Begin with the exit

Can you set out to build a salable business from the start ?

I frequently run workshops for entrepreneurial mid-market businesses titled “Building Business Value”.  The point of these is to draw on the lessons of 30+ years as a corporate finance adviser to ensure that founders and management teams who might at some point seek to exit their businesses clearly understand the way the M&A process works.

By unpicking the value equation, the mysteries of completion adjustments and the logic behind driving up multiples I hope that potential business vendors will be able to manage the way in which they prepare for exit, to deliver the best possible outcome when the time comes.

Most potential vendors attend these workshops, or start to engage with advisers, when they are already actively on the way to an exit and inevitably there will already be things about the way that their business is run or presented that will have a value impact. Depending on the time to a planned exit some can be managed, and some probably can only be presented as positively as possible.

For some reason, over the last few days, my LinkedIn and Instagram feeds have been full of “built to let” opportunities to invest in new build student accommodation. It made me wonder how many businesses these days are similarly designed and built with a smooth and valuable exit in mind, without any of the entrepreneurial eccentricities which can be the bane of a disposal process.

The truth is that the earlier an entrepreneur starts to think about their exit the better. It will potentially stop them making value depleting decisions and give a strategic framework for decision- making, above and beyond annual profit.

What then are the biggest mistakes that entrepreneurs make which come home to roost when it comes to exit and where a value enhancing approach can be baked into a business early on? Here are my top five “elephant traps to avoid” and/or” value enhancers to focus on” as you design your business from the outset.

Revenue Repeatability

A business with evidence of repeat revenues will be worth more than a business which cannot not point to an underpinning level of repeatability. Whether you can design a business on a subscription basis, secure rolling customer contracts or just build a compelling evidence base of returning customers over the long term, a focus on this area will positively impact the multiple achieved at exit.

Management Continuity

For all the EMI schemes out there and the posts about succession, many entrepreneurs are still the single most important person in their business when they come to sell. A buyer or investor will want to see and spend time with the individuals who are going to take the business forward post exit and if all the evidence points to the departing shareholder being still the key driver and influencer it will have a value impact. Managing a gradual step back, ensuring that customer relationships are wide and deep within the organisation and detaching the brand from the individual are all steps that will embed value within the business prior to exit and can be baked in from the beginning.  

Customer Concentration

Buyers and investors worry enormously about over-dependence on one or more key customers. For an entrepreneur it is completely counter-intuitive to turn away profitable business from a trusted customer and so for many businesses that platform customer is both a positive and a negative. Starting out with a clear intention to ensure a spread of customers and having KPIs which manage over- exposure is a way to avoid the risk of over-dependence when you come to sell. It requires discipline and a strategic approach to selling.

Ensure the business has everything it needs to be sustainable

This is a broad heading but it is surprising how often a key piece of software is owned by an external developer or ex shareholder, or that the asset base has been allowed to decline in the years leading up to exit, or that the “clever bit” of a business is locked into the brains of a handful of key team members or that a fundamental element of the technology roadmap has been parked in the couple of years leading up to exit. In designing a business for a valuable sale, the owners and management team should ensure that everything that makes the business work and creates differentiation is designed into the business itself. Embed knowhow and special capabilities into software, databases  or (at least) “how to” toolkits; maintain investment in capital items and technology to remain ahead of, or at least in line with the market, and ensure that everything important is owned by the business itself so it is clean and ready for sale.

Don’t diversify too far from the core

Entrepreneurs are entrepreneurial. It goes without saying. This means that sometimes they see the opportunity to make money which is slightly left field of the core purpose of their business. They might see an acquisition bargain (which can quickly become a problem child), a lovely freehold building that the business can occupy (but that most acquirers won’t want) or decide that they can do their own logistics or their own software development in house rather than use outsourced solutions. Sadly, sometimes this leads to the development of non-core activities which make the business less, nor more, attractive to an acquirer or an investor. Once their knitting is defined, entrepreneurs should stick to it or at least consider the implications of branching out before doing so on a whim.

Not all entrepreneurs want to sell their businesses and not all of them are prepared to constrain themselves in the interests of ending up with a highly saleable asset. This is to be admired and celebrated, mine would be a boring job if all businesses were designed for an easy exit.

However, I do believe that there is a difference between an entrepreneur knowing the value implications of a strategy but “doing it anyway” and one who doesn’t understand the impact of their choices and has regrets consequently. With that in mind I believe that all entrepreneurs should understand how the M&A market evaluates things and to think about how they go about building their companies from the very start.

Building a salable business doesn’t compel you to sell, it just ensures that you always have the choice.

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