3 Ways to Increase the Value of Your Business

So that's how I came up with this recipe, which I call the high-valuation triangle. Now, the first ingredient, it's a really intellectual property monetization is where, effectively, according to certain research that we've seen, businesses become 10 times more investable than those who do not actually really care for this stage. This makes more money from characters than they make from movie because they expand from movies to merchandising, to exhibition events, to film parks, and etc. In fashion, we can see Zara, dominating the fashion market, Zara is capable of going from concept to a story Manhattan in 20 days. While their fashion competitors, they will take months and months to do the same journey. Welcome to M&A Talk, the number one podcast and selling a business brought to you by Morgan & Westfield, a boutique M&A firm specializing in the sale of small-to-mid-size companies. I'm your host and president of Morgan & Westfield, Jacob Orals. If you're considering selling your business and you'd like to work with me throughout the process, you can schedule a free consultation at Morgan & Westfield.com or, if you'd like my team and I to perform a valuation of your company for one-time fee of $1,500, visit Morgan & Westfield.com or see the link in the show notes. Welcome, this is your host Jacob and today we're going to talk with Mateo Tutti and we're going to talk about three methods to increase the value of your business. And while Mateo primarily operates in the world of investors, there's some really interesting parallels here between that world and the world of acquires or those companies or individuals that may buy your business. You will find here that Mateo is likely going to use some different language, but I'll help translate that language as we have this conversation. And again, you'll find that there's lots of parallels here when it comes to building a valuable business either for investors or to sell. And with that being said, Mateo, welcome to the show. Thank you very much, thank you for joining us and we're going to talk about the recipe that you've created for increasing the value of the business. And I think this is a very subjective topic. Everyone has their own different method for increasing the value of the business. Before we dive into this, these three ingredients, if you will, how did you come up with this? What's your background and how did you create this formula? Well, I remember when back in 2016 I was beginning to sponsor events for myself and during events and I used to give presentations. And I remember I was invited to join a number of initiatives to make business more investable effectively. So it just increased the exit value of a business. And I remember at free invitation, one of them was to make a business more investable by effectively creating a franchise's strategy. The second invitation I had was about creating better management, better succession planning. And the third invitation was about how to take a business global, so that is more sellable. So I started to think, well, maybe if I connected the dots really, and if I put these three ingredients together, we make it a recipe for success for entrepreneurs, effectively leveling up entrepreneurs with investors. So that's how I came up with this recipe, which I call the high valuation triangle. Now, what types of companies and what size companies do you think this is applicable to? Well, effectively, there are five stages in any history of any business. And this recipe is applicable to any of these five stages effectively. So when we think about the transition, the business goes through, they basically start when they start, they are called start up. When they eventually scale, they are called scale up, which is a second stage, then there could be three other stages. One is stagnation, one is crisis, and one is exit effectively. So for any one of these five stages, the recipe will effectively adapt to what is more important in that particular stage. So I'll give you an example. If you are in a start-up phase, you tend to lean more on one particular part of the recipe, because it's the intellectual property monetization, for example. Because when you start up, your priority is not to have a global presence, but you have to prove your intellectual property, for example. So it's really a recipe that can be adapted to any kind of situation. It's not really advisable to be used for businesses that run like a lifestyle. So if you have a plan to exit, if you never plan to scale it, then it's not really advisable. That's what I would say is the situation which would not be useful. Now what particular scale or phase do you think this is most useful for? Of those five phases here that you mentioned, do you think there's a particular phase that we're going to talk about as it's most useful for and most applicable? Yeah, I would say the early stage of the business, the first one, the start-up, and the second one, the scale-up, it's where we see most failures that are avoidable. If only there was a better awareness from entrepreneurs. So I would say these two phases is what we see the most painful failures, because they're really absolutely unnecessary. Now let's talk about the first ingredient here, or whatever you might call it, what's the first one? Now the first ingredient is a really intellectual property monetization. Is where you effectively, according to certain research that we've seen, businesses become 10 times more investable than those who do not actually really care for this stage well. Now intellectual property monetization is where you really discover the unique selling point of the business, and effectively you create a lifetime value solution for a client. So initially it's all about, really, you get passionate, about really resolving a problem. A problem exists, obviously, the bigger the problem, the better. And once you find this problem to resolve, you have to find a solution that is repeatable to its several revenue streams, and it's effectively as practical as possible for a customer. So effectively what you create, it's a recurring patterns which create a recurring result. Generally speaking, we have three phases in which intellectual property monetization is created. The first phase is the concept. It's where effectively you have an idea that's no more than an idea. Now that concept then needs to be validated. And it's only after validation that you really want to talk to an investor. And after validation is executed, then it's about development and deployment. And for that, I highly recommend the utilization of the technology readiness level system. So you go from TRL1 to TRL9 effectively. So that's something that if you are able to show where you are in that particular sort of scale, then you're able to command a good conversation with an investor effectively. So that's where it all starts. And intellectual property monetization is so underrated. And because you know, every business owns intellectual property. Now we're not just talking about registered IP here. Are we trademark's patents, copyrights? I would assume that we're talking about the scope beyond that, right? Yeah, absolutely, absolutely. I mean, we're talking about well-behind patents, well-behind just the pure registration of the intellectual property. Now, intellectual property, not only needs to be really developed, but it also needs to be monetized in the right way. So then you need the right, what I call it, the two phases. Is one is protect, then to profit, and then you go back to protection and profit, again, back and forth, yeah. So you have to be able to protect and profit all the time. And you know, each business is unique, of course. And the way in which a business really starts to dominate its own sector is by really creating what we call the lifetime value solution for a customer. And the lifetime value solution for a customer needs to be such that, for example, the customer acquisition cost needs to be a fraction of the lifetime value solution for a customer. So in general, what we tend to see is that the value created is when excess of the cost, you know, to acquire a customer. When you are dealing with investors, why is this so important to them? And how many of them just zero and straight on this point here? Well, effectively, the evaluations of a business will take a totally different shape once you can answer that question, what do you own? Effectively, a business that owns an asset, in this particular case, it's a process or it could be a way to serve more than one customer with one method, yeah. That changes completely the valuation of a business because you could have a business doing the same activity, but effectively showing that the same method can be used for more than one customer, suddenly everything changes. Instead of reinventing the wheel every time you have a customer to serve, then you know you're using the same method and that's what really changes absolutely the valuation of a business and the investability as well. How does this apply to established businesses that already have established product lines? Well, what we tend to see is that we can see how big businesses become bigger all the time, yeah, say we can we can mention household names, yeah. So the names that, you know, we can see every day, you know, our eyes, for example, Disney, but Disney makes money, they basically they will create a movie, but then they will make money so many other different ways, you know. So there is so many different revenue streams and each revenue streams will increase the the value of the of that particular intellectual property. In fact, Disney makes more money from characters than they make from movie because they expand from movies to merchandising to exhibition events to theme parks and etc. So obviously, each situation is unique, but generally speaking, there's no shortage of additional revenue streams. We can see, for example, Starbucks, Starbucks, they didn't follow the way McDonald's did it McDonald's did it through franchising, Starbucks did it through joint ventures. Well, even Starbucks eventually they started to do some franchising themselves as well. So as we can see, there's always a way to adapt to a market. So you can always increase your presence within a market by creating a different method. I mean, when it comes to partnership, you can create probably dozen and dozen of way to do a joint venture. In example, Pfizer with biotech for the COVID vaccine, we'll know about them shortly. So joint venture at a very common method. Let's remember Google and Luxor doing a joint venture together. So there is no shortage of additional revenue streams that can be created when we introduce the element of joint venture. We introduced the I meant to punish it for example, but just one example really now. We're really just talking about the value proposition here to your customer and the reason I ask that is because when we got a solid company. We asked the owner of very important question, which is, how do you set yourself apart? What's your competitive advantage or what's your value proposition? And what I've noticed with a lot of businesses in the lower middle market is they have a very difficult time answering that question like we pick up the phone faster, good customer service, obviously, that's not a very strong value proposition. And that this doesn't mean that your business is not saleable. If you don't have what we're talking about here, I think what we're talking about here is how to 10X your business, but I'm really talking about customer value proposition here or how does that tie into monetizing your IP. Or are they very similar? Well, the market is always there and it can shift, you know, it can take away the position that you think you created. Yeah, each situation is follows its own story. I mean, let's go back in time. Those who can remember for example, Kodak, they invented digital photography, but they were making too much money in films. So they had an edge. So if someone wants to invest in Kodak, they would have thought, okay, wow, you dominate the markets and film, but you also created the digital camera as well, digital photography. I mean, guess what's happened with that? I mean, even if they were, they had a competitive advantage, they just wasted it. They allow other companies to effectively overtake them. And that's where they were completely crushed by the new entrance like Adobe. At different type of behavior we can see is with Apple. Apple was dominating the digital music download with the iPod. And they had an opposite decision made compared to Kodak, you know, although they dominated the digital music, they completely killed the success product because they wanted to develop a new product called the iPhone. So meaning the iPhone killed their previous product, the iPod. Yeah, they deliberately killed their own product, the iPod, because they understood that the iPhone had a lot more mileage than the iPod. So again, two different types of behavior when you own intellectual property and you either use it or, you know, at some point, someone else will actually take it away from you. The other thing that many, many business underestimate is that the distribution of the IP is sometimes more important than the IP self. So you don't have supply chain. A given example in fashion, we can see Zara dominating the fashion market. Zara is capable of going from concept to a story Manhattan, I mean, 20 days. Oh, yeah, it's, um, each industry has its own characteristic, each business has its own unique selling point, yeah. And it's about really exploiting it as much as possible. Yeah. Well, let's take a quick break and we'll be right back. This is your host, Jacob, and thank you for listening to the show. If you're interested in selling your business and you'd like to work directly with me, you can go to Morgan and Westfield dot com. And you can schedule a free consultation. And like I mentioned, you'll work directly with me throughout the process. And now back to today's show. Welcome back to Emily talk with Mateo, Tori, Mateo, what is the second ingredient here? Our second ingredient is a succession planning and it's really about creating a very strong leadership because what investors tend to really buy what they really concentrate on is transferable value, not personalities. It's really talking about management team. I think the first point we're talking about your value proposition, as you call it, IP monetization, the second point here, the strength of your management team. And this is a very common problem that we run into in my and my space selling companies, M&A, a lot of entrepreneurs, a lot of their values in their head and so forth. And if they leave their business won't do well without them. I know a lot of entrepreneurs know about this. What do you think is the single biggest thing holding them back from being able to build a strong management team? We see that control obsession is a major problem most of the time. And we can see that owners, they don't tend to let go unfortunately. And that's a major issue, but that's really part of the transformation. When you go from an other stage business into a business that wants to mature effectively, it's about like changing completely personality, going from a founder, typical founder situation where you are pretty much multitasking into a situation where you really become a CEO. The CEO then needs to really behave as if he was a football coach, for example, so it's a different type of personality where now you have to really delegate you have to really find the right talent for your team. How would you define a good a strong management team or strong succession plan? A strong management team, I would say we tend to define a good management team where we can see that the business runs very well without the founder effectively, without the founder being involved on a daily basis. It's a very, it's a very rough type of description about when things really go well. When effectively you have what I call the next triangle, the triangle of leadership, effectively we have three main goals, business needs to achieve, very, very simple and you need three leaders effectively. Number one, sell number two, produce number three, general cash flow. So these are the three biggest goal businesses to score and usually for each one of these three goals, you want one leader. Generally speaking, if we translate this into language that every business talks every day, a strong sales leader, a strong operation leader and a strong finance leader. And usually when I talk about this, obviously it's in my book as well, I tend to refer to a comparison with a sport like it could be football, it could be another sport. So in football, you tend to have someone who's very good at scoring goals and usually does the sales director. Then he got somebody who's very good at midfield, which is an operation director. So usually that kind of person tends to ensure that there's delivery for the selling effectively. On the back in defense, you tend to find somebody who is protecting, who is ensuring that the business is generating cash flow. How do investors evaluate a management team? Are they looking at resumes? It's kind of a hard thing to evaluate potentially. So how do they do that? Well, the first objective for an investor is to be able to see if there is transferable value in a business. Now transferable value exists when the management team is capable working together to produce results effectively. Now, how do we ensure that this is actually of interest to an investor? Well, it's about diversity as well. It's about really the systems in place. Not only you have three good strong leaders, but depending on the size of the company, you could have underneath the strong leadership team, most succession planning, which is built into the business. And for example, if you have also a good team, if you've got a good composition, good diversity into the team underneath, just give an example. If you are recruiting your team, and you have to say five or six people in the same department, what you want to do is to make sure that you're building diversity. You don't want to have too many people wanting to do the same thing. So you want to have somebody's very good at finishing a task. Somebody's very good at coordinating somebody very good at chat. So yeah, sometimes people say, well, look at the look at the organization chart and that's it. You know, I don't want to go any further. That's good enough for me to see the company works very well. That's absolutely untrue because what you want to see is really to find if the skills are there really to work together, they can actually contribute to the business in the right way. I'll give you an example, let's say you hire a team of four people, three of them, they like coordinating one of them likes finishing a task. I mean, that doesn't involve us, you know, so you want to have somebody's good at coordinating somebody's good at finishing a task and maybe somebody is very good at making some research, some analysis and et cetera. So yeah, when you go very deep into an organization, you will find also the situation as well. There's a very good book. I like on this. It's called organizational physics by Lex Cisney because I like the name of the title organizational physics as in you talk about physics and things moving and so forth. An organization or company does have an element of physics to it in terms of the stages that it goes through and how to propel yourself with growth. What do you think is key to doing that with your management team to be able to build a business that can scale? So what's the key to that primary role you as the CEO to be able to build your management team? Yeah, the management team again, we need to define really, you know, say when we look at the composition of a board director's obviously we need to ensure that the board, the leadership is first of all capable of creating alignment. So alignment with not just the internal stakeholder could be the employees, but also sometimes external stakeholder if they needed. Now in general, a balanced team will work very well when there's an element, a complete elimination of something that personally I think is negative 100% is called groupthink. So what you want is really challenging people, people who are really when they sit in a boat, they are not afraid of really absolutely disagreeing. Regardless of the, you know, of the subject, you know, because you know, I'll tell you this is obviously part of my education, I've been part of the financial times board director program. I've been part of this functional boards as well, and we tend to see failure in companies where either that is groupthink, everyone is agreeing with someone else, you know, there's no disagreement on anything. Or they could be a strong dysfunctional board. What is very healthy is sort of culture where really the management team is is always is always really, you know, each individual person is expressing their own ideas and they is fundamental. The diversity in management team and in the board is also fundamental, you don't want everyone to be 100% aggressive or have intensity. You may want to balance, for example, a very passionate CEO with potentially a much more balanced figure in the CFO. And sometimes when the CEO maybe needs a little bit more sort of motivation, maybe you want to see a pose is actually, you know, the opposite sort of mentality, should we say. So, yeah, and investors, they tend to look at these things and they tend to look at how these people they work together and they always tend to look behind. And they need to do their own plan for the next five years because most of the time when you exit the business, you think wrongly that you're going to exit at the peak of the business. That's actually, that's very wrong because and the day, if you want to exit your business, you know that those are going to buy from you. They will have to organize their own exit plan out of the business that they're just about to buy. So if it really what they need to do is they need to see a big uplift from the price of which they're buying. So you need to leave money on the table as well. That's a great point about group think I love that we have that in our company that group think but the opposite of that we encourage healthy debates and I couldn't imagine if we suffered from group thinking. I think that's instrumental to building a strong management team and in that note, let's take another quick break and then when we come back, we'll discuss the third in grading here and we'll be right back. This is Jacob, your host and thanks for listening to the show. If you'd like a free copy of one of my books on selling a business, you can send an email to [email protected] and we're giving away two books. The first is the art of the exit, the complete guide to selling your business. It's written for businesses with 1 to 10 million per year in revenue. And the second book is acquired, the art of selling a business with 10 to 100 million in revenue. And again, if you'd like a free copy of either of those books, you can send an email to [email protected] and now back to the day show. Welcome back to M&A Talk with Mateo Tori and Mateo, third ingredient, what's the third ingredient here? Okay, once you've established your position, what you own, the intellectual property and you've done it really well, you've executed your intellectual property monetization strategy. And after you then built your leadership team, so now you've got a strong team that is executing really well. Now you've got your defined by the market, you've got an intangible value because your brand is very strong. What else can you do to increase the valuation of your business? That's where we get lessons from obviously big companies. You know, the next step is to go global. Well, in actual fact, you do not go global by not thinking about going global at the beginning of the adventure because when you monetize your intellectual property is when you're really thinking about going global. So even if you're at the concert phase, even if you are at the development phase, you haven't done any sales yet. You need to think ahead of when one day you're going to need to go global if you have to, you need to sell. That's a great point. I like that because it sounds like you need to think about a product that's highly scalable at a global basis as opposed to just within your region. And why am I saying that is because when we look at household names, we see that when they go global, they go back always to intellectual property monetization. I could give a many, many example, you know, this given example of Gillette, you know, by the way, Gillette is a company where many people think. Does he have intellectual property? Of course he does. He actually sells blades in the same way as Microsoft sells licenses. Yeah. So not the same thing effectively. So the system is the razor, but the royalty. They are the blades effectively. Now how did Gillette go global? They didn't reinvent what they did in the USA. They established distribution agreements with partners. So they went into, you know, they went into a leverage mode, you know, the leverage from their own IP. Now the world leverage is fundamental if you want to create a top class business because IP is exactly what gives you leverage. So you have a brand, you have an intangible name that creates lots of lots of interest from customer, then you have to need to leverage, you know, let's see Nike. How did Nike become a brand non wall white, you know, again, the leverage on their own IP, whatever they started and then they went into agreement with the various distribution company. What I tend to talk about sometimes is to allow somebody else to sell with the intellectual equity, you know, I'll give you an example formula one, yeah. It's a brand formula one allows its brand name to be sold by anyone in the world when they organize an event, you know. So, and that's the way you leverage yourself by, you know, in a very smart way. You don't have to work as hard as you did when you initially started your own business. Mateo, if you look at the average kind of typical business owner in the lower metal market, say they have a business doing five to 100 million and revenue or turnover as you call it. What do you think prevents most of those companies from being able to go global in most situation is it could be different number of reason one could be the lack of education or lack of setting the business up in the right way when they first started. Say they might not have set up their intellectual property monetization in such a way that they could go globally in a competitive manner. So, they might have built a product that doesn't really scale so well. The distribution method cannot be scaled in many situation. You have to be very selective in which market you go because there are certain markets where you need to really adapt. I mean, for example, lack of adaptation is one of the reason why many companies don't go global. Example, McDonald's, McDonald's, they let they have to adapt to a country in which they start to set up their own franchising. They're not going to sell the same menu in India in the same ways that you say. So, if you're in a business between 5 and 100 million dollars sales and you're struggling to scale is probably because you are not adapting to the market in which you want to scale effectively. So, there could be a big opportunity that you're missing out on the opportunity because you're not effectively scale it in the right manner in the market. So, you need to adapt to that culture effectively. But it's interesting, how do you think this relates to point number two team? How do you think that prevents you from the third ingredient here going global? Okay, the number two is where you establish the right management team and when you want to scale from, let's say, from the current management team to a different type of method. Sometimes, you know, you could determine that instead of, you know, building a new team overseas, you instead need to use a completely different method. I'll give you an example, licensing instead of, you know, that sells, for example, yeah. So, you might have established a very strong force in your own country when it comes to selling. But if you want to continue selling in another market, you may need to use a different method which is, it could be licenses, it could be franchise. Franchising is obviously is the most complex way to do it because you have to clone a system and then you have to, you know, distribute the franchise in license. What is the pattern that you see for companies that do successfully expand globally? What do they have in common? The pattern is just one word, it's called leverage, really. So they leverage from what they've already built in their own country and they know how to really adapt to a new culture effectively. So it's fundamental. So you need to, you need to be aware of the fact that, you know, you're entering your culture, you need to study really well. Doing your own work is very important. You want to do a SWAT analysis, of course, before you do that. You know, you want to do also a pass analysis and you want to do a political, economical, social, technological, environmental, legal analysis as well. So you need to do some study on that, you know, you don't just go overseas without, you know, having studied the market and sometimes you will find that businesses that fell going global is because they just rush it. They just want to go too fast, you know, they haven't completed probably the second part of the evolution triangle well. They still haven't got a good management team locally. They already want to go global. This is why my high evaluation triangle follows each step at a time. Of course, you have to plan it, but it doesn't mean that you have to rush it. Yeah, this doesn't take just a few months. Do you think these three ingredients should be done in a certain order or priority? She's just focused on one at a time or prioritize them, what are your thoughts on that? Yeah, we'll divide between a few in practice because each business is unique. Yeah, let's face it. There are businesses that go through very, very fast changing economy that they need to act very quickly. They can wait. There are the situation that mature much more slowly. However, common pattern is that depending on each one of the five stages, whether you're starting up, you're scaling up, you're in a crisis, stagnation or exiting the high evaluation triangle will change shape according to the stage effectively. So when you're in a scale up mode, you have to really get it right with succession planning. And perhaps you need to really start accelerating on global presence. But that doesn't mean you have to do it in the scale up phase. You know, it's desirable that you have an idea about what you're going to do. But it's not desirable to rush if the market, for example, is not mature, for example. So I would never say that I wouldn't call it a playbook at all. I would call it a framework really. Mattel, in your experience with investors, how are those? Can you just still down really these fundamental three ingredients here? The reason why I created this high evaluation triangle is because after my 20 years experience as a CFO, I attempted to study, go back to all my experiences. On top of that, I've also looked at a study so many companies. And I wanted to create a framework, which is very easy to remember, and to understand it doesn't mean that it's applicable to all situations. So I will say this high evaluation triangle addresses in my view, especially the intellectual property. The first one addresses so many concern because you're able to answer the key question that an investor will ask you, which is what do you own? And the second big question is, what's your transferable value? So I will say 80% even more. Mattel, that's a very good point. Actually, let's drive that home. What are those two questions really that fundamentally every investor asks? Our first question is, what do you own? And then what is my transferable value? And effectively is designed to answer a question about whether the business has a valuation engine. That's a very good point. And let's plug your book and your newsletter. Tell us about your book and your newsletter before we wrap up. Yes, actually this year, in early January, 2035, I started a newsletter called the exponential blueprint, which is effectively inspired by this high valuation triangle. It's about really giving entrepreneurs a recipe, returning them from invisible to investable. So that's the key goal, giving them a recipe so that you know they can find out how to be successful, how to exit successfully. And on top of that, because I could see that there were so many requests to go deeper. Now, already this newsletter is already trusted by 20,000 founders, investor, CFO, CSU executive. I was prompted to effectively start a new book, a new project, which is called fell evil scale now fell people scale effectively is an observational what happens to successful businesses, usually they always fell somewhere sometimes. Now, the problem with so many entrepreneurs that they the interpretation they give about failure is not the most positive one because when you look at big businesses after they fell they pivot and after that they scale and they are successful. So I decided in this book to illustrate not just the high valuation triangle, but also create studies several case studies in my career as a CFO where the businesses effectively fell, then they needed to pivot from that and then eventually scale and the same goes for household name. Now, very, very important because sometimes the book can be a one off exercise, I decided to offer this journey life through a new version of the premium newsletter, which is called the high valuation code. And this premium newsletter will start at the end of October and there's already lots of enthusiasm about this. I have to say I'm very excited about it because it will combine the high valuation triangle with the you know key studies really practical case studies about how you can go from from start to scaling effectively yet. Well, Matteo, thank you for your wisdom and your advice here, lots of experience that you've distilled down into these three points and really appreciate you coming down the show. Thank you very much. Thank you for having me, the Jaco, and I know you're forward to being touched with you. And that's Matteo, Tony and thanks, get for listening. And leave a review. Learn more at morganandwestfield.com. While we take reasonable care to select recognized experts for our podcast, please note that each podcast presents the independent opinions of such experts only and not of Morgan and Westfield. 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