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RAPID toGROWTH
SMART EXITS
Not only do you lack the time to plan your next steps, but you lack the
deep expertise and experience to make the best choices for yourself,
your employees, and your family. That’s why it is so important to find
a trusted advisor to help you navigate these uncharted waters.
B
efore you can make any major thorough market analysis on your own.
decision or transition for your “A privately held company’s financial
company, you need to understand performance is exactly that: private,”
what your business is worth. But that’s Botchway notes. “Unless the business
easier said than done. Of course, there are owner has access to an entire data set
many different methods for determining of privately held companies, it would be
the value of your business, including difficult to do a comparable analysis.”
three well-known models: DCF analysis,
comparable company analysis, and Another reason, he says, is that most
historical transaction data. But Charles business owners gauge value by the
Botchway, CEO of Madison Street Capital, balance sheet, or “book value,” which does
recommends against tackling this project not give a robust picture of entire worth.
by yourself. In fact, there are many other variables
that go into valuation beyond the balance
“We do not usually recommend that sheet, and while trying to determine the
business owners try to ‘value’ their own worth of your company on your own is not
businesses,” he says. Why? One major recommended, it’s helpful to understand
reason is that it’s very hard to do a what factors are weighed. Let’s take a look.
When business leaders are asked to list their assets, they tend to
think of tangibles, “like historical earnings, working capital, cash
flow, and hard assets on the balance sheet,” says Botchway. He
reminds business owners not to forget about technology—both
proprietary and nonproprietary, “especially if that tech is unique
to their business model or industry.” Botchway notes that there
are intangible assets to account for as well, including intellectual
property, specialized knowledge, and expertise in serving a
unique vertical or customer base.
Access to Capital
The old axiom “you have to spend money to make money” isn’t
wrong; without the ability to spend, growth and transition can
be tricky. “Your revenue should cover day-to-day operating
expenses,” Marsala notes. “But if you’re looking to expand your
product line, spread your geographic footprint, or move your
business into an ideal position for acquisition, you might need
an infusion of capital.” Without robust access to funding, your
potential for growth is limited and, by extension, so is your
business’s value. We’ll explore funding sources in more detail in
Chapter 2.
External Factors
While this is by no means an exhaustive requires time, effort, and expertise that
list of valuation factors, it’s important to extend well beyond what’s needed to
remember that anything that differentiates manage a balance sheet. For that reason,
your business, gives it a competitive “it’s important to have independent third-
advantage, or adds to its value should party validation of a company’s outlook
be given proper weight. What to weigh— and valuation,” says Marsala. “And it
and how much weight to attribute to should be done by companies with staff
each—is complicated. And gaining a full who have the proper credentials and
understanding of your business’s value experience.”
Y
ou want to plan for a major transition business owner and the investment bank
for your business, but you’re not sure with a deeper understanding of current
where to start. Maybe you have a and future capital needs. “Regardless of
new idea and you need capital to dive into the business owner’s timeline for an exit,”
another venture. Maybe you’re thinking Petersen notes, “having validation that all
about retirement. Or maybe you want to your ducks are in a row will increase the
merge your offering with a complementary odds of a successful sale or transition of
set of products or services and become the business.” Your investment banker will
a bigger fish in a bigger pond. “This is then help assess the benefits and costs of
the discovery phase of the process,” each alternative. Based on that process, an
says Barry Petersen, senior managing entrepreneur might choose to sell, merge,
director of Madison Street Capital. “During or seek external funding.
discovery, we work with the business
owner to identify what they want, why they To help you understand the best option
want it, and when they want it.” for you and your business, let’s do a quick
tutorial on acquisitions, mergers, and
To get started, an initial transaction external funding sources—and how they
review is necessary to provide both the relate to the valuation of your business.
Mergers
A merger occurs when multiple businesses join to become a single
entity. Upon completion of a merger, there is a single set of assets
and the new business has a new value based on the combination
of strengths, liabilities, and the market position of the new entity.
Whether selling or merging your company “The right investment banker will help you
outright or doing a recapitalization, any create a competitive environment—an
significant business transition is a major auction environment—for your transition,”
milestone that requires careful deliberation, says Petersen, “with the distinct purpose
strategizing, and assembling the right of optimizing the terms and value, and
team. To optimize success, finding the obtaining all of the business owner’s
right investment banking firm is critical. objectives.”
M
yths get built around the origins the door to new business ventures, a well-
of businesses: a good idea born in earned retirement, or other life-changing
someone’s basement, a long-unmet scenarios. A lot is riding on getting your
need filled by a visionary. We think of exit right—so, like the rest of your business,
businesses as engines of innovation, as the it must be planned. In this chapter, we’ll
beginnings of bold new endeavors. Exits, walk you through some often-overlooked
on the other hand, tend to get overlooked. steps.
But a business exit is a big deal; it opens
One mistake business owners make is to plan for the big financial transaction
itself—the sale or merger—but neglect the lifestyle and mental adjustments
that go along with it. Ideally, this self-reflection will happen first, before any big
financial decisions are made.
“Make sure that the entire business-exit process is thought through,” Owen
says. “Set expectations around what you really want—in terms of time,
lifestyle, money, etc.—and make sure a team of professionals is selected to
ensure a smooth transition. In other words, your team should help you create
a strategic path to the exit and the after-exit transition.”
Once you’ve reflected on which lifestyle changes you’re looking for or are
willing to accept, the next step is to consider which business transition will
allow for those goals. “Some business owners are serial entrepreneurs and
want to start or acquire another company,” says Owen. “Some want to
continue working, just without carrying the risk or responsibility of ownership.
Others want to fully retire, relocate, or even travel the world for a few years
after the sale of the business.”
Many business owners do not grasp the full range of options available to
them—many of which we touched on in Chapter 2. Restricting yourself to a
business sale, for instance, without fully exploring the other options can lead
to a post-exit life that is unexpected or unfulfilling—and then it’s too late to go
back.
For instance, after exploring options, an exiting owner may actually decide to
stay on with the new owner—in either a full-time or a part-time capacity. If this
is the case, says Owen, “it must be negotiated and reflected in a letter of intent
and in the documents signed at closing.” This provides clarity for everyone
involved and helps smooth the transition, post-exit.
H
aving adequate capital is a big than capital to the table, and that equity,
part of how your business’s value once surrendered, isn’t easy to get back.
is determined—but it’s not the only Here’s how to make sure you’re aligned
part. If you’re considering taking on a in a way that adds value to your business
funding partner to deepen your pockets, while protecting the interests of everyone
remember that a partner brings a lot more involved.
Define Roles
Make sure your books are in order and there are no surprises that may
come up at the closing table and kill the deal. “These could include
a prior bankruptcy, pending litigation, or back taxes,” Cohen says.
“We call it ‘the good, the bad, the ugly’ of a business’s history.” It is
important that anything “bad” or “ugly” is shared privately with your
investment banker before going to market so that it can be addressed
early and not discovered during due diligence.
T
he reality is that most business times its earnings before interest, taxes,
owners really don’t know the true depreciation, and amortization (EBITDA).
value of their company—and this While this formula is not necessarily a
applies to companies of all kinds and bad starting place, it ignores factors
sizes. “It’s not easy to objectively value like industry variables, market, growth
something when you’re close to it and projections, risk, and access to capital, to
have poured vast amounts of your energy name just a few.
and time into it,” says Jay Rodgers, senior
managing director of Madison Street While knowing the true value of your
Capital, “After all, the company is your business may not be an emergency during
baby.” normal business operations, there are a
number of circumstances and triggering
Then, there are also some fairly common events that suggest it’s time to get a better
misperceptions about business valuation understanding of your value. You might be
floating around—that, for example, a in need of some expert business valuation
business could be worth four, five, six help if one of these five thoughts surface:
1
You’re considering selling your business.
5
You need funding.
The reality is that anyone who owns a strategies the moment they first put the
business should be thinking about when key in the door,” says Rodgers, “and if that
to obtain expert advice around funding has already passed, then they should have
and exit strategies. If he had his way, all done it yesterday.”
business owners would “consider exit
“Taking your eye off the business while trying to sell it could result in poor
financial performance, a lowered valuation, or a buyer backing out when
performance requirements are not met.”
—Jay Rodgers, Senior Managing Director, Madison Street Capital