Peter Harford: Exit vision
What’s your exit vision?
When it comes to selling their business, many owners simply continue with day-to-day management until they wake up one morning and say, “Hang on. I need to sell my business.” But by then it’s too late.
We always strongly advise clients that they need an exit vision to maximise sale value. While much of this vision relates to numbers and finances, there’s also more to it.
Clients often come to discuss exiting their business with only a hazy idea. Typically they might say, “I’ve built this business over the last 25 years. I think I have something of value and reckon I’ll be able to sell it at some stage. I’m certainly looking forward to riding off into the sunset when I retire!”
But when we ask them, “So what’s your exit vision?” they usually have a number in mind that’s quite fluid. Having only a vague number places the owner in a state of anxiety and uncertainty – essentially on the back foot – when it comes to selling their business.
What’s your asset worth today?
We usually start by valuing the business today to see what the owner’s asset is currently worth. At least if it’s bad news they’ll know and can do something about it. Valuing today’s business is designed to shift clients from being anxious, uncertain and on the back foot. Instead, they gain new knowledge that places them confidently on the front foot.
It’s very common for owners to say they want to sell when clearly their heart isn’t quite in it. When owners are selling their business it’s not just a logical, thinking process. Underneath the logic sits a fair amount of emotion. While owners are saying “I want to sell”, emotionally they’re often very reluctant.
We can help them arrive at a vision where their head and logic are aligned with their heart and emotion.
Once we know today’s business worth we work with the client to define their exit vision in terms of time and value. Often they have a time – five years say – and a value in mind, but we need to deconstruct any valuation figure before we can fully define their vision.
Profit x multiple
Let’s say the owner is looking to achieve an exit value of 20m. There are several ways this 20m could be constructed in terms of profit and multiple.
Valuation = profit x the multiple and so that 20m could be 10m x 2 or 5m x 4, for example.
- If we know today’s profit – and what the exit vision profit needs to be – then we can create a plan to achieve the exit vision profit
- If we know today’s multiple – and what the exit vision multiple needs to be – then we can create a plan to achieve the exit vision multiple
In the mid-tier market this P x M valuation equation isn’t common knowledge. But it’s easy to understand and people pick it up quickly. When we first set up Assay Advisory we spent 18 months researching and I interviewed lots of people on the buy side. Advisers and investors thought our methodology was great, but even some of these professionals hadn’t heard it explained in this simple way before.
We can help business owners by clarifying the financials, which stops their projected exit valuation being too woolly. With a fully developed vision they’re able to plan with confidence. “If we do these specific things over the next few years, then in five years” time the business will be worth 20m,” they can say.
Getting the language right
Much of what we do gives owners a new asset language. This helps them identify which assets have the potential to enhance equity value. Often those assets don’t sit on the balance sheet – off balance sheet assets like intellectual property, for example.
Typically the business will have used a profit motive to develop something innovative. The business team has probably said, “If we innovate this system/product, we’ll make more money.” In this way, they’ve created a system/product with a profit – rather than an asset – motive.
Once we’ve identified this innovation as an asset, we can explain how it could attract a buyer in an unexpected way. They’ll buy the business for the system/product (asset) rather than the profit that system/product is generating.
In this way we sometimes help owners get an even better deal than they first thought possible. Part of what we do, from a third party perspective, is to look inside the business and identify assets the owner can’t always see because they’re too close.
We provide an asset language to help owners set out their stall: “intellectual property”, “channel extension”, “product extension”, for example. This new asset language is an addition to traditional business language, which typically focuses solely on profit.
Realising your assets
Once again, part of the vision is being able to identify intellectual property in your business. Let’s say we uncover an asset that could be worth 5m at point of sale. But we recognise it’s currently not in the right form and needs to be made more explicit.
The business team can then say, “This…is our vision for the future. If we take these…actions, we can crystallise our intellectual property and provide 5m uplift.”
The original question might have been, “How to get 5m uplift in equity value at point of sale?” If the answer is, “Let’s go for an extra 5m in revenue,” it smacks of hard work. How much easier to crystallise what already exists. Once again we’re back to the vision.
Peter Harford is a co-founder of Assay Advisory. He is the firm’s CEO, based in London. Contact Peter on +44 (0) 207 194 8130 or firstname.lastname@example.org