If you want an exit later, deal with critical issues now.
Guest author Bob Barker is managing partner of 20/20 Outlook LLC. He acts as a trusted CEO advisor, helping convert a clear vision into executable strategies that accelerate growth.
In part 1 of this article, Bob covered three of the six issues he recommends you deal with now to accelerate your path to an exit: show credible numbers, acknowledge the intangibles, and recover from business entropy. Here are his recommendations on the final three:
- Increase your multiple
- Understand the jungle
- Hang with winners
Increase your multiple
Why do some companies get acquired for .5 times revenue while others get 2x, 5x, or even 10x revenue? Every market has underlying dynamics that determine valuation multiples.
Here’s an admittedly simplistic value continuum, using the software industry as an example. From a sale of assets on the low end to a highly strategic acquisition on the high end, different steps tend to increase the multiple of revenue that the company can expect to receive in a sale. What drives a business from left to right on this continuum, i.e., toward higher value? In this case, it’s a business based upon proprietary technology and a well-developed, repeatable sales model.
How this continuum looks will vary from market to market, of course. If you’re serious about increasing company value to drive a higher exit value, understanding the specific dynamics in your space is imperative.
Understand the jungle
Many CEOs tend to view other companies as competitors, rather than as opportunities whose assets can be leveraged to accelerate growth. This narrow view limits the number of potential acquirers, thus decreasing the likelihood of being acquired and the expected valuation.
Try this exercise. Make a list of 20 potential buyers who want to buy your company. It sounds easy, but you’ll quickly list the first 4 or 6 or even 8 acquirers, and then it will seem impossible to get to 20. If you persist, though, you’ll find your thoughts moving beyond companies in the same or adjacent markets, e.g., those that might evaluate your company simply on a discounted cash flow basis to include companies in other verticals for whom your products and services can greatly accelerate growth or open new markets.
Discovering who could be hunting whom will guide you to make incremental decisions that move your firm closer to the centers of high growth value that exists in your market.
Hang with winners
Once you can distinguish predators from prey, engage with the most relevant players. Two types exist: potential acquirers on whose radar screen you’d like to appear, and potential partners or acquisitions whose assets could be leveraged to grow your perceived value to the first group.
Remember that list of 20 acquirers you compiled? Potential acquirers typically fall into related clusters based on common growth requirements. Discovering their shared needs highlights strong growth areas for your market! Conduct a gap analysis of your offerings vis-à-vis acquirers’ needs, then guide your company to partnerships that will fill in the gaps and increase your value to acquirers. The right relationships can dramatically impact a company’s valuation, but they take time to develop and they must be done using a deliberate, thoughtful process.
Don’t procrastinate. If a 2016 exit is your goal, work on these six steps today to create the internal focus and processes needed to maximize your company’s valuation down the road.