Your business valuation is determined by several factors. One of them is the Intellectual Property (IP) you develop and own.
There is never enough money to invest in developing products when you’re running a self-funded business. When you’re running your company out of cash flow, most of your resources go into selling existing products and services. This leaves little left over to fund your new product ideas.
You could keep plugging away with your existing product or service lineup. But you will leave yourself exposed to competitors that dream up a better offering. The other option is to develop unique new offerings for customers that ask you to customize your solution. But this method can eliminate any scale in your business as you develop a unique thing for every opportunity.
The other option is to offer to develop a custom product for one client with the understanding that you will retain the rights to the IP associated with developing their unique solution.
The most famous example of getting your customer to fund your new product development comes from Microsoft. As legend has it, co-founder Bill Gates negotiated a deal with IBM that paid Microsoft $430,000 to develop the DOS programming language. IBM was given a license to use it. However, Gates retained ownership over the code, which allowed him to sell it under the MS-DOS brand.
How Brian Ferrilla Got a New Product and a Premium Valuation
In a more recent example, Brian Ferrilla ripped a page out of Bill Gates’s playbook when he started Resort Advantage to help casinos adhere to new anti-money-laundering laws. Criminals were laundering money through casinos, and Ferrilla’s software helped casinos spot the bad guys.
Ferrilla started by selling a simple version of his product to small casinos. Eventually, he received a call from MGM, the granddaddy of casino operators. MGM needed extensive customizations to Ferrilla’s product. Instead of building a custom solution that MGM would own, Ferrilla offered to waive the customization charges. In return, Ferrilla retained the ownership of the product.
Ferrilla reasoned that since MGM was one of the biggest players in the gaming industry, whatever levels of security and features they wanted, other operators would also value.
MGM got their custom solution, and Ferrilla retained the rights to an underlying product that the entire gaming industry valued. In the end, Ferrilla was glad he kept the rights to his IP. His $3 million business, with just 15 employees, was acquired for more than $10 million.
Had he slipped into the trap of making custom software for each of these customers, Ferrilla’s business valuation would have likely been worth less than half that. This is because custom software development shops that offer a unique solution for each customer usually trade at around one times their annual revenue.
The next time a customer wants you to develop something just for them, consider agreeing provided you maintain ownership of the IP behind your work.
Maximize Your Business Valuation with Maximum Possibilities
Understanding the techniques to increase your business’s valuation is just one of the ways Maximum Possibilities can help your company.
Whether selling your business is at the forefront of your mind, or even if a sale is a few years away, you want to always be planning for the future. Just look at the examples of Gates and Ferrilla.
Your success is our success. Contact us today and let’s get started.