December 27th, 2016 | By: Steve Little | Tags: Exit Strategy, Planning
Startups often adopt a sprinter’s mentality. They want to get as far ahead as possible in as little time as necessary. Progress is measured in terms of growth, profitability, and revenue, but there’s a big difference between generating revenue and driving actual value. Just because a company is growing doesn’t mean it’s actually becoming a greater asset. It’s just a larger version of its previous self.
To boost your company’s value, I recommend creating a startup exit strategy as part of your startup’s overall business plan. You may be thinking, “I’m not ready to sell!” But hear me out.
All business owners should be taking steps from day one that will determine how profitable their creation will be on the day of the sale. And the exit strategy is what’s going to determine where you invest your time and money.
It’s a worthwhile exercise, even for company leaders without immediate plans to exit.
A well-thought-out startup exit strategy will enable you to:
Opportunities and adaptations that could help the company uncover and amplify its value drivers are often overlooked in the headlong pursuit of top-line growth. And that’s one of the main problems with the sprinter’s mentality: It blocks out all perspectives except the one straight ahead.
When I talk with prospective clients, I like to ask them what drives the value of their business. And 99 percent of the time, I hear, “Uh, revenue?” The majority of business owners don’t know where the value of their business is locked up.
An exit strategy will help you identify the value nuggets in your business, which you can then leverage to position yourself in a high-multiple market.
Just as there are elements of your business that drive its value, so, too, are there elements that constrain it.
Here’s an example: A client of ours had essentially no documentation on his company — no sales documentation, no marketing documentation, no competitive analysis, nothing.
Assessing the value of his business without this information was next to impossible.
Many company leaders don’t even know these constraints exist. Luckily, in many cases, otherwise trapped value can be released by making sometimes minor adjustments and investments.
For example, one of our other clients had a poorly structured, error-filled cap table. Once we discovered this constraint, we simply reset the capitalization of the company, which added about $4 million in value.
Once you have a clearer sense of what drives and constrains your company’s value, you can adapt your present and future strategies to maximize it.
Most valuation companies can produce an accurate depiction of your monetary value, but that shouldn’t establish the market value for your company.
What I mean by that is that every prospective buyer is going to value your company uniquely. Each, after all, is buying it for a different reason.
For instance, let’s say you have two interested buyers. One values your customer base at $8 million, while the other values your intellectual property at $10 million.
To capture and maximize that value, you need to funnel your time and resources into either acquiring more customers or increasing IP — your choice should depend on which option will provide the most financial return with the least amount of risk.
A second route to amplifying value is to pivot your business into a higher-value market. I recently worked with a regional trucking company that was, by all accounts, a good, solid business.
It was valued at $27 million when the founders started the selling process, but because of its market position, this valuation was capped.
At the time, the trucking industry had a valuation multiplier between 0.85 and 0.9. Furthermore, our assessment revealed that it was next to impossible to ramp up revenue quickly enough to overcome the multiplier and get the company’s valuation in line with the founders’ expectations.
So we looked for ways to change the multiplier.
As our team continued to work with the trucking company, we discovered that most of the business was located in the energy sector and the company had developed proprietary technologies to improve the specialized logistical needs of the industry.
This trucking company actually had a greater value rebranded as an energy logistics provider. Just seven months after it was valued at $27 million, we shifted the company into a higher-value market, and it sold for $67 million.
Adopting a business plan that includes an exit strategy provides you with new, relevant insights about your startup that could help it moving forward.
Whether you decide to sell or stay, your company is in the best shape for the rest of the sprint.
Steve Little is the CEO and managing partner of Zero Limits Ventures. Little has led six successful startups to private acquisitions averaging $100 million each. He has raised more than $1 billion in startup and growth funding for 11 different businesses in multiple industries, led the buy-side M&A team for a major technology innovator, and acquired and successfully integrated nine companies in less than 12 months.
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