The Hidden Value of a First Impression: 10 Reasons Why Perception Matters in Business

By Cheryl Powers

As a business owner, you already know that the way customers perceive your business can greatly influence their spending decisions. But have you ever considered how a potential investor's or acquirer's first impressions impact their perceived value of your company? This is a critical factor when it comes to raising capital or selling your company, as initial perceptions can affect the equity you'll need to give up for growth and the company's value when selling.

"...SME business owners who often work very hard and end up creating a great job and perks for themselves but have a difficult time transitioning their company because they need the company to maintain their lifestyle. By working instead on value growth, you are focused on decentralizing yourself as an owner and you begin to work on the infrastructure and architecture of your people systems, your customer acquisition and retention systems, your financial structure, and your culture and brand. What you end up with is not only strong revenue but, more importantly, a strong EBIDTA and a more significant asset that can work for you." ~ Cheryl Powers

Take the example of Jeremy Parker, who faced challenges in raising funds for Swag.com, a company he founded in 2016 to provide branded promotional products for businesses. Parker and his team had to overcome the issue of perceived value by developing an innovative online platform that offers customers an easy way to order products through a memorable website. This approach helped Swag.com generate $30 million in revenue by 2020.

However, when Parker explored acquisition offers, potential buyers viewed Swag.com as a mere distribution company, leading to low valuation offers. To overcome this, Parker repositioned Swag.com as a technology company that offered a world-class, direct-to-consumer buying experience through an e-commerce platform with a memorable domain name. This shifted investors' perception of Swag.com and resulted in a lucrative acquisition offer that valued the company at a healthy multiple of revenue.

Even If You Never Plan To Sell Your Business

Knowing your company’s value is crucial even if you never plan to sell your business. A statement of value will provide you with rich insights and benefits beyond the context of a potential sale.

Here are several compelling reasons why obtaining a business valuation is crucial:

• Benchmarking and Performance Evaluation
• Strategic Planning and Decision-Making
• Attracting Investors or Obtaining Financing
• Partnership Dissolution or Shareholder Disputes
• Estate Planning and Succession
• Insurance and Risk Management:
• Employee Stock Ownership Plans (ESOPs) or Employee Incentive Programs

I’ll discuss each of these in more detail in future articles.

Category Matters

The way investors categorize your business in their minds is crucial, and this can significantly impact your business's perceived value. For instance, investors tend to discount diversified businesses and prefer companies that focus on dominating a single product or service instead of diversifying into unrelated offerings. If your company is small, a diversified portfolio may lead investors to perceive your business as unfocused, resulting in a lower valuation.

If your goal is to grow by increasing revenue, diversification is an excellent strategy. However, if you're striving for a more valuable company that could potentially be sold, maintaining a clear focus is crucial. By positioning your business in a differentiated way and offering a unique buying experience, you can shift investors' perceptions of your business. This is an especially important point for SME business owners who often work very hard and end up creating a great job and perks for themselves but have a difficult time transitioning their company because they need the company to maintain their lifestyle. By working instead on value growth, you are focused on decentralizing yourself as an owner and you begin to work on the infrastructure and architecture of your people systems, your customer acquisition and retention systems, your financial structure, and your culture and brand. What you end up with is not only strong revenue but, more importantly, a strong EBIDTA and a more significant asset that can work for you.

Domination or Diversification

Diversification may not always be the best strategy for businesses, especially when it comes to valuation. Chinese internet giant Alibaba's recent announcement of splitting into six separate businesses has caused its market value to soar by $19 billion within just two weeks. But why did investors welcome this move?

Alibaba's diverse range of businesses, which include e-commerce, logistics, and cloud storage, often lead to investors undervaluing the company. They may be compelled to purchase assets they are not interested in and apply the lowest value multiple of a particular business to the entire group of companies. However, each individual business as a standalone would likely fetch a much higher multiple.

Amazon is facing a similar situation. The Bloomberg Intelligence Unit predicts that Amazon's cloud storage division, AWS, could be valued at $2-3 trillion as a standalone business. However, as a collection of various services, including e-commerce, audiobooks, and cloud storage, Amazon's entire market capitalization is less than half (around $1 trillion) of what Bloomberg analysts believe just one of its divisions could be worth as a standalone.

Investors typically prefer businesses that focus on dominating a single product or service rather than diversifying into various unrelated offerings. A diversified portfolio may lead investors to perceive your business as unfocused, which can result in a lower valuation. This same principle applies when you decide to sell your company. If your business appears scattered, potential acquirers may focus on your least valuable division and apply that multiple to your entire organization.

It’s clear that while it can have benefits, diversification may not always be the best strategy for businesses, especially when it comes to valuation.  

Brand with Purpose

Another important factor is branding. A well-crafted brand image can influence how investors perceive your company. For example, Swag.com's catchy domain name helped differentiate it from other promotional product companies and positioned it as a technology company. A memorable domain name can also help potential customers and investors easily remember your company.

Finally, it's important to note that the optics of your business play a significant role in raising funds or selling your business. Investors prefer businesses that have a clear focus, a unique value proposition, and a sustainable competitive advantage. By emphasizing these aspects of your business, you can shift investors' perception of your company and increase its perceived value.

In other words, investors prefer businesses that focus on dominating a single product or service instead of diversifying into unrelated offerings. 

Here are 10 Reasons Why Perception Matters in Business And Why You Should Care

"When a potential investor or acquirer evaluates your company, their initial perceptions can play a significant role in determining your company's value." 

When it comes to evaluating your company, the first impression counts. Potential investors or acquirers are likely to form initial perceptions of your company, which can significantly affect the way they value it and how much they value it for. A positive first impression can lead to a significantly higher valuation, while a negative one can lead to a much lower one. 

Lack of Clarity

Your value proposition or business model must be clear to potential acquirers. If the company's messaging is unclear, or its value proposition is hard to understand, it may lead potential acquirers to view your company as unfocused and undifferentiated. This will reduce the company's perceived value.

Negative First Impressions

A poorly designed website, unprofessional branding, or poor packaging can create negative first impressions of your company. These impressions can reduce your company's perceived value and make it less attractive to potential acquirers.

Misaligned Positioning

If your positioning is not aligned with market or industry trends, potential acquirers will often view it as irrelevant or outdated. This misalignment reduces the company's perceived value.

Weak Financials

Your company financials must be transparent and easy to understand. If your financials are weak or difficult to understand, potential acquirers may view the company as high-risk. This will reduce your company's perceived value and make it less attractive to potential investors and acquirers.

Lack of Scalability

Your company's operations and infrastructure must be scalable to enable growth. If your company's operations or infrastructure are not scalable, potential acquirers may view the company as having limited growth potential. This can reduce the company's perceived value because an investor or acquirer makes money on the future growth of the business.

Poor Customer Relationships

Your company's relationship with its customers is essential to your company's value. If your company has a history of poor customer relationships or negative reviews, potential investors and acquirers may view the company as a liability and lower the valuation.

Overdependence on Key Personnel

If your company is heavily dependent on key personnel, including you as the owner, potential acquirers often view it as risky and unstable.

Limited Intellectual Property

Your company's intellectual property is essential for its value. In some cases, if a company has limited intellectual property or a weak patent portfolio, potential acquirers may view the company as less valuable.

Compliance Issues

If your company has compliance issues or legal liabilities, investors and acquirers may view it as high-risk, leading to a lower perceived value.

Inconsistent Performance

Your company's performance must be consistent. If you have a history of inconsistent performance or missed targets, potential acquirers may view your company as unreliable. This perception can seriously reduce your perceived value.

"By working instead on value growth, you are focused on decentralizing yourself as an owner and you begin to work on the infrastructure and architecture of your people systems, your customer acquisition and retention systems, your financial structure, and your culture and brand. What you end up with is not only strong revenue but, more importantly, a strong EBIDTA and a more significant asset that can work for you." ~ Cheryl Powers

Remember, when potential investors or acquirers evaluate a company, their initial perceptions can play a significant role in determining your company's value. These perceptions can either increase or decrease your company's perceived value. By addressing these ten ways, you can improve your perceived value and increase your attractiveness.

Overall, initial perceptions can significantly impact a company's value to a potential acquirer in any business deal. It's critical to prioritize your positioning, financials, scalability, customer relationships, intellectual property, and compliance to ensure they are viewed as valuable investments.

Are you ready to understand your company's value and exactly what it's going to take to increase it and your net worth? Take the first step and get your Founder Freedom™ Score. It's like getting an MRI for your business.