Dragons’ Den fans will know that investors will assess the value of a business according to the return it will generate over time balanced with the risk of the investment. The most attractive businesses are those that are low risk, consistently profitable and scalable.
The principle opportunities for scalability beyond a company's original market are:
- Geographical diversification – the ability to expand into new regions or countries.
- Sectoral diversification – the ability to replicate success in one sector in other sectors, for example recruiting marketers as well as IT specialists.
- Skills diversification – the ability to offer additional services to an existing client sector.
For diversification to be effective you need a core competence to leverage. The core competence is what distinguishes you from other businesses operating in the sector. It could be your genuine USP, the ability to undercut the market, the quality of service you offer, your access to specific talent pools or resources, your knowledge of a specific client/sector or many other factors.
Having seen the potential for the business to grow beyond its core activity investors can feel confident there is opportunity for continued growth and can offer multiples that reflect its true potential.
Alex Arnot is non executive advisor to 20+ recruitment businesses.