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What are the best metrics for evaluating a portfolio exit plan?

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As a private equity professional, you know that exiting a portfolio company is a critical and complex process that requires careful planning and execution. You also know that choosing the right metrics to evaluate your exit plan can make a big difference in maximizing your returns and minimizing your risks. But what are the best metrics to use and how can you apply them effectively? In this article, we will discuss some of the most common and useful metrics for exit planning and execution, and how to use them to optimize your exit strategy.

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Momen Elsady

Wealth Management Expert | Financial Strategist | Advanced Options Trader

1 Return on invested capital (ROIC)

One of the most basic and important metrics for exit planning is return on invested capital (ROIC), which measures how much profit you generate from the capital you invested in the portfolio company. ROIC is calculated by dividing the net operating profit after taxes (NOPAT) by the total invested capital. A higher ROIC means that you have created more value from your investment, while a lower ROIC means that you have destroyed value. You can use ROIC to compare your exit performance with your initial expectations, benchmark your exit performance against other deals or industry averages, and identify areas where you can improve your operational efficiency and profitability.

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George Kinyua

Legal Counsel - Business, Corporate & Commercial Law | Intellectual Property Law | Privacy & Data Protection | Legal Compliance & Governance Audit
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To begin with, consider: a) Available exit routes based on the market, the applicable law and the provisions of any contracts entered into at the time of investment; and b) Whether the expected value/return of investment at the time of investment has been achieved or is likely to be achieved at the time of exit. If not, consider course correction measures and hedge your risk.

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2 Internal rate of return (IRR)

Another key metric for exit planning is internal rate of return (IRR), which measures the annualized rate of return you earn from your investment in the portfolio company. IRR is calculated by finding the discount rate that makes the net present value (NPV) of your cash flows from the investment equal to zero. A higher IRR means that you have achieved a higher return on your investment, while a lower IRR means that you have achieved a lower return. You can use IRR to evaluate the attractiveness of your exit plan, compare your exit plan with alternative scenarios or opportunities, and assess the impact of different exit timing and pricing options on your return.

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Momen Elsady

Wealth Management Expert | Financial Strategist | Advanced Options Trader
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When you're planning to leave a business, an important thing to check is called the internal rate of return (IRR). It's like a way to measure how much money you're making from your investment in that business every year. I learned this when I was thinking about leaving my own business. The higher the IRR, the better it means you're getting more back from what you put in. On the flip side, a lower IRR means you're not making as much. I used the IRR to figure out if my plan to leave the business was a good idea, and how it compared to other options. It helps you see how different factors, like timing and pricing, can affect what you get back in the end.

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3 Multiple of invested capital (MOIC)

A third metric for exit planning is multiple of invested capital (MOIC), which measures how much money you make from your investment in the portfolio company. MOIC is calculated by dividing the total cash proceeds from the exit by the total capital invested in the portfolio company. A higher MOIC means that you have multiplied your investment by a larger factor, while a lower MOIC means that you have multiplied your investment by a smaller factor. You can use MOIC to measure the absolute return on your investment, compare your exit performance with your target or hurdle rate, and communicate your exit performance to your stakeholders.

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4 Exit multiple

A fourth metric for exit planning is exit multiple, which measures how much you sell the portfolio company for relative to its earnings or cash flow. Exit multiple is calculated by dividing the enterprise value (EV) of the portfolio company at exit by its earnings before interest, taxes, depreciation, and amortization (EBITDA) or free cash flow (FCF). A higher exit multiple means that you have sold the portfolio company for a higher valuation, while a lower exit multiple means that you have sold the portfolio company for a lower valuation. You can use exit multiple to estimate the market value of the portfolio company, compare your exit valuation with other comparable transactions or industry norms, and analyze the drivers of your exit valuation.

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5 Exit readiness

A fifth metric for exit planning is exit readiness, which measures how prepared you are to execute your exit plan and deal with potential challenges and opportunities. Exit readiness is not a single number, but a combination of qualitative and quantitative factors that reflect the readiness of the portfolio company, the exit market, and your exit team. Some of the factors that affect exit readiness are the growth and profitability of the portfolio company, the alignment and engagement of the management team, the quality and completeness of the financial and operational information, the attractiveness and availability of the exit options, the demand and competition in the exit market, and the experience and capability of your exit team. You can use exit readiness to assess the feasibility and timing of your exit plan, identify and mitigate the risks and issues that may affect your exit outcome, and leverage the opportunities and advantages that may enhance your exit value.

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6 Exit feedback

A sixth metric for exit planning is exit feedback, which measures how well you learn from your exit experience and apply the lessons to your future deals. Exit feedback is not a single number, but a process of collecting and analyzing the data and insights from your exit plan and execution, and using them to improve your exit performance and strategy. Some of the sources of exit feedback are the post-exit reviews, the exit surveys, the exit interviews, and the exit reports. You can use exit feedback to evaluate the strengths and weaknesses of your exit plan and execution, identify the best practices and areas for improvement, and implement the action plans and recommendations for your next deals.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the best metrics for evaluating a portfolio exit plan?

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1 Return on invested capital (ROIC)

2 Internal rate of return (IRR)

3 Multiple of invested capital (MOIC)

4 Exit multiple

5 Exit readiness

6 Exit feedback

7 Here’s what else to consider

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