EXIT STRATEGY: Making it easy for the buyer

Many acquired businesses have underlying potential which the buyer can’t exploit because the knowledge the business uses to generate revenue is locked up inside the heads of founders or key employees.

For the business to expand other people need to acquire the knowledge or the knowledge needs to be codified and/or de-skilled.

When the buyer reviews the potential of the business he is going to want to estimate the time and cost of putting the business on a growth footing.

If he has to extract company intelligence first it may look problematic because there is the danger of getting it wrong and/or losing the people who have the knowledge.

An essential part of the value proposition to the potential buyer is to show him how he can easily exploit the revenue potential.

If systems are already in place to do that the risk to the buyer reduces and the payback time on the investment may decrease. Both those elements lend themselves to adding to the price you can extract at time of sale.

The opportunity is worth more to the buyer if benefits can be received earlier and risks of exploiting the opportunity can be reduced.

The firm needs to put itself into the position of the buyer and think through activities the buyer will have to undertake to rapidly exploit the opportunity.

Perhaps that is best understood by making some assumptions about the rollout program. Assume that the buyer:

• Wants to launch projects associated with revenue growth as quickly as possible.
• Is willing to provide necessary funds to undertake the program.
• Will allocate necessary management capability to support the activity.
• Will deploy the new capability as widely and as quickly as possible if costs can be quickly recovered by new revenue and
• Wants to minimize possible risks.

A good rule of thumb for any acquisition is to set a break even or cashflow positive target on the investment within two years.

Generally speaking corporations are prepared to fund new projects or programs where they can clearly see their investment being recovered inside two years, which means the sooner your proposed expansion program can be cashflow positive the more positive the buyer’s interest will be.

Two considerations arise from that approach.

The seller must be aware that the gross margin achieved from new revenue in the first two years is probably the limit of the value of the acquisition to the buyer.

Anything which can be done by the seller to assist in higher and earlier revenue will directly impact on the sale price of the business.

For the buyer an acquisition which has a quick payback is going to be much more attractive.

The figure he is likely to offer as a purchase price will be strongly influenced by the likely gross margin generated by new revenue in the first two years. The more he can earn in that period the more he will be willing to offer as the purchase price.

Working out how best to exploit the potential in the business to maximize revenue within two years is part of the planning the firm should do in order to articulate the opportunity to the potential buyer.

If you think through activities to be undertaken by the buyer to exploit potential in the business you will have a better appreciation of what needs to be done to prepare the business for sale. Ask yourself some key questions.

What can you do now and during the period before the business is sold to make each activity more effective?

I normally work on a two-year preparation program prior to the date of anticipated sale of the firm. That is:

What can I do over the next two years to put in place a platform from which the buyer can launch a program to exploit the opportunity?

That may require an investment by the seller during that two-year period but the more revenue the buyer can generate in the two years after the sale the higher the potential sale value of the firm.

Since you don’t know when you will need to sell the business or receive an offer to sell the business you can’t afford to delay that preparation

Assume you will sell the business in two years’ time and if you delay the sale at least you will be well prepared when you do sell.

Given an objective of rapid deployment, scalability or replication after the sale:

What can you do during the two years before the sale to enable that to happen?

Are you able to go to the potential buyer and say: “I can make this work for you because we have built a capability and put in place a set of circumstances and activities to support your rapid rollout of this opportunity.”

Put yourself in the position of the buyer to try to work out what problems he would need to solve to enable this opportunity.

To what extent can you resolve those problems in advance?

The key to a premium on sale is to create a platform from which the acquirer can rapidly achieve the benefits he seeks in the acquisition.

A strategic buyer will be interested in the rate at which the strategic asset or capability can be replicated or scaled.

The financial buyer will wish to pursue projects which improve the growth rate and/or productivity of the resources.

The anticipated speed of execution of those activities impacts on the value of the business to the buyer and greatly influences the price the seller will receive.

There are many things you can do to make the buyer’s task easier.

Some of the examples below should stimulate your thinking about what you could do to enable the buyer to be more successful in exploiting the potential in the acquisition.

Documentation

It is likely that many more people will need to become involved in order to scale up a program. Are you able to provide necessary documentation of the product, process, systems, implementation activities and so on to support rapid deployment?

Knowledge cannot be in the heads of current employees if many more people are going to be involved.

Support for a scaled activity

If you were asked to support an activity 10, 50 or 100 times what you are doing right now:

• What would the product or service need to look like and what supporting activities would it need?
• Are you able to put the underlying support structure in place to enable the buyer to quickly move to those levels?
• If you were asked, for example, to train sales staff, product demonstrators, implementation and support staff in large numbers how would you prepare for such an activity?
• What would you need to have in place to quickly move to a much higher level of activity?

Arranging capacity

Some products and services require additional specialized capacity to support a higher level of activity. That might be manufacturing capability, a help desk, implementation or support capability.

You may need to ensure you have access to adequate supplies of components, ingredients or supplies to support a scaled-up operation. While the buyer might have his own plans on how to do that you might be in a better position to assess the needs.

You might screen potential suppliers or identify potential sources of manufacturing capacity or manpower and have an option the buyer can take up to gain resources. For example you could secure a letter of intent which the buyer can activate to speed up launch capability.

If the buyer needs to implement new internal systems, processes or capabilities in order to undertake the release of a new product you might be able to source external capability to allow an earlier launch with a gradual transition to in-house capabilities. You should do whatever you can to ensure earlier generation of revenue.

Building strategic partnerships

Some products or services require complementary skills or resources in order for them to be delivered.

If you are able to define those requirements before a scaled-up operation could you also identify, screen and gain agreements for such services?

For example, say you had a business which would be very attractive to a multinational software corporation.

You have an application which could be sold to global end users but you need a consulting organization to implement it, which your potential buyer does not have.

Assume the savings to the global end-user are significant and the earlier they are achieved the more the end user saves.

You could identify a global consulting service which could implement the solution and you could work out an agreement for the deployment of consulting services, a program of staff training and support desk capability which could be implemented to support the program.

Your presentation to the potential buyer can now show how the product could be delivered to end users with minimal delay.

Creating immediate revenue opportunities

The ultimate opportunity might be enhanced if you are able to deliver to the buyer a large-scale customer project. While you might not have the capability of delivering on the project yourself the buyer might see it as a way of bringing the acquisition into positive cashflow very quickly. It also demonstrates the credibility and capability of the long-term potential of the acquisition.

Implementing reference sites

A large scale rollout, especially across multiple geographies, may require a small number of reference sites to demonstrate key features of the product or service.

That might be the case, for example, where the product needs to demonstrate multiple language capability, the ability to handle certain types of transactions or solve specific problems.

Reference customers might be arranged for certain types of consumer products by having them associated with high profile personalities. Having the product in the right places with the right people or being used for the right applications will assist a more rapid ramp-up of sales for the buyer.

Localisation

Products you intend to scale internationally might need to have some localization changes or support. That could be local language, local reference customers, packaging requirements, technical standards and/or support for specialized transactions such as tax or payment methods.

While it may be expensive to do every one which will be needed you might make underlying changes in the product to enable changes to be done quickly and cost effectively.

It would be sensible to implement changes in your products which would be required for largest markets in order to speed up time to market.

Where customers are sceptical about capabilities you might want to implement reference sites in those sectors or geographies.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.