Enterprise Value, Exit Planning

My company is worth something, how do I help a buyer know that?

I get this question a lot.  I HAD this question a lot!  There are so many factors and special situations, but there are also some generalities that hold true.   The interesting thing that I have found is how many misconceptions founders have about what is building that value.  Again, I had those too.  Being on both sides of the equation many times now, I thought I’d share some of those thoughts.  This isn’t by any stretch a full list.  Just some various thoughts I’ve seen recently.

As with many topics, let’s start with a note of empathy.   Put yourself in a buyer’s shoes.  What do they want?  What are the things in your company that is going to make their company better?  So often founders get so caught up in their own reasons for valuing their company that they struggle to look at it from this other perspective.  Something buyers are really trying to determine about your company is:

  • How much cash flow will you add to my company?  Is it sustainable?  How realistic and at what expense can we add to that using their bigger resources?
  • How sticky is your body of work?  Will it continue?   How will it be impacted by being a part of a bigger thing?
  • Do you have special things I do not already have?  Are you in a customer space I really wanting to be in? if so, do you have prime contracts, therefore direct government personal relationships?  Are you hidden under a bigger prime?  Do you have any say in the strategic execution of this business?  How much?
  • Do you have special technology, facility, security discriminators, that I can both sustain and leverage in ways you cannot in your current state?
  • Will your contract base survive an acquisition?  Do you have set aside or 8a types of work that will not transfer to a bigger company like ours?  Can you convince me that you can get this ongoing work without that status? Does your customer like you so much that they will follow you and allow for full and open contracting if necessary? Basically, will this work evaporate soon after a deal or can you keep the customer? Convince me.
  • Are there strong revenue synergy opportunities?  Typically, pure flat line sustainment of your company isn’t enough justification to acquire it.  At least not with a high value.  I must be able to show how my strengths, customer access, expertise, resources, etc. Can take your model to a new level.  Public, or even private large buyers, will put significant energy into showing these synergies to their board to attain approval to buy you.
  • Cultural fit is critical.  How well do your model and your team fit into ours?  Will it struggle? Thrive?  How much attrition can I expect? How hard will it be to retain the most important talent?
  • Cost synergies?  Though I’m personally not a big fan of making this a focus in most cases, many buyers do.  What cost savings can we recognize in our collective merged company as a result of joining forces?
  • Many others are based on both parties.

In my experience, the two that make buyers fall in love with a company are:   are you special in an area we want?  Can you sustain and grow your cash flow.

Another huge factor is your size.  In this industry that typically doesn’t mean headcount or even revenue.  It’s adjusted profitability ( EBITDA ). It takes an enormous amount of energy to acquire and then integrate a new company.  Much of the process pain and even cost is somewhat independent of the size.  So clearly you can see why buyers would want to take those shots and pay that penalty on ones that will make a higher difference to their company.    I encourage you to watch this short video on how size impacts value and some strategies for taking advantage of that knowledge.

SO now, shifting back to your perspective as a seller, how should you think about these motives and exploit them?  Or at least not go down the wrong rabbit holes?  I like to focus my messaging to a prospective buyer in ways that make it really easy to bridge my info to these underlying objectives.  Do much of their work for them.  They see so many possible deals, often they are just trying to throw out as many as possible.  You can help yourself stay in contention by helping them see how you meet their goals.  Keep in mind, I’m not just talking about teaser pages or PowerPoint overviews about your company.  It could even be just a conversation with an executive in that company. So have a plan and follow it regardless of if, it’s an introductory meeting, phone call, email, or more formal presentation of your company.

Craft your messaging around these tenants:

  • Here’s is why we are special
    • We have customers you should have exposure to.  We have products, technology, etc you can exploit in ways we have yet to achieve.  Our path is rosy but think about that path with a resourceful partner! 
    • Keep this headline short in the initial communication.  Don’t try to enumerate 87 reasons why you are special.  Spend significant energy on boiling that greatness down into a short couple of sentences. 
    • You can expound and expand more later. Later in the conversation or later in a document. Right now, you are just trying to hook them.  Give them a reason to pay attention to you.
  • Here are why our financial models are sustainable and even growable.
    • If you have a strong contracted backlog, hit that hard.  Customer relationships are very important.  If you have strength here, make that apparent early.
    • Are you a prime?  How are you going to keep that work?  Strong history in recruiting talent?   Technology that would make it hard for you to be unseated?  Rock stars your customer knows they can’t live without?  What’s the secret sauce that will help them believe you can keep or grow this work without much help?
    • If you are a subcontractor, here is why our prime won’t drop us.  Keep in mind that your buy will be concerned that your existing prime will now fear you more as a true competitor.  That might put future revenue in jeopardy.
    • Skeletons in the closet.  Don’t lead with them, but the obvious ones should be addressed so you don’t get rejected without a chance.   You need a plan for revenue that might be lost due to the acquisition.  How do we continue our set aside work? 

  • Here is how we add synergistic value together. 
    • Here are our thoughts on, how can do much more as a combined unit than our already positive organic plan.  While you may not know enough about the buyer to build a full roadmap to this synergy, that’s ok.  Just whet their appetite on how much upside there is with them alongside you.  A little ego-stroking never hurts and gets them thinking early about all the stuff you didn’t even get to.  
    • If we had X, Y or Z we could materially increase our revenue in this area.  WE are looking for a partner that brings those attributes to the relationship.  We have options.  Are you a good candidate for us?  This flips the game around a bit and causes a buyer to realize you are perhaps more strategically sophisticated than they are used to.  You can imply that you are obviously speaking with various partners that all have different X, Y, and Zs to add to your equation.   People are competitive.  They don’t like to lose.

If you have a real story that can hook someone out of the gate with your specialness.  Then you follow that up with evidence it’s sustainable/growable.  Then you close it out with the synergy thoughts to close the deal, it’s much easier to get a buyer emotionally attached to wanting to make this happen.  This means everything is staying in the conversation, and these days, negotiation of value later.  Once they are emotionally attached, you have the leverage.  As a review, the best way to achieve that emotional reaction is to start with empathy, hook them with a very short thought on why you are special, do their synergy work for them. Or at least get it started.

One final thought on the value that matters a great deal.  What type of deal are you looking for?  Are you selling:

Less than 50% stake of the company:   There is a concept called “minority discount” for these types of transactions.  Generally ( really pretty much always ) a buyer pays significantly less, per stock share, for a company they do not control.  This can be a great partner to have with many resources, allowing you to grow well beyond your organic capabilities, thus growing the whole equity pie for everyone.  But that initial stock purchase will be at a discount of true value.

Controlling majority but not 100%:  This is a frequent model for Private Equity or similar professional investment funds.  You retain a material stake in the company but the buyer has achieved control.  Your shares will be valued materially higher than the minority situation above.  Often you are rolled over and retained equity is motivation to continue helping the newly merged company thrive and grow in value.

ALL of your company:  This option generally represents the highest per-share value of your company.  This is your final bite of the apple.  Usually, this type of sale is to another bigger strategic company. Unlike the other two options there is less, or even no, upside in the future equity growth of the company so this price cannot be discounted in exchange for that possible upside.

I have had many conversations with people on both sides of this equation.  I would guess over 75% of my consulting conversations are people trying to better understand how this works, and how specifically it would work for them.  Every company and every person is different.  I’m always happy to confidentially discuss your situation and its unique characteristics.   Feel free to reach out and we’ll have that conversation.  There aren’t many safe places to do that these days.

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