Lunching with an associate recently I was reminded of this phrase in relation to business strategy: get big, get niche or get out. To me, it encapsulated beautifully one of the key drivers of exit-readiness: appeal.
Why is it so pertinent? Fundamentally, if your business does not have something special that a buyer would want or can’t obtain without buying it, you’re in no man’s land. And that is not the place to be when the time comes to sell.
Size matters, as critical mass is not something you can achieve quickly through organic means. For example, if your business generates sales of $50 million, it is going to have appeal to other companies looking to achieve fast revenue growth (e.g. publicly-listed companies, private equity-backed organisations), whereas one with only $5 million in sales would not hold similar appeal. It is a far easier proposition for a well-funded business to underwrite organic growth to achieve $5 million in sales than it is to achieve $50 million within a reasonable timeframe.
Your niche holds appeal in a completely different way. Your business may have developed a particular set of capabilities, assets or specialisations that make you the best – or right up there – in what you do. Perhaps it’s your brand that garners your business significant market share, known as a specialist in an environment populated by so many generalists. Perhaps your niche specialisation enables you to eschew margin cutting and continue to command a premium. Replicating what you have is not something that could be achieved easily or without considerable investment, so an acquisition is a more compelling proposition.
In both scenarios, what your business has that makes it appealing is barriers to entry. Replication cost, reputation, IP, people and/or key client relationships make organic growth a far less appealing strategy compared with a smart acquisition.
So what does “No Man’s Land” look like? If you have neither size nor scale, your business is likely to be far more easily replicable or at risk of competitive forces. You may be operating as a boutique with a low volume/high margin model, but being forced to compete with pricing schedules of the larger players, underpinned by high volume and low margins. Perhaps there are too many competitors with similar charateristics: small, lack of true differentiation and a operating in a highly competitive, and stagnant (if not declining) sector.
No Man’s Land is no place to be. You have to be great at something – something that few others have or do. Otherwise, when the time comes to exit, your best laid plans are far more likely to come unstuck – buyers will have far more appealing options available to them with significantly higher barriers to entry.
So make the decision: are you going to focus from this point on gaining the size you need to appeal to the big end of town, or define and absolutely own your niche so that the only way in for a competitor is to buy you out? Occupying No Man’d Land is a well-trodden path to disappointment.
So be great. At something. Either scale up, or scale back to own a niche. There is no middle ground.