How First Impressions Can Drive the Value of Your Business

How First Impressions Can Drive the Value of Your Business

Customers’ initial impression of your business often influences how much they decide to spend with your company, but have you ever considered how first impressions also affect how potential investors perceive and value your business?  When you’re looking to raise capital or assess your business’s worth, the way investors initially categorise your business can significantly impact their valuation, affecting both the equity you might have to give up for growth and the company’s overall value.

Take Jeremy Parker’s experience with Swag.com as an example.  Initially, investors perceived Swag.com as just another distributor of promotional products.  Despite Parker’s efforts to position the company as more than a middleman, investors weren’t convinced and categorised Swag.com alongside other promotional product companies, offering Parker a low single-digit multiple of EBITDA for a stake in his business.

Parker re-strategised and repositioned Swag.com as an e-commerce platform with a memorable domain name and a world-class, elegant, direct-to-consumer buying experience.  This shift in perception transformed Swag.com from a simple distributor to a technology company in the eyes of investors.  As a result, Parker received an acquisition offer that valued his $30 million company at a healthy multiple of revenue.  This example underscores how refining how your business is perceived can significantly improve its value and potential.

The Alibaba Discount: Why Diversification Can Hurt Your Valuation

The way investors categorise your business can profoundly impact its valuation, as demonstrated by Alibaba’s recent announcement of its intention to split into six separate businesses.  After the announcement, Alibaba’s market value increased by $19 billion in just two weeks.  Why?  Before the split, investors applied the lowest value multiple of any one of Alibaba’s diverse businesses—spanning e-commerce, logistics, and cloud storage—to the entire conglomerate.  By separating these units, each business will likely fetch a much higher multiple as a standalone entity, better reflecting its true value.

This phenomenon is not unique to Alibaba.  Amazon, for example, faces a similar challenge.  Analysts estimate that Amazon’s cloud storage division, AWS, could be valued at $2–3 trillion as a standalone business, yet the company’s diverse range of services—spanning e-commerce, audiobooks, and more—results in a market capitalisation of less than half that figure.

For your business, the lesson is clear: Diversification can sometimes lead to a diluted valuation if investors perceive your company as a collection of disparate parts rather than a cohesive, focused entity.  To maximise your business’s value, consider whether a more focused strategy might better highlight its strengths and potential.

Focus or Diversify?  Striking a Balance Between Revenue and Valuation Goals

As you look to grow your business, it’s essential to strike the right balance between expanding revenue streams and enhancing overall valuation.  Investors typically favour businesses that dominate a single product or service over those that diversify into unrelated areas, which can lead to a perception of being unfocused and result in a lower valuation.

When evaluating your business strategy, ask yourself: Are you aiming to increase revenue through diversification, or is your goal to enhance the value of your business for a potential sale in the near or distant future?  While both objectives are important, they often require different approaches.  Pursue diversification if your primary aim is to grow revenue.  However, if you’re focused on creating a more valuable company, maintaining a clear and focused business strategy is crucial.

Ultimately, how your business is perceived—by customers, investors, and the market—can drive its success and value.  By carefully managing this perception and strategically aligning your business’s focus with your long-term goals, you can optimise both growth and valuation.