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Tips to MAXIMISE Exit Value

Are you a shareholder considering selling your business? If the answer is yes, then shareholder value should be on your Board agenda as this directly correlates with exit value. Don’t wait until you are ready to sell – it will be too late. It takes several years to deliver sustainable shareholder value. But get it right, and the rewards are high.

We’ve compiled some starter-for-ten key focus areas on exit value to get the shareholder conversation going below:

TIP #1 – GO FOR GROWTH

Few will pay top dollar for a business with a static or declining revenue. A buyer may think he or she can grow the business better or faster, but one indicator of an attractive business, is ‘how fast is it growing?’

You should be able to demonstrate growth over the past 2 – 3 years as a minimum. But the question is, ‘how much growth?’

There is no hard and fast rule, however, growth needs to at least match the market – and preferably exceed it. So if your market for ‘widgets’ is growing at 3% per annum, then you need to at least match that. But preferably, exceed it! Conversely, if your market is growing at 11.11% (e.g. online education > source Cision, 2022), the same rule applies.

As a general rule, all growth is good. But expect more interest from strategic buyers if you are taking market share – i.e. exceeding the market growth rate for your product or service.

But remember! Always leave something on the table for a new buyer. The greatest lever you have in the negotiation is the upside of your business in the hands of a new buyer. But this needs to be more than rhetoric! This should have a strong basis in demonstrable fact – so show the prospective buyer how the business can grow faster, or generate more profit in his or her hands. Use facts, data and make sure the financial modelling is robust and realistic!

TIP #2 – BENCHMARK THE PROFIT

There are many ways to value a business, however, ‘multiples of EBITDA (profit)’ tends to be the norm. So as a rule of thumb, the higher the profit, the higher the value of your business, right? Generally this holds true. But there are some exceptions to the rule. In high growth industries, e.g. online retail, or early tech startups, the rule book can be different. The fact is, revenue growth is usually only achieved by constant re-investment. Or another way of looking at this – it’s difficult to grow a company when milking it dry!

Each industry tends to have a profit level ‘norm’. E.g. if you are operating a 50 year old manufacturing company making ‘widgets’, the norm may be 10% – 15% EBITDA. If you have a pure-play e-commerce business demonstrating double or triple digit growth, a buyer might not expect to see any profit at all…

So, in shaping your business for exit, you need to understand what the EBITDA norm is for your industry. Call a good exit advisory boutique, or even research your top 10 competitors yourself. What you are looking to do is view your business from a strategic buyers perspective – i.e. someone who knows your industry.

Building a exit plan to achieve maximum value is about understanding what a buyer will value the MOST – is it size of revenue, rate of growth, EBITDA or… Benchmarking helps you understand where the profit baseline sits in this equation.

TIP #3 – BUILD YOUR LIST

There are numerous firms and individuals who could potentially buy your business. The question is, who will offer the best deal?

The most likely answer is: a strategic buyer – a person or firm who operates in your ‘space’. This could be a direct competitor, a firm that serves the same industry as yours, or could be an upstream or downstream supplier in your industry.

Why will a strategic buyer potentially value your business higher? Because of synergy. This could be a range of factors – e.g. reduced operating costs, merging sales channels, combining headcount & skills, selling complimentary products… the list goes on. The essence is that a strategic buyer may be able to drive stronger growth or improve profitability simply because they know and understand your type of business and / or industry.

A comprehensive list needs to be researched and built. Don’t leave it for the day you decide to sell. Prepare it in advance. Sure, a good exit advisory firm will research the market – but be prepared! Know in advance who ALL the key players in your industry are. Get to know them – talk with them at exhibitions, keep abreast of industry news.

Nothing is guaranteed, but when you are ready to sell, chances are this list is where the value lies.

FINAL THOUGHT…

Extracting an above-average valuation is not so easy. Buyers are generally sophisticated and will only pay top dollar when they are certain that the investment will generate a strong return.

TheNonExec offers a bespoke advisory service to clients wishing to improve shareholder value and deliver a quantum change in results.

We have an outstanding record of delivering value and this takes time to achieve. So if you are considering an exit, start planning at least a year downstream and ideally two or three. Contact us now to take the first step and explore your options.

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