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Capital Ideas for Private Business

Growing Before Selling

An Exit Strategy to Maximize Value

By Patrick Powell, Managing Director
Lexington Office
Corporate Finance Associates

Every business owner eventually comes to a point in his or her life when it makes sense to convert the company they have created into liquid wealth and move on to the next phase of life after business. For those caught off-guard without a solid exit strategy, the net proceeds may fall short of expectations. But for those with time and a solid plan, the sale of a company at maximum value is a realistic goal. And yes, company size does make a difference. The larger the company, the more attractive it can be to both strategic and financial investors. So, how do you grow your company before a sale?

There are two main methods to grow a business. Organic growth is the most basic and fundamental avenue of growth. A company gradually expands its customer base, increases revenues and gains a larger share of the market. This process is financed purely through the reinvestment of the profits of the company by the owners and management. This process can often take years but allows the company to maintain its culture and levels of quality. There are plusses and minuses with this approach. A company that grows slowly and uses its internal resources wisely is committed to the success of the business model. Management and employees avoid a culture clash that can arise during a merger. Organic growth is generally less expensive, as acquiring a company involves large capital investments. On the other hand, organic growth often takes a long time and lots of patience. Because organic growth is funded from internal resources, it can be a greater risk than externally financed growth. Business growth requires developing new products and services as well as expanding current ones. If the company experiences a down turn, they may not have the resources to adequately fund growth initiatives while maintaining current revenue.

The alternative to organic growth is acquisition. Acquisitions allow a company to dramatically increase revenues within a short time frame. One of the benefits of acquiring a business is that the acquisition does not need to be a competitor nor in your current market to be a success. The acquisition could be a vertical such as a key supplier to your current business or a company that distributes your product. Or, the company you acquire could be a horizontal, or a competitor that works in the same field and produces a similar product or service. Acquisitions are rarely successful without synergy. Will the acquiring company improve your processes, reduce costs or add a new geographic customer base? The whole needs to be bigger than the sum of the parts. If the acquisition is managed correctly, it will allow the new company to experience a period of organic growth as well. The downfall of an acquisition is that they can be expensive. They usually involve either a very large outlay of cash or the taking on of debt. The other risk involved in acquisitions is compatibility. However, with the proper advisors and management in place a company can mitigate these problems.

By growing your company before its sale, you are hedging yourself regardless of what type investor you attract. In many cases, a significant portion of a company’s ultimate value is delivered in an “earn-out”. Unlike a cash payment, an earn-out rewards the business owners for continued future performance. It makes little sense to sell a business at its most mature state for the earn-out will amount to little or nothing. Typically, buyers are willing to pay for growth, but seek a level of continued growth in the businesses they are acquiring. By creating a business that has sustainable growth, you are creating an environment where the exit value of your business will be at its maximum value.


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