In the latest of a series of articles drawing on topics discussed at our recent round table lunch, we consider building value for exit, and advice from those who’ve gone before.
Building value for exit
One key way to make sure there will be value at exit is to make sure that you have a business, rather than merely a product or an idea. Oscar Jazdowski of Silicon Valley Bank, who was chairing the event, explained that this was a common frustration for his bank – people bringing him products, rather than businesses, and trying to borrow money for ideas which don’t yet have revenues.
This also comes up in established businesses which have developed new opportunities or products or models with fantastic growth potential, but which haven’t yet been able to sell them in any significant volume.
Purchasers will struggle with this; however exciting or game-changing or strategic this new product or technology may be, if you haven’t been able to monetise it yet, you’re asking a purchaser to do that for you. Don’t expect them to pay for that privilege; while some will make pure technology acquisitions, they’re rarely at premium strategic valuations. It’s more likely that they’ll offer an earnout on this part of the business and will pay you for the value subsequently generated. At worst, they won’t pay you for it at all.
Scale and Scalability
This leads on to the question of scalability; how can you demonstrate it without merely building scale? The table discussed ways to demonstrate scalability, and the tension between maximising growth and maximising profit. If you are re-investing all your profits to support future growth, you need to be able to show that the growth is coming through and that investment is generating a return – otherwise a cynical purchaser or investor will simply assume you have an elevated cost base and a business model that’s difficult to scale. Keeping track of ROI on investments such as staff can be difficult but having some kind of measurement in place will help you make the case.
Don’t be distracted by a derisory offer
Another key piece of advice from the table was not to be distracted by a mediocre offer. It can be very flattering when a major international corporation makes direct contact with you and says they want to acquire your company, but if they don’t have to pay full value, they won’t. Their opening offer will always be significantly lower than they would be willing to pay, which may itself be less than you’re worth to them, which may be a lot less than you’re worth to others.
The table unanimously agreed on the importance of using experienced corporate finance advisers to benchmark offers received and to provide an independent view on potential value and achievable deal structure.
In summing up, Oscar asked each person round the table who’d been through a transaction to give a piece of advice to those who hadn’t yet. Some choice pieces of wisdom included:
- Know what you’re getting in to: The process itself is demanding and can be something of a roller coaster – make sure you’re prepared.
- Avoid burnout: The stresses of a transaction can put you under significant pressure; make sure you have good advisers who can take some of the burden off your shoulders. Another attendee extended this, recommending a nutritionist and personal trainer to help keep you on-track, mind and body.
- Losing control: Leave on day one if you don’t want to see someone else in control of your company once the deal is done, or don’t want to have a boss. But be up-front about this intention; there’s no point negotiating a deal with a purchaser who expects you to remain, then trying to leave. If you’re staying, be prepared for the loss of independence.
- Financial pressure: Particularly in the context of an earnout, be prepared for increased pressure to hit financial targets, and be aware that other priorities might be downgraded. For organisations which have prided themselves on a culture of customer service, or creativity, or technical excellence, this shift to a financial focus can impose challenges.
- What comes next? Think carefully about what you want to do with your life after the deal.
- Communication: Think about what to tell your team, and when. If you’re running an international business, it will be difficult for you to tell everyone face to face; how will you manage this communication?
- Good advice is invaluable: Get more help from advisers; don’t try to do it all on your own.