To get the best value for a small private company on exit there are many factors that can play a part in getting the best price or deal. Here’s my list.
- An existing close relationship with the acquirer’s management where they know you and your team and the value you would bring and the ease of integration (i.e. low risk and high speed)
- At lease one or more rival bidders who know each other.
- Try and get into a position where you are ‘in the way’ of those in a roll-up strategy that want to bulk up fast. High market profile – already on the radar of potential buyers for some while. High profile so that its noticed and high profile in terms of being company that’s obviously written or spoken about as a being successful and ‘one to watch’.
- Strategic advantage for buyer in a time sensitive sellers market – this could be IP, market share, brand or execution is a space in the market they are weaker or are trying to dominate.
- Unique and sustainable market positioning in a hot sector – whether that’s expressed in product/service leadership or a dominant or ‘top 3 players’ market share.
- Generating cash – doing so from a good EBIT margin % at a sufficient level to be entirely self funding for future growth from working capital for capex enhancements to product/service development.
- Strong and sustained growth – such that the acquirer can count on continued shareholder value growth and so that the NPV of that growth can be expressed in present sale price.
- Simple story – a core product/service line that is performing well with no clutter such as significant (untested) new product lines draining EBITDA or expensive forays into new markets including new geographic territories.
- A revenue model that indicates that the company will become more profitable as it grows – so that revenues and the gross margins arising will outgrow the increase in cost of sales and fixed costs
- Competent, successful and stable senior management team – plus a plan for succession in each operational discipline.
Written by JGB & Julian Costley
What? You can’t be serious…the VCs will never buy that!
“Start with the exit and work backwards” is a direct quote from one of my most respected and successful entrepreneurial friends – he has made over $100M personally.
Frankly in the investment community the idea is deeply unfashionable…but when did I ever care about the fashion of VCs? Never! That’s when, I think most of the investment criteria and sheep mentality of the investment community is just so much B.S. and it drives me nuts. So I do what I think is right and what I believe.
OK, the idea ‘de jour’ is that you must want to change the world and then money will rain down on you from the heavens…pah! Neither idea is in fact wrong, but my friend’s is more likely to make you some money. If you don’t want a lifestyle business that is.
Rant over, so why is this idea of the exit at the beginning powerful and important?
It’s simple – it gives you a focus and makes you think about your outcome.
When working with many mentees and new entrepreneurs they think they have a world changing idea but have never thought about how they will create an end point for them and their investors. “So what” you say, let’s just do it and work that stuff out later!
Well here’s why you should create a business with a definable and preferably measurable exit that you can prove can be achieved (as apposed to the “we will IPO or get a trade sale” standard jargon that means nothing and is not worth the paper it’s written on):
- If you actually try and find someone who ‘may one day‘ buy your idea or company it will make you look at the future and what the real prospects of an exit really are…in most cases they are not great and could lead you down a different path.
- If the exit starts to not look so likely it can make you change your idea, your business model, your business all together. If you don’t care then you are just making your chance of success so much smaller.
- If you have a world changing idea that makes life so much better for the rest of the planet, it doesn’t mean that someone like google will drop by and buy you – sorry it just doesn’t. If you think about who you may sell too you can check out their acquisition history, what types of businesses they like to buy, at what stage and why. If you know that it can help you position your business in such a way as to make it highly attractive at the right time.
- Often it’s your competitors (the bigger ones) that can buy you out so it will force you to learn a lot more about them and their goals, ambitions and requirements. This process will help you create a business that fills a hole in their product range (for example) which will achieve two things: it will make you attractive but it will also show you a way to succeed against the competition you may not have noticed before.
- If you think you will IPO, it will make you look at the markets and think about you will need to deliver in order to have a successful floatation – a very expensive and much harder prospect than you can imagine, especially in the US. Also, it will make you consider the quality of your people and who you could take on to give your business the right connections in the city when the time comes (a ‘name’ can be very important to the city).
- If you are thinking of an IPO you have a few choices and these may come up faster than you think. If you plan early you can structure your business correctly both legally and financially to take advantage. Timing is everything with the markets and once again planning means you can get your IPO away at the right time and valuation. Some early stage businesses can IPO very early in their development so it’s worth considering from day one.
- If you do some long range planning you will find out all sorts of things at the beginning about your fellow partners in crime you would not imagine – you may not all agree about the amount of an exit, the timing, the implications and this is the best time to find out if you disagree, not 3 years later. Often you can have people in a start-up that are at different life stages, especially where you have a big gap in ages. The older ones will be more conservative and the young ones have little to lose – this causes issues in my experience. Work these out early.
- If you have actually taken the time to do the homework that my suggestion requires, including meeting prospective buyers early as I tend to do, you will get much more respect from them and this in turn increases the chance of an exit. In addition, you will get more respect from your investors by showing that you care enough to consider the future and are focused on showing a return on investment.
So, as you can see, there’s more to an exit then meets the eye and thinking about the future at the beginning can add a great deal of value to your business and it can also help you shape your strategy from day one to be more competitive and likely to succeed.
Of course, you should be looking to create a world class company that adds real value to the world – even changing it for the better but this shouldn’t stop you thinking ahead either.
None of these ideas means you have to sell or makes you sell based on your original strategy, it simply makes you think about the future and plan accordingly.