Photo Credit: Generated with CoPilot by Kathleen Patrick

If you think about it, the goal of Scaling Up your business is ultimately to increase its value. An intrinsically high-value business is always a good thing. Even if you want to pass down your business to future generations, one that runs with the precision of a Swiss watch will generate more profitability and cash—and be a lot more fun to operate on an ongoing basis.

The fact is we will all eventually exit our business. If done right, successfully selling a business can be one of the most significant and important events of our lives. It sets us up for financial, time, and purpose freedom post-ownership.

If your business is not fully prepared for sale, or the transaction is not done correctly, you can leave millions of dollars on the table. Let’s explore five proven strategies to ensure that you maximize your business’s value when it is time for you to sell:

  1. Be Better-Run Than Your Acquirer
  2. Become a Platform Company
  3. Take a Second Bite of the Apple
  4. Sell to a Strategic Buyer—Not Only Find the Rembrandts Hiding in Your Attic but Paint Them As Well
  5. Don’t Leave Money on the Table at Closing

Let’s break down each of these strategies in detail:

Be Better-Run than Your Acquirer

One of the best ways to intrinsically increase your firm’s value and achieve a better than 10x multiple at exit is to be better-run than your acquirer. A business that runs like a Swiss watch is extremely attractive to buyers because proven systems and processes mitigate the risk of ownership to them. By buying a well-oiled machine, they can also scale your proven processes back to their larger enterprise, dramatically increasing your value to them.

Imagine being interviewed by your potential buyer and they ask how your business is run and you answer:

We run the Scaling Up growth platform.

We’re chasing a BHAG of $100M.

Our rhythm is to meet annually to set the 5 strategic priorities to achieve, and then quarterly to break these down into the 3–5 rocks that support the annual priorities with 13-week sprints.

Monthly, we check progress as a leadership team and knock out a big strategic issue.

Weekly, we dive into execution to ensure we are holding ourselves accountable to movement and address a tactical issue.

Finally, we have a daily huddle to check yesterday’s metrics and ensure everyone is addressing a strategic priority.

If you think a strategic buyer will crave that kind of Swiss-watch precision in how well your business is run, the answer is an unqualified yes!

These systems and processes are best encapsulated in concise playbooks illustrating the operations of each department and the critical end-to-end processes. In Scaling Up terminology, these are referred to on the Process Accountability Chart (PACe). They are the end-to-end processes instrumental in driving results for your business. The recommended approach is to display and highlight the value of the playbooks during the initial management conversations with a buyer to attract a fat letter of intent (LOI). However, do not allow access to them until due diligence.

Another key factor your acquirer will be looking for is the quality of your team. Once you have developed your playbooks, it is easy to recruit and coach a team of A Players and A Potentials to run them. Showing your buyer that you track performance and have greater than 90% A Players on your team (like our clients do) will add millions of dollars to your valuation at the time of sale.

Just like when you fix up and increase the value of your own home, running your business on a strategic growth platform like Scaling Up increases your enjoyment of it every day. When your home is nicer and more valuable, you never know who may knock on the door with an offer you cannot refuse!

Become a Platform Company

Closely related to the above notion is strategically structuring your company in a manner that allows the acquirer to seamlessly integrate other businesses. When this capability exists, you become a platform company.

The key here is to look strategically at businesses like yours and to deliberately architect your business so you can bolt others onto it. The essential point is to strategically identify businesses resembling yours and then craft yours in a way that allows for the seamless integration of others onto your platform. If you have already made successful acquisitions to your platform, so much the better, but the real key is for a buyer to clearly see you as a platform company to which they can apply capital to turbocharge growth and earnings.

An example would be a home services company that has honed its training program for technicians so well that it positions its service trucks to be seen over the technician’s right shoulder when greeting homeowners at the door. This attention to detail, which engenders feelings of trust, among other factors, contributed to the firm achieving a very healthy strategic multiple in the 12–14x range. This is because the acquirer can integrate various service companies into that platform framework.

Take a Second Bite of the Apple

If you happen to be purchased by a private equity (PE) firm and not a strategic buyer, there is still a great way to maximize the value from the sale of your company, and that is to stick around and run it for 3–7 years and then get a second bite of the apple when it is sold a second time. How does this work? Assume you sell your $5M EBITDA company for a 7x multiple to a PE. That’s $35M of value. The PE firm is going to assume a 3x return on their cash investment, known as a 3x multiple on invested capital (MOIC). Also, PE will most likely ask for the CEO and key team members to stick around for the 3–7 years mentioned above and they would like to keep you aligned for growth, so they will usually ask for something between a 20–34% earn out—$12M in this case. (As we will show you later in this article, PE will typically leverage the transaction with 50% debt financing, so your actual roll-forward of equity will be half of your $12M, or $6M, but for the sake of simplicity in this example we’ll assume a non-leveraged transaction). Now it’s 5 years later and the firm achieved its 3x MOIC. On the second sale, you receive an additional $36M payout. If you want, you can roll forward this formula and deal structure almost indefinitely. As long as you and the PE firm continue to achieve 3x MOIC, each bite of the apple is bigger than the last. This is a great way to produce generational wealth for you and your family.

Want to be irresistible to great buyers? The “Moneyball Metric” for getting a healthy multiple at exit, from either a PE or a strategic buyer, is that your gross margin as a percentage of revenue (% gross margin) is growing year on year as revenue increases. This is important because the acquirer can safely pour more investment on your proven business model without adversely affecting the price-volume relationship and eroding margins.

Sell to a Strategic Buyer

Want to play even bigger? Build your company to be so strategically positioned and operationally efficient that it garners a strategic multiple. Scaling Up defines a strategic multiple as a multiple greater than 10x. This is in contrast to private equity buyers, mentioned in the above example, whose rule of thumb is typically to pay less than an 8x multiple on an acquisition.

Attracting a strategic buyer means transitioning from “like to own” to “want to own” to “have to own” in your buyer’s eye. When it comes down to it, a business is just a collection of assets and capabilities. Too many businesses underutilize their assets and don’t have defined strategic capabilities. That is why their companies are of no interest to strategic buyers.

Your business’s unique capabilities and core competencies are your “Rembrandts in the Attic.” The more you have documented these Rembrandts in we-know-how-we-do-what-we-do playbooks, the better.

Here’s a great story to remember the value of Rembrandts in your business. Imagine you and your significant other are in the market for a new home. There is a beautiful, vintage lakefront property listed for $1 million. One buyer who loves watersports will pay a premium of $1.15 million because of the dock and lake access. Another, who is a great chef, will love the massive gourmet kitchen with a six-burner range and built-in Sub-Zero refrigerator. Unbeknownst to the buyer, you and your significant other visit the attic, where behind a bunch of rubbish you find an unframed Rembrandt. Since your partner has an art history degree, you are sure it’s worth more than $10M. Which buyer do you think is going to have the winning bid on that house?

A strategic buyer is on the lookout for Rembrandts in your business’s attic. Because Rembrandts are extremely valuable to them, they are willing and able to pay a strategic multiple because of the value those capabilities can unleash in their business. As our clients like to say, “We like to paint Rembrandts, not just find them.”

Also, if your strategic buyer is looking to exit themselves in the future and you are interested in sticking around, you can roll forward a percentage of your dollars and get a second bite of the apple in the future. With the higher multiple of a strategic sale, the roll-forward strategy is put on steroids.

Don’t Leave Money on the Table at Closing

Remember that as the seller, you are probably going to be at the transaction table once, or only a handful of times in your life. In contrast, your acquirer, whether it is a private equity firm or a strategic buyer, is very sophisticated and skilled in these transactions, perhaps having done hundreds in the case of a PE and dozens in the case of a strategic buyer. It is not an exaggeration to say that the experience differential is like an amateur high school football team playing a professional NFL team.

This is a good time to state that I’m a big fan of private equity. They have a track record of recognizing great business opportunities, adding capital, and providing fantastic returns for their investors. As long as the terms are advantageous for you, working with a PE can definitely be a win-win for everyone. I just want to point out that you are across the table from seasoned business operators who are wizards at financials and deal-making.

In terms of not leaving money on the table, let’s start with the factors you can control first. Let’s call this “friendly fire.” In particular, I’m talking about overzealous, unseasoned attorneys and underprepared CFOs and CPAs. The former will waste your money by arguing every minute point of the deal, and not saving their powder for the really important terms. The same goes for CFOs and CPAs without top-notch accounting and financial-modeling skills. They just won’t have the experience necessary to run a mock due diligence, build audited financials, and run a reverse QoE (quality of earnings) analysis. Skilled financial jocks on the buyer’s side will eat these rookies up. This is no time for amateur hour!

Thus, without the guidance of a skilled coach and other advisors who have transactional experience, you risk being significantly outmatched and outmaneuvered during the deal, potentially leaving substantial money on the table.

As a certified Scaling Up Coach, I got tired of watching entrepreneurs (not our clients!) getting screwed at the seller’s table during the most important and vulnerable time of their life. Consequently, I’ve assembled a team of investment bankers/M&A advisors alongside seasoned, deal-specific attorneys and CPAs with specialized experience in sophisticated transactions to level the playing field for our clients. They can maximize the amount of money from the transaction as well as structure favorable deal, exit, and earn-out terms.

Here are a few areas where we see experienced buyers trying to take advantage of less-experienced sellers during the deal. While these practices are not illegal, they range from manipulative to totally unethical, and they are all leveraged to the buyer’s advantage, not yours, in the deal structure:

  1. Applying psychological pressure. Savvy buyers will try to leverage the emotion of selling your life’s work against you. Don’t disclose too much about your plans post-sale or they will reinforce your desire to have a condo in Maui, a private airplane, or your dream non-profit against you. You will be less willing to pull away from a bad deal. Remember, these people are pros at this!
  2. ABC waterfall of stock. This is where the class A stock gets a preferred payout (and potentially preferred yield) over the B and C classes. This is a potential pothole for you as the seller. As a rule, we do not recommend doing a deal with multiple classes of stock.
  3. Trying to negotiate in due diligence. Many savvy sellers will attempt to use the due diligence process to negotiate the deal. Remember, due diligence is only for confirming the facts, not re-negotiation.
  4. Smoke and mirrors. This takes the form of attractive, but unrealistic growth projections that are higher than your historical levels, a poor investment thesis, or a squirrely earnout structure. Remember, unless you sell the business for 100% outright, and you can walk away free and clear, you now become an employee of the new company. Private equity are masters of working you like a dog on behalf of their investors. If this happens and the assumptions or terms are bad, your earnout period can become a living hell for you. See the below sample deal structure where a company had a historical compound annual growth rate (CAGR) of 15%, but got sold on the assumption of 30% growth under the new ownership. As the calculations show, if only the historical CARG of 15% is achieved, the seller most likely would have been better off selling 100% at a 10x multiple and not having to work for someone else for 5 years for only an incremental $1.1M net present value.
  5. Sleight of hand on the equity capitalization. As you can see in the example below (and this is a critical point!), remember you are selling 100% of the old company (SellCo) and in this case putting in 20% of the equity in the NewCo, not the total capitalization. Every single day, buyers try to trick sellers into putting their whole 20% from the sale into the new equity capitalization, effectively screwing you into putting 40% of equity ($5.6M highlighted with orange in this case instead of the $2.8M (20%) highlighted in yellow). We call this “putting their hand in the cookie jar” and it is just plain slimy. It takes money out of your pocket at closing, and effectively, cuts your future returns in half.

The good news is with the right advisor team, you can craft a deal structure that is favorable to you and also your buyer—without leaving frictional losses on the table. The key is developing a crystal-clear deal vision. Know what you want to have, what you need to have, and what you cannot accept in your terms and parameters.

In summary, increasing the value of your business is just like increasing the value of your own home. Upgrade its assets, capabilities, processes, and people now. Then you can enjoy it more every day as you own it. And who knows who will knock on the front door one day with an offer that is too good to refuse!

Ready to apply what you just learned to grow the value of your business by several multiples? We have the world’s foremost Scaling Up coaching practice and do the 4 Decisions of People, Strategy, Execution, and Cash better than anyone else. Schedule a conversation with us today. We will show you how we have helped businesses worldwide build their valuations to achieve incredible strategic multiples at exit.

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