Scaling Up Cash - How to Maximize Your Company's Valuation

“When the opportunity comes it's too late to prepare.” ~ John Wooden

If we were having a discussion five years from today, and you were looking back over those five years, what has to have happened in your life, both personally and professionally, for you to feel happy with your progress?

For one client, the CEO of a calibration services company, his goal was to enjoy being able to travel and spend time with his family as a retired CEO.  He wanted to maximize the fruits of his labor in his early years of retirement. But it wasn’t just going to happen overnight. In early 2019, this CEO built a focused plan to prepare his company for a recapitalization with a new equity partner.

The goal: Double the company’s revenue while more than doubling EBITDA over the next five years, with a focus on maximizing the company’s value. 

The outcome: Thanks to his commitment to working on the business, a sound growth strategy, and the execution of a competitive exit process, this company sold for a multiple of more than 5x their 2019 revenue. 

The CEO’s goal was realized, and his vision of spending time at his vacation home with his family is now a reality. 

How can you improve your company’s valuation and maximize the potential multiple you earn when you decide to exit part of all of your business? Let’s dive into three foundational principles below:

Commit to working on the business, not in the business

In order for an organization to truly scale and maximize its valuation, the executives must be free to think strategically instead of putting out fires. If a CEO is constantly caught up in managing his or her team, they will be caught in a downward spiral that reduces productivity and results in the business feeling stuck. 

Oftentimes a business is founded because an entrepreneur has a gifting in a specific area. To gain momentum, the entrepreneur needs to find others to compensate for their weaknesses, however, to scale up the entrepreneur needs to find others to compensate for their strengths.  The entrepreneur needs to focus on strategy, building a great executive team, the culture and company balance sheet.  They cannot do this if they are mired in the weeds of day to day execution.

Working on your business means you have time and clarity to develop your business’ strategy, inspire your team, and build a culture that propels everyone forward.

Committing to growth

You may look at this section of the article and roll your eyes. “Mark, who doesn’t want to grow?” Sure, committing to growth might seem like an obvious answer to maximizing your company’s valuation. My counter question? “Then why doesn’t every business meet and exceed their growth targets?” As the great Jim Rohn said, “For things to change, you must change.”

In order for your business to truly commit to growth, start with setting a specific date for when you will double our business.  It will take five years if you are averaging 15% annual growth but it can be done in three years if you are growing at 24%.  Next commit to specific strategic and tactical priorities you are going to puruse to make this goal a reality.  Ideally you will use the One-Page Strategic Plan to align your team.  

It is difficult for you and your team to hit a target you cannot see and you cannot see a target you do not have. Create clarity on the targets you are pursuing, use priorities to focus, get the team in place that is capable of executing the plan and then lead the team.

Executing A Solid Exit Process

Once you’ve scaled your business to a level where you are ready to recapitalize, business owners often jump the gun in this final step. Too often, CEOs leap to accept the first offer that comes their way. Instead, the final step in truly maximizing your valuation is executing a solid exit process. Instead of settling for the first offer that comes your way, create a competitive bidding environment, one that identifies strategic buyers for your organization.

For the calibration company, they patiently waited for multiple offers to roll in, eventually evaluating dozens. The CEO could have easily jumped on the first offer he received. Instead, he identified a strategic buyer that valued the business as a platform, valued the expertise of the existing leadership team and was willing to pay what the CEO knew the company was truly worth.

3 Ps to Maximize Value

This story should encourage and inspire other business owners who are focused on maximizing their company’s valuation. The CEO set a goal, followed the plan, and now gets to enjoy the fruits of his labor. Here are three Ps to remember as your company looks to do the same. 

People - Your A-player team is even more valuable than you are as the CEO to an acquisition team. What this means practically is that the acquisition team values how strong the team around you is. If the buyer feels like the performance will drop without you, then chances are they will discount their offer. 

Process - Develop world-class processes including your strategic thinking and execution planning process. Demonstrating that you have honed processes that differentiate you from the competition can help you position your company as a potential platform organization. Buyers will typically pay a higher multiple for a platform company acquisition than a “bolt-on” or “tuck-in” acquisition.

Profits - Predictable and steady growth are your company’s best friend when it comes to exit strategy. The acquisition team will value recurring revenue most, repeat revenue and episodic revenue third. No matter what type of revenue drives your company, it is important to demonstrate it is profitable revenue. Demonstrate you are growing profitable revenue by demonstrating that gross margin percentages are increasing, EBITDA is growing and cash flow is strong. 

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