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What Private Equity can teach you about planning an exit strategy

When a private equity house is considering making an investment in a company, an important component of their process is Exit Due Diligence. That's right : part of their decision-making on acquiring a company is looking at how they will sell it.

Self-evidently, private equity is in the business of buying and selling, but the lesson to draw here nonetheless is that it is never too early to consider your exit strategy.

At the very least, it is important to build alignment and understanding with your co-founders on what your objectives are regarding exit.

If you're able to reach a general consensus on exit objectives and timing, it can be extremely helpful to feed this into your strategic planning for the business. For example, you might aim early to:-

  1. Envisage the likely "shape" of the ideal buyer for your organisation (size, services, sector etc)
  2. Understand what they are most likely to value in a business like yours and how your business might unlock value in theirs

For example, in the consulting industry, a buyer would value very highly a business with rich intellectual property focused on specific services and sectors. This sort of target can give market access, and can be scaled if the intellectual property can be migrated to similar clients in other geographical markets. On the other hand, the value of a business with general consulting skills but 'great people' is much harder to define - that's more of a bolt-on of scale that delivers less synergy value to the buyer.

Armed with your thumbnail of your prospective buyer, use it as an additional stakeholder in your strategic management meetings, for example:-

  1. should we open a new office in Germany? (No: our strategic buyer is unlikely to place much value on a small overseas operation; they are likely to have operations there already and it will make us more difficult to acquire)
  2. should we invest in new technology to boost growth in the business? (Yes: the multiple we'll get from our strategic buyer at exit is critically dependent on consistent growth. And we can always try and adjust out the costs as one-off expenditure...)
  3. should we recruit a finance director? (Yes. The answer to this question is almost always yes!)

More to follow on this subject.

'Phil


Published: 06-05-14 by Phil Baxter

small business, sale, exit, synergies