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Exit Strategy – Selling A Business Can Increase Its Value by 50+%
This very valuable concept is one of the most challenging for investors and entrepreneurs to intuitively understand. I didn’t ‘get it’ until I was fifty. It’s not that I am slow to learn, it’s just that, like a lot of things in life, it takes a few dozen experiences before the lesson really sinks in. When those experiences are about selling a business, it can take decades to accumulate the wisdom.
An extraordinarily valuable lesson for both entrepreneurs and investors is that when you sell a business a well designed and executed exit strategy can easily increase the business valuation by 50%, and sometimes by 100%.
Yes, that is correct. The business valuation can easily increase by 50 to 100% just because you sell the business.
Another way to look at this is that the exit transaction, which occurs right at the end, can make you half again as much money as all of the years of hard work that went into the business from the founding until you cash out. For example, let’s suppose you have worked very hard for three or four years to build a company that is fairly valued at $10 million based on standard financial valuations. By designing and executing the exit well, you can often sell that business for $15 million, or possibly even $20 million. This is not a fluke or random occurrence; it happens all of the time. (The important factor to keep in mind here is ‘well designed and executed’.)
Yes, I know it doesn’t seem intuitively obvious, which is why I’m writing this article.
My First Business Sale – Nexus Engineering
The first time I experienced the 50% business valuation increase was when we sold the company I co-founded in grad school - Nexus Engineering. We managed to sell it for about 50% more than everyone expected. I thought it was a fluke – a lucky accident. It wasn’t until I had seen the same 50+% business valuation increase about a dozen more times, and talked with dozens of smart guys who had each sold businesses a dozen times, that I appreciated this 50+% business valuation increase can, and should, happen much of the time.
Business Valuation Is Not Created Linearly
One of the ways to intuitively appreciate how extra value is created by the exit transaction is to extend a more familiar concept about how business valuation increases earlier in the company lifecycle. Significant valuation increases usually occur in discreet steps rather than through smooth linear growth. These steep value increases occur when individual strategies are successfully executed. Familiar examples are strategic partnerships, marketing alliances, acquisitions, new locations and new products or services. These strategic initiatives almost always create more fundamental business valuation than all the hard work on execution that most of the company employees spend most of their days working on.
A well designed and executed exit transaction is the last, and usually largest, strategically driven increase in business valuation.
This non-linear increase in business valuation is described here.
Markets for Selling Companies are Very Inefficient
The market for selling a business is very ‘inefficient’. This is one of the reasons a well designed and executed exit can easily increase the business valuation by 50% or more.
The market for selling companies is inefficient because:
- there are very few buyers and sellers,
- the market is illiquid, and
- information is not easy to access
This post describes the market inefficiencies when selling a business and uses the residential real estate and NASDAQ markets as counter examples. It explains how this market inefficiency can contribute to a 50+% business valuation increase when you sell the business.
Strategic Value can be Very Different to Different Acquirers
One of the most important reasons selling a business well can increase the business valuation is the high degree of variability in the ‘strategic value.’ Very loosely, that is the increase in the value of a target company over its ‘financial value’. This page includes more on increasing strategic value during a business sale, including ways to discover and communicate it to prospective buyers.
Selling a Business Well Requires Multiple Bidders
Every time you sell a business the exit strategy must include a bidding process. An active bidding process ensures safety, predictability, negotiating strength, price maximization and good governance. This post describes each of these elements in a successful company sale and explains how they contribute to the extra 50+% business valuation.
Great Business Brokers can Significantly Increase Business Valuation
Companies are sold not bought.
In part because it’s such a big transaction, there is a lot of mystique around selling a business. It’s true that the numbers are very large, the largest of all sales. It is also true that these are the most complex of ‘complex sales.’ But other than the size and complexity, selling a company is a pretty standard marketing and sales process.
It still all comes down to people. It’s people who make the decisions to buy and sell businesses. No matter how big the business for sale, these individuals, like all other investors, have psychological imperfections that make them susceptible to a well designed and executed sales pitch.
This means the skill of the sales people, or business brokers, working with the board and CEO to sell the business can have a large effect on realizing that final 50+% increase in business valuation.
No matter what it costs, engaging the very best business brokers always delivers a very high return on investment, this page explains why.
Recent Case Study - Parasun
In my BC Tech Fund portfolio, I invested in 9 companies. About three years after the first investment, three of the nine had a liquidity event - one went public and two were acquired. This was not a happy accident; it was a necessary component of the portfolio strategy. In that fund, I both selected companies I thought could execute early exits and worked actively with the boards and CEOs to sell the businesses.
The Parasun case study is posted here.
Recent Public Company Examples
There are very few private company case studies that illustrate how selling a business well can increase the business valuation by 50% or more. Even when it happens, it’s not easy to quantify the difference in the business valuation before and after the exit transaction. That’s one of the reasons this concept is so unfamiliar to most private company investors and entrepreneurs.
Fortunately, the same dynamic occurs regularly in the public company markets. This page describes a few recent public company examples which clearly show the business valuation increase when selling a company.
Summary
One of the most valuable lessons for both entrepreneurs and investors is that when you sell a business a well designed and executed exit strategy can easily increase the business valuation by 50%, and sometimes by 100%.
