There is hidden treasure buried in virtually every business.
Not only does any successful business have unique systems, methods and processes that help it succeed, but these can be the greatest determiners of company value. It the event of a company sale, these may be worth enormous sums of money. That’s why we believe one of the most important things for any owner to do is find this hidden treasure, and cultivate and leverage it.
This is intellectual property, outside the traditional realm of patents, trademarks, service marks, technology and science. The broader interpretation of intellectual property is particularly important for companies not oriented towards creating or inventing things.
"Magic" and Expanding the Concept of Intellectual Property
Business owners, especially in technology industries, know that traditional intellectual property is enormously valuable. However, the concept of “business method patents” expands what is viewed as IP. As a Harvard Law School white paper explains (http://cyber.law.harvard.edu/ilaw/BMP/), a business method patent provides "exclusive rights to a particular way of doing business."
These protect what you do better than your competition, or what we term the "magic" in your company, that can add value in the event of a sale. During the normal evolution of building a business, an owner will almost certainly develop some form of proprietary ''magic'' that can be translated to a larger company. To maximize value, you need to know, cultivate and leverage your magic.
Know It When You See It
Outsiders might be dazzled by something you consider mundane. Therefore, your first challenge as a business owner is to know what it is. You need to be able to look at your company from the outside in.
What are you looking for? Something that is innovative, scalable and has bottom-line impact. Look for what helps you excel against your competition and understand why it does so. An option is to have an investment banker review your company to help identify your magic.
Your company might have better service, higher margins, lower employee turnover, higher revenues per employee, a better safety record, better products, or more new products and services. Any of these advantages might point to your magic if you understand how they have come about.
Suppose, for example, that your company has a process for bringing new products to market faster that reduces your costs 10 percent below your competition's costs. If that process can be identified and scaled to a larger company, it has tremendous value.
Cultivate It Through Branding
Having determined what your company has that is unique and of potential value, how do you cultivate it? In a word, branding. Branding in this case allows you to tum your magic into tangible intellectual property.
Use names, labels and other identifiers.
Treat it like a great invention (which it is) and consider a business method patent.
Feature it in discussions of your company, especially your "elevator speech."
Find ways to take it out into the market.
Even original equipment manufacturers should develop some brand identity. A classic example is Intel. Look at what that company has done with "Intel Inside®" for a classic example of branding something that few people cared about - chips. Companies with a strong brand orientation are often worth multiples of revenue compared with companies valued strictly on their profitability.
One note: you must own your magic. If your search points to something that is licensed, has shared ownership, or is dependent on a component, product or service provided by an outsider, it changes the picture. Why would a large company buy your business if it could acquire your magic from another source?
In this situation, you have two options to create your own magic. One is to gain some exclusivity, at a minimum for your market area. Another is to supplant that magic with something of your own. Build your own software, create a process that you can call your own... just don't risk patent infringement by doing so.
Leverage It for Maximum Value
Leveraging your magic, in this context, means understanding how to turn something you have created and cultivated into something that can be marketed. If your magic gives your company an edge, what would it do for a company 10 or 20 times your size?
Let's say you have a process that enhances your bottom line by 2 percent. If your company is a $10 million operation, that single process is worth $200,000 annually to you. For a $250 million company, assuming a straight-line projection (perhaps a little aggressive), it could bring in $5 million per year.
In a competitive bidding situation (the only way to achieve maximum value for your company), buyers can usually justify making offers based on at least four years of the acquisition's potential boost to earnings. Therefore, the value of a $10 million company without recognized "magic" might be $5 million to $10 million. That same company, if it can provide the $250 million buyer with the 2 percent advantage could sell for $20 million more.
It Happens in Real Life
Some years ago we represented a national fulfillment company in a sale transaction. It had developed proprietary software to track clients' inventories in real time using the Internet. In examining the company, magic, in the form of scalable systems for tracking in-transit inventory – was discovered.
The opportunity to leverage this magic opened up a new world of possible buyers. It could be applied to direct mail, other fulfillment, mail order, and almost any company not relying exclusively on point-of-sale transactions. That led our marketing to companies far afield from traditional options and to the ultimate buyer, the nation's largest archival storage company.
What did that mean to the owner? He anticipated a sale price of four to six times earnings before interest, taxes, depreciation and amortization, or EBITDA. The price paid - which was not the highest amount offered - was more than 10 times EBITDA.
It does happen in real life, and that is the beauty of a company's magic - its nontraditional intellectual property. Magic is the "gold in them thar hills." You just need to find it, mine it and take it to the market!
IP is Hidden Treasure in Any Business