Nobody pays for upside they have to imagine

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Almost every owner approaching a sale has a growth story, and buyers have heard all of them: the second site, the interstate market, the marketing nobody has ever really done. On its own the story is worth very little. A small piece of it, tested, with the costs attached, is worth a great deal more.

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There’s often a moment in a first meeting with a buyer when the owner relaxes. The numbers have been gone through, and now they get to talk about what the business could become.

Suppose the business makes $3 million of EBITDA, and the owner believes it can reach $5 million within three years. Asked why, they say the business has barely scratched the market. They may well be right. The buyer still has to decide how much of that future belongs in the price they pay today, and “barely scratched the market” gives them nothing to put a number on.

What a buyer can put a number on

Founders are usually good at seeing opportunity. They’ve spent years doing it. In a sale, though, the buyer needs the mechanism behind the opportunity: where the extra revenue comes from, how many customers it takes, what those customers cost to win, how long the sales cycle runs, what extra capacity and management it needs, and what happens to margins along the way. Then the question that carries the most weight: whether any of it has been tried, and what happened.

The strongest growth stories come with evidence for six things. The market exists. Customers have shown they want what you’d sell them. The business has a credible way to reach them. The economics work, and the operation can deliver. And some part of the story has already been tested.

Start closer to home

The weakest growth stories usually start with the size of the market. “The market is worth $5 billion and we only need 1 per cent.” That sentence has appeared in more investment presentations than anyone should have to endure, and a large market on its own tells a buyer nothing about what your business can win.

Better evidence sits much nearer to the business. Look at where existing customers are asking for things you don’t provide yet, which products or services already get bought together, which kinds of customer already convert well, which regions hold customers like your best ones, and where the business already has a reputation it could use. Each of those connects the future to something you can show from the present.

A buyer wants to see the route from today’s business to tomorrow’s revenue. The shorter that route is, and the better the evidence along it, the more they’ll believe the opportunity is real.

The upside nobody has tested

“We’ve never really done much marketing, so there’s huge upside.” It’s one of the most common things a seller says, and it may be true. What the buyer hears is that they’d be the one paying for the experiment.

Compare that with an owner who can show that one marketing channel costs $3,000 to win a customer, and that the average customer from it brings in $40,000 of gross profit over four years. Or that another channel looks cheap at $50 a lead, until you see how few of those leads become customers, and how quickly the few who do then leave. Both findings are useful. If you can show that a channel has already produced customers on good economics, and that the only limit has been how much money or attention you’ve given it, the conversation changes.

Pricing works the same way. A business that hasn’t put its prices up for seven years may tell a buyer there’s obvious upside. It may also be telling them that nobody knows how customers would react. A business that has made sensible increases every year and kept its customers has shown that they’re buying something more than a low price, and a buyer can value that.

Test a slice before you sell

You don’t have to complete the growth plan before you sell. If you did, you’d simply be selling a bigger company. Test the assumptions it rests on.

If you believe a new region is attractive, test demand there. If you think paid advertising can scale, run a few controlled campaigns and measure what each customer costs. If you think customers would buy an adjacent service, sell it to a small group of them. If you think another salesperson could match your results, hire one early enough to find out.

Each test turns an assumption into evidence. Even one that fails is useful, because it stops you putting a weak case in front of a buyer.

Then compare two things an owner might say. “We think this could work.” Or: “We tested it in two regions, won 46 customers, achieved these margins, and stopped expanding because we were preparing the business for sale.” The second gives a buyer something they can put a number on. It also leaves some of the upside for them, which can be a good position. You want enough proof to be credible, without having to capture every dollar of the opportunity yourself.

Growth with the costs attached

Revenue forecasts have a habit of arriving without the costs of producing them. The sales line climbs, the margin holds, overheads barely move, working capital looks after itself, and nobody has to be hired until the revenue has arrived. Reality is less cooperative.

More customers usually mean more of everything else: salespeople, equipment, stock, premises, software, management, and working capital. Fast growth can drain cash even while reported profit rises. A buyer will work out what your growth costs whether you do or not, so do it first. Work out what has to be spent before the revenue appears, what happens to margin during the ramp-up, how much working capital each extra dollar of revenue ties up, and when the money comes back. Sometimes the most exciting idea looks a lot less attractive once its real capital cost is visible, and a quieter one turns out to pay better.

The plan also has to work without you. A founder’s growth plan often carries an invisible assumption, which is that the founder will run it, and that’s a problem if the founder is the one selling. A plan a buyer can use says what happens first, who’s responsible, what it costs, what capability is missing, how long it should take, which early signs show whether it’s working, and what would make the business call it off. A buyer doesn’t need certainty. They need a plan capable of surviving contact with reality.

How much of the future a buyer believes

A buyer rarely pays the seller for every dollar of future growth. They are the ones taking the risk of making it happen, putting in the capital, and owning the company when the future arrives. What credible growth can do is change how they see the business today. It can bring more buyers to the table, support a stronger multiple, ease their fear of the downside, and sometimes make the business strategically important to one particular acquirer.

The strongest position is a business with durable revenue today and a visible opportunity beyond it. The current business stands on its own, and the growth story gives the buyer a reason to want it.

Sooner or later every buyer asks themselves how much of this future they actually believe. If the answer rests on your enthusiasm, they’ll discount it heavily. If it rests on customer behaviour, tested channels, sound economics, and a plan someone else can run, the growth starts to affect what they’ll pay. A buyer shouldn’t have to imagine the upside for you. Show them enough evidence that they can see it for themselves.

If you’re raising money rather than selling, an investor is paying for the future almost by definition, and a tested slice of it will persuade them more than a confident forecast.

If you are the buyer here: ask which part of the growth plan has already been tried, and what happened. Then ask what it cost.

What to do this week

Write down the three growth opportunities you’d put in front of a buyer. Under each one, write the assumption it depends on most, the cheapest way you could test that assumption in the next six months, and what pursuing the opportunity properly would cost.

The one with the cheapest test and the most valuable answer is where to start. A test begun now will have a result by the time a buyer asks.

The full growth review, from the evidence behind the story to the tests worth running before you sell, is in Amplifying Market Presence and Growth Potential, free to download from the Download Vault: manolutions.com/downloads.