When you sell your business, the acquirer will apply both
A common misnomer we hear is, when I look to sell, the exit multiple someone pays me is whatever the market will bear at that time and I just can’t influence it.
You can influence it and you should have a plan today for doing so.
At a very simplified level, the acquirer will begin identifying what they want to pay for your business by applying Science. Meaning, they will look at your data, specifically your historical profitability and they will apply a multiple that the market is generally paying for companies like yours. The dollars they are willing to pay you starts here. This part you can only influence by ensuring you’re presenting a business with attractive profitability but you can’t influence the range of multiple the overall market is paying.
Then the Art enters their equation. And it’s this part of the acquirer’s valuation that you can greatly influence. This is where the acquirer will evaluate critical variables of your company such as;
-Quality of your financial tracking/reporting
-Visibility/predictability of ongoing growth
-Customer/vendor concentration
-Uniqueness of your product/service offering
-Organization/culture strength
There are potentially other variables the acquirer will consider specific to your industry but these are often the key ones in any acquisition. The acquirer will start with the Science they applied to identifying what they might pay, but during due diligence, they will evaluate these variables. Present a business with these variables impressing them, your multiple will move upward in the range. Present a business that is lacking in these variables, the exit multiple they apply will absolutely move downward.
Ask yourself – am I working a plan that has me managing and improving the Art side of our future exit multiple?
And keep in mind, the acquirer has two levers to play with in buying your business. The first is the overall valuation they are willing to pay. The second is how they want to structure paying you that valuation (i.e.: all cash or combination of cash and other tools at their disposal such as earnout, reinvestment, seller notes, etc). By influencing the Art variables in your future exit multiple, you’re not just influencing the valuation you’re influencing the potential to get a more favorable deal structure.
Use time as a friend in influencing the Art side of your future exit multiple. Doing so will have you on a stronger path to achieving your future euphoric exit event.
