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Grooming your Business to be Acquired – Part 2

by on July 17, 2013

Time FliesIn Part 1 of the series we discussed WHAT is Grooming for Exit.  In summary, it is preparation to enable you, as the Founder, CEO, an Investor, or part of the Executive Management team, to take advantage of the Right Deal to come your way, with the eventual sale of the business done quicker and at a higher valuation than would have been the case without Grooming.

In Part 2 of the series we will discuss the first of three common stages of the Grooming Process: when to begin

When Should an Exit Strategy Be Formulated?

The answer is NOW.

Let’s start by working backward.  When do you want to be in a good position to sell the company?  Are you looking 2-3 years ahead?  If significant change is required to the business it may take that long.

It will take about 6-18 months to get your business into “shape”; to be in a good position to sell in order to obtain that higher valuation you’re looking for.

Assume 6 months to complete the sale process, from initial contact, to initial meetings, to initial negotiations, to an LOI, to Due Diligence, through documentation, and finally to Closing.

And because you’re an integral part of your company’s performance, expect 6-12 months of employment with the purchaser.  This also may tie to any earn-outs that may be structured into the purchase agreement.  You’ll want to ensure you get the extra money coming to you.

Believe me, the time will FLY by.

So what affects the valuation? 

Well, to start it’s good to know what you’re worth today and then set a realistic target that you want to achieve.  If you’re worth $1 MM today, is $10 MM in 2-3 years a realistic target?  Or if you’re at $5 MM today, is a $25 MM valuation the target?  How will you get to that number?  The factors that are important are:

  1. Your forecasted revenue, profit and cash flow.  How fast are you growing and how much runway do you have?  Do you need to raise more money?
  2. Do you have strategic partners?  These are often your pool of eventual purchasers.  So pick them carefully.
  3. Strategic buyers typically pay more than financial buyers because they buy based on future revenues and profits.  And your valuation is affected by how much of that future revenue and profits they’re willing to give you today. Financial buyers typically buy based on leveraging costs.  They want to buy at a low price today because they’ll want to sell at a higher price at some point in the future: Buy low, Sell High.
  4. Market position is important.  Are you seen as a thought leader, a technology innovator, and do you offer something that others don’t?  It’s important to understand how you’re perceived in the market place.  Perception can drive valuation.
  5. How do you compare to other private and public companies in your sector?  Private companies typically sell at higher multiples than public companies but you need to understand what’s happening in the marketplace.

So how do you set your valuation?  How is it determined?Risk decision

As a general rule it’s determined by a formula, and in the technology sector it is your trailing twelve month revenues multiplied by a multiplier.  That multiplier is a function of perceived growth and perceived risk.  I’ve seen numbers from 1 times trailing twelve month revenue, or less, to 10 times TTM revenues or greater.  It’s all a function of growth vs. risk.

Grooming can reduce the risk associated with your business by addressing specific areas, and increase your growth potential, both independently and as part of your acquirer.

Sometimes it’s good to get an independent valuation of the company.  It provides a comfort level for investors and it provides a reality check for your starting point.

But keep in mind that the “true value” of the business isn’t what you think it is, nor, not necessarily, what you get from one offer, but the highest offer you receive in a bidding process from more than one buyer of your business.  Often the highest bid is as much as 50% greater than the lowest bid in that situation.  That’s the True Value of your business.  That’s the situation you want to create.

Please look for the rest of the Grooming for Exit series.

  • In Part 1 I discussed What is Grooming
  • In Part 3 we discuss What Exactly to Do in the Grooming Process
  • And Finally, in Part 4, we discuss How to Implement the Grooming Phase

p.s.

If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn How to Quickly Increase Your Valuation – A Proven 5 Step Process.  http://www.therevenuegroup.net/free-offer.html

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