9 Great Ways To Build Wealth As A Business Owner – Series (9 of 9)
This series of articles follows on from an article we published recently, titled “9 Great Ways To Build Wealth As A Business Owner”, where we mentioned that business owners who focus on building company value over company size, generally get to sell their businesses for a premium when the time comes to exit, allowing them to cash out the maximum with no regrets.
This article looks at Rod Drury’s story about AfterMail and covers the 9th way – Leave some market share for the next owners.
On July 30, 2002, George Bush signed an obscure piece of legislation into law in the United States. It was written to protect investors from a repeat of the accounting scandals surrounding WorldCom and Enron. Named after the bill’s sponsors, U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley, Sarbanes-Oxley ushered in a new set of accounting and disclosure regulations for companies.
A young entrepreneur from New Zealand was watching.
Wellington-based Rod Drury realized those big companies would have to do a much better job archiving their email, so he started a company called AfterMail. The business helped Fortune 500 companies archive their corporate disclosures after the introduction of Sarbanes-Oxley made keeping accurate electronic records a matter of law.
Drury convinced two Fortune 500 customers to buy his software, each paying around a million dollars. With revenues of $2 million and a proven product, many business owners would have been keen to build a big business to sell to the other 498 companies on Fortune’s list, all of which needed AfterMail due to the new legislation.
But Drury is a Value Builder and knew that to maximize value, he must show a buyer how they would win from acquiring his company. Drury approached Quest Software, which had virtually all of the Fortune 500 as customers already. He argued that since they already had the relationships and the new legislation required large enterprise organizations to use software like AfterMail, they should buy his company. Drury sold his little $2 million business for $35 million — an outlandishly good multiple, even for a Value Builder.
Leave Some Market Share For The Next Owners
If running a business were a sport, it would be a marathon: a long slog with lots of twists and turns before the eventual finish line. Most founders end up dragging their tired bodies across the finish line and forget that there is a buyer on the other side of that trade that is starting their marathon.
Value Builders know the buyer is beginning the race and must be enthusiastic about the future to commit to the pain of running the course. The buyer needs to know the outlook is bright for your business and that plenty of future opportunity remains untapped. Most small business owners think market share is desirable, but bigger is not always better. In fact, there is a point where too much market share can dilute a company’s value because acquirers will reason there is little left to harvest. Therefore, the Value Builder often sells earlier than expected.
Consider the 10/40 rule. Size the potential market for your existing offerings and estimate your current market share. Consider exiting when your market share exceeds 10% (proof of “product/market fit”) but is no more than 40% of the total addressable market.
If you found this article of value, then feel free to read through two other series we’ve published recently:
- 8 Key Drivers Of Company Value That Every Business Owner Should Know
- Unpacking The Subscription Economy
If you want to see how your business scores in “8 Key Drivers of Company Value” right now, take 15-minutes to complete this survey and you’ll get a comprehensive 25+ page report benchmarking your business against its peers, plus 49 tips on how to improve those 8 key areas.