Part 1 addressed the need for companies to focus from the very start on their exit strategy and the valuation that will realize when they exit.
Consider the following example: Two $30 million companies in multi-site retail businesses are
similar with respect to merchandise. Each generates $5M EBITDA. Both decide they want to sell their businesses. Whatsits, Etc. sells for a multiple of 4 X EBITDA at $20M, while Widget Express sells for 7 X EBITDA at $35M. That is FIFTEEN Million Dollars difference. Why? It certainly wasn’t luck.
Widget Express
Years before, the Widget Express had a CEO who developed “touch points” within a universe of potential buyers and/or merger partners of his company. These potential strategic buyers spanned selected companies, private equity firms, and investment bankers. The Widget CEO paid close attention to what was happening within his industry and kept track of the larger companies that might be interested in entering the market. He monitored key data and characteristics of each. This information provided invaluable intelligence that the CEO incorporated into his strategic business plan each year. He overlaid the data onto growth and operational capability planning. His market intelligence influenced his decisions in the four critical aspects of the business identified by Newport Board Group’s Four Ms methodology to get across NO MAN'S LAND…market, management, model, and money.
Whatsits, Etc.
The Whatsits Etc. CEO, on the other hand, focused almost entirely on growing his business in a typical opportunistic manner. He broadened his scope of merchandise beyond the original core products and moved into markets on the sole principle of chasing business. Whatsits did have impressive growth as a result. However, the operating model morphed frequently, varied somewhat from market-to-market, and the operating capabilities were stretched. Whatsits attracted an interested buyer and sold, but at $15M less than Widget Express. Why?
The Difference
The Widget Express’s CEO grew his business well, but in a way that his business would be attractive to a variety of buyers. He ensured that every year of growth added to the value of the company by “driving the multiple”. Private Equity firms showed interest in his company because he had a disciplined, replicable model, on a solid platform with a highly competent management team, fully capable of driving and managing future growth.
Interested Competitors
Large competitors wanted Widget Express because it was the most expedient way of entering desired local markets served by the company, and could do so with very little adjustment to the business model. Lenders were attracted to the predictable cash flow, stability, and predictability.
The Result
While both companies delivered the same EBITDA, Widget Express had aligned buyers’ interests and sold for considerably more money. The CEO planned it that way. He didn’t know when precisely an exit would occur. But when the decision was made his company had many exit options, and that translated to happy equity holders. He managed the multiple.
While disparity in valuations of similar businesses is common, it is all too often left to chance. Too few entrepreneurs realize just how much control they can have over optimizing the eventual outcome of their business.
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contact David at David.Gnass@newportboardgroup.com
