What Is Your Market Share and Why the Answer Matters

“How large is your market, and what is your share of it?” If you haven’t been asked this question yet, you can certainly expect it if you ever consider any sort of transaction. This is one of the most common questions from both strategic and financial buyers, yet we typically find that business owners have not spent sufficient time on this topic to develop a data-driven response.

Market share is usually defined as the percentage of total market sales that is earned by a company over a defined period of time. It is a commonly held belief (and nearly proven fact) that profitability and market share go hand in hand. Whether you are operating in a high-growth industry or in a market that is on the decline, it is critical for business owners to understand the dynamics of the market in which they operate as well as the share which they have amassed.

Based on our experience as transaction advisors, here ­­are four items to keep in mind when investigating market share:

1. Define Your Market and Your Segment

Many owners will simply lump their companies into the top-level industry they operate in. While overall market dynamics are important, potential buyers will want to go deeper on the key nuances related to the company’s specific market segment it serves. Keep in mind, there are also cases in which certain sub-markets are performing well while an overall industry is struggling, so owners should understand and define both.

2. Security of Market Share

The defensibility and long-term security of a company’s market share is a key driver of value. The market’s competitive landscape and customer contract terms are two primary characteristics that contribute to the protection, increase, or decrease in market share. These components can provide a moat around a company protecting its market share from competitors. Generally, if a company has the ability to execute long-term agreements with customers (or demonstrate consistent renewals or re-use) with minimal interruption from competitors, buyers are more willing to pay a premium. While most companies have some level of competition in the markets in which they operate, one way for owners to mitigate this risk is to clearly articulate what distinguishes their company from competitors.

3. Where Do You Go From Here

In order to gain market share, will it require takeaways or is there still a significant number of potential customers who have no solution in place? As most owners will agree, selling to a first-time user is generally easier than unseating the incumbent player. Consumable product companies have more opportunities to convert new customers. However, excluding some markets such as pharmaceuticals, this high usage may lead to lower switching costs.

4. “I’m Not Sure” is NOT an Answer

If it’s not particularly easy to compile the data necessary to define market share, we encourage owners to use disparate sources of information to triangulate an answer. While buyers certainly prefer explicit details, these groups will understand if the information is not readily available, yet they will value an owner that approaches the topic from various angles.

At the end of the day, it is typically impossible to have full information on market share, but an owner that has command over this topic will increase the value of his or her company. Keeping these four items in mind, we hope you’ll be better equipped to answer that inevitable question about the size of your market and what your share of it is.

– Guest Article by Brad Johnson

High Growth Rate but Low Valuation?

Many business owners would consider a company with a revenue growth rate of 40% exceptionally attractive. “Surely this is a well-founded business primed for a promising future. With a growth rate of 40%, this company will soon be a dominate player in their market.” But they’ve forgotten a key part of that equation, What’s the market’s growth rate? If the market is growing at 60%, this company is sprinting towards obsolescence as it hemorrhages market share.

However, on the flip side in the 2008-2010 recession when the markets were plummeting, we saw companies with negative growth rates receive all-time high valuations. They were gaining market share since the market was contracting faster than the company was. A company’s future cannot be summed up in a number as simple as growth rate but should be compared to its competitors’ growth rate.

Rather than only focusing on growth, business owners could benefit from benchmarking their growth rate relative to their market. Here are some ways to determine your market’s growth rate:

– Ask an industry association in your sector
– Read annual reports from public companies in your market
– Hire a local MBA student
– Have a internal analyst calculate it – here is a helpful article for calculating market grow rate

If you would like to discuss how this applies to your business, we would be happy to talk with you.

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