highest valuation you can get. Because I'd rather have my owners, my directors, the people I work with, at 15 million.

 

than exited five or six million. And they're gonna have a whole better life as a result of that advice and counsel. So there's a huge part to play in terms of realizing that value. And the marketing function has a huge part to play here. And I fear quite often they're not in the game, they're not in the ring, they're not part and parcel, they're not owning the narrative, they're not owning the story.

 

The storytelling has to come down to myself as the CFO or advisor, oftentimes the CEO too.

 

Paul Mills (12:16.797)

I want to go a bit deeper into what you've just said there, Rob. I've previously worked in a corporate finance organization and so I've seen

 

how deals operate from the acquirer's side and how the process works. And I've witnessed that a company's valuation multiple, it's not just based on revenue, there's multiple other factors on there. And one of those factors is also based on the quality and scalability of that revenue. If you can't demonstrate that that revenue is predictable and that there is a potential to scale it, that will impact the value.

 

so you mentioned there that, marketing can influence the value. What, specific marketing elements can drive higher multiples and really from, you know, marketing's capability to drive recurring revenue, to, increase customer attention, to improve brand strength, to impact a company's value. What other things, you know, can, can marketing do to help increase that multiple?

 

Rob Nicholls (13:27.32)

So sometimes you're be limited by the market, the industry, the product you sell. If you're selling a one-time product for 1,500 pounds, that's fine, there's a place for that. But I want to be selling a product that's 1,500 pounds today. I want to sell it next year and the year after, and I want to have incremental value and services. I want to able to increase the price on that service as well. So ownership of that product.

 

delivery and that journey and that customer journey is hugely influenced by the brand, the positioning in the market, being in the right industry. And I think it's something that's largely almost forgotten to some extent by marketing is that they have a huge part to play in terms of where the business is going and orientating the business or the organization to where the business is going to be two, three, five years from now.

 

and developing products and services and distribution into those markets and developing the right pricing. A huge part of what drives value in a business is the goodwill. It's intellectual property and goodwill. And if you've acquired other businesses, you've acquired goodwill. But building your own goodwill in a business is hugely developed on brand investment.

 

So if you've got a brand and you're not investing in it, you're not developing any goodwill, therefore you're not really creating a very much value in that business. it goes to, you're putting 50,000 a year into brand, whatever mechanisms that is, whether that's blogs, social proof, whether that's customer journeys, whatever it is to develop the brand, you're creating value in the business that will be realized

 

at a point in time when there's a transaction potentially. Most businesses will over time with this within the next three to five years or five to 10 years, there will be a transaction that they have to enter where the value of the business is determined by the investments you've made this year and next year. So I'm a huge believer in investing in the brand and recognizing that you'll see the value come out the other end.

 

Rob Nicholls (15:47.982)

£50,000 this year might generate a business that's worth 2x 3x what it is today in three to five years time. And it's something that's really not recognized and understood nearly enough in business today in the UK.

 

Paul Mills (16:04.961)

Yeah, and you touched on earlier the SaaS businesses, they have the recurring revenue model. And that in that sector can drive high valuation multiples. I think anyone that's not in SaaS can kind of look to SaaS and think, actually, maybe we can create a pricing model that replicates that. Maybe in professional services, for example, there might be an ARR model that you can implement. And I think certainly as a buyer, if you're confident

 

that the business you're buying

 

It does have predictable revenue. It has scalability in the future. There are cross-selling opportunities within the organization to upsell, cross-sell, whatever. That will just lead to stronger long-term growth projections. And I think you mentioned also about brand equity impacting or positively impacting valuation. think if your marketing leader, If your marketing function can create brand equity, if you can create a brand that enables higher

 

pricing power, stronger customer retention, increased bargaining power in the value chain. That's really going to help an acquirer. It's going to mitigate any objections they may have in terms of buying the business. They'll have more confidence in paying a fair price for that organization. And I think also,

 

Marketing, needs to demonstrate long-term brand resonance. So buyers aren't just looking at recent sales. They want to see multi-year brand traction. And I think if marketing has created a loyal customer base, which is built around a strong brand recall, again, it reduces risk for a potential buyer. It increases the value.

 

Rob Nicholls (17:45.75)

Thanks

 

Rob Nicholls (17:50.542)

Yeah. And I think there's a couple of things to play in here. Sales are obvious, but a strong brand through investment over time is going to increase your margins. It's going to enable you to price and take price when you determine you need or want to take price. So that will often determine an expanding margin profile. You never want to be looking at people won't look at businesses where the margin profile is contracting over a period of time. that, you you're developing strong sales growth.

 

good expanding margins will increase profitability substantially, which will therefore create value. And it's those real three or four things that play into the creation of business value. And brand has a huge part to play in it. Marketing has a huge part to play in this. They're just not really stepping up to large extent now in creating the conditions where

 

You can see expanding sales, not just 5, 10, 15 percent sales growth. I want to see sales growth from low single digits to double digits to high double digits. And any business that I go into, if they're seeing 5, 10 percent growth, I want to be seeing 15, 20, 30 percent growth every year, every quarter, every year. I want to see expanding margins. I want to see expanding pricing on those products or services.

 

because that is what's going to be valued by anyone looking at the business, either as an investor or an acquirer or PE firm, venture capital firm, someone looking to acquire other businesses in that world. That's what they're looking at. Growth in sales, expanding margins, increased profitability and value creation. And marketing has a huge part to play in this scheme.

 

Paul Mills (19:42.135)

That's a pretty good segue into, I guess, the final topic in this episode. And that's really how marketing can help create the story to attract the right sort of buyers.

 

Rob, I think you mentioned in an earlier episode that buyers, don't just want a profitable business, they want a compelling growth story. And so the right marketing strategy can help craft that narrative, highlighting the businesses, market leadership, its strong customer demand and future potential. So Rob, how important is storytelling in the exit process and what role does marketing play in shaping the company's growth narrative?

 

Rob Nicholls (20:27.746)

I'll give you an example where I think it's played in here. I had a client about three years ago that we we led through an exit where a large regional retailer bought 45 % of the business. had honed, We'd segmented the business, if you will, and honed in on the high value, high margin, repeatable businesses. So this wasn't selling a system and then go away and never selling another system to that industry or that industry group. But it was honing in on

 

where do we have a unique value proposition for the client in an industry group that we can generate frequent repeat business and develop a profile of clients that an acquirer will really find attractive. we honed in and it was actually within the, they could sell to anyone, but then we actually honed in on one industry group which became, and they,

 

became the foundation of something that an external businesses that were also playing in the industry wanted to acquire. So it was really focusing in on high value, repeatable business, high margin business, and other, it attracted interest in the business simply through that developing the business case and the marketing plan and honing in on one segment and looking at that.

 

and repeating that on an ongoing basis and building a resonance in the marketplace so that people knew what we did, who we did it for and the value that was being generated. And there was a number of things that played into that. Social media played into that as well. Strategic partnerships with other people in the industry played into that such that my client, which we secured an exit for, basically became the number one

 

supplier of choice of that product with repeatable businesses, with strong strategic alliances, and they got acquired. It was a very attractive proposition. And we had developed a good storyline, a good narrative. We told a good story. It was repeated. It was repeated by other people when we weren't in the room, so that people were talking about the brand because we'd seeded the marketplace. We'd nurtured the marketplace. We'd developed a

 

Rob Nicholls (22:52.0)

a strong brand identity and that people talked about us and referred businesses in and other strategic partners came on board and they lifted the brand further. And it just created a very compelling storyline and narrative that the CEO and myself who was playing point on it was able to secure a good value as a strong valuation for the business that generally, you know, three years prior.

 

we would not have been able to do.

 

Paul Mills (23:23.285)

Yeah, and I think marketing teams, marketing leaders in organizations, if they're struggling with campaigns to drive demand, they will really struggle to do that storytelling well when it comes to that exit opportunity. If you're a business owner, don't have much faith in your marketing team, outsource it to a PR agency and you've got an 18 month campaign to really sell the business and position it in the best way.

 

And buyers, they'll be looking for companies that outperform their industry. And really that PR campaign, that content strategy, it's got to demonstrate how your business is gaining market share, how you're innovating in customer acquisition, how you're innovating the product or the service, and how you position yourself ahead of competitors. And I think the other thing, I guess another important point to make is...

 

Rob Nicholls (24:00.078)

Thanks for watching!

 

Paul Mills (24:19.627)

The growth rate has to exceed industry benchmarks. So you need to demonstrate that as well as part of that storytelling, as part of that content strategy. A strategic buyer is gonna seek businesses that scale faster than the market average. So if you can demonstrate that through case studies or your numbers, that again is gonna be quite attractive to a strategic buyer.

 

Rob Nicholls (24:40.974)

That's a really good point. If you're growing at 5%, the industry is growing at 10%, no one's going to be interested in you underperforming. If the industry is growing at 15%, but you're growing at 30%, then I'm interested and you're going to generate a higher multiple. So it's all about the narrative. It's all about the story you're telling. It's all about positioning yourself in the right way. And marketing is a huge part to play here. Sales not so much.

 

The finance lead, generally the CFO will often play point on this in terms of directing the narrative. And that's unfortunate. That's just the way it is today. The CEO and the CFO are basically locked in at the hip here, but it's the story you're telling. It's the brand equity you've built. It's the goodwill. It's the clients you brought on board. Any acquirer, any businesses acquiring another business, they're going to look at the client list. They're going to look at what the value is.

 

what the cross-selling opportunity is, how pricing has been taken. The number of businesses that I go into and they haven't taken price over the last couple of years, that's no way to run a business. I often give the example of some of the businesses I looked at in the US, where they'll take multiple price increases on an annual basis and they won't lose clients. They won't lose business. Business will just scale. They'll often sell

 

more units, more tickets at a higher price and therefore generate revenue. And that's what I think we've lost to some extent is understanding that it's all about driving growth over the long term, exceeding the market, exceeding what you've done prior. You might have grown 15 % last year, but you need to be growing high double digits next year. And you need to be thinking bigger. You need to be thinking, where are we going with this?

 

Who can we build into our ecosystem? What partnerships we can be built? What bridges can we build? What story do we need to tell? And it goes to brand. It goes to investment in the brand and how that's being told and how other people are talking about you. That's the best brand equity can build is other people talking about yourself, about your business in the marketplace. It's not nearly done enough. And I think marketing clearly needs to step up.

 

Rob Nicholls (27:03.02)

their game on this because they're just not really doing nearly enough as they should be.

 

Paul Mills (27:11.209)

And on that, that's probably a good point to close this show and sadly this season. If you've been streaming this season's episodes, I hope you found value from everything that's been discussed between Rob and myself.

 

Rob, I'd really like to personally thank you for freeing up your time from the golf course to share your perspectives across these 10 episodes. They've kind of flown by, but I've really enjoyed every single show. again, thank you for your time and your insights and your nuggets of wisdom there. They've been really valuable.

 

Rob Nicholls (27:49.56)

Thank you, it's been really very enjoyable joining you. If anyone wants to get in contact with me, if anyone wants to pick my brains or argue with me, just reach out and connect with me on LinkedIn.

 

Paul Mills (28:01.225)

and all of Rob's contact details and links will be part of these show notes as always. So Rob, on that note, again, thank you very much. I can see your itching to get on the T, so enjoy your golf. And finally, before we close, just as a heads up for season four, I'm gonna be joined by Emma Clayton. She's a fellow of the Chartered Institute of Marketing.

 

And Emma is on a mission to help marketers reclaim their credibility and trust within the boardroom. It's going to be a whirlwind. So stay tuned for that one coming really soon. So look out for that. Rob, thanks again. Good luck with the golf. Get a hole in one and I wish you all the very best with your clients.

 

Rob Nicholls (28:47.512)

Cheers, Paul.

 

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Paul Mills

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