How do you evaluate your business when exiting?

Some less conventional ways to value a business include: 1. Customer Value: A business’s true value could be determined by the worth of its customers. 2. Value of Team: The skills, knowledge, and experience of your team can have significant value. A potential buyer may be willing to pay a premium for a highly skilled or uniquely experienced team. 3. Social Impact: For some investors or buyers, the social or environmental impact of the business can add value. This might include contributions to the community, sustainable practices, or other positive impacts. 4. Personal Value: This method considers the value of the business on a personal basis.

Value of Your Product to the Acquirer Another approach which is particularly interesting for very early-stage businesses is calculating the additional revenue the acquirer is expected to generate by incorporating your product into their portfolio. EG: Your product is priced at ￡10K ARR You have 30 customers = ￡300k ARR The acquirer has 30,000 customers – all could buy your product The value of your IP: 30,000 x ￡10k per year = ￡300m Avg of 3 year contracts 30,000 x ￡10k x 3 = ￡900m How would an extra ￡300m ARR affect their share price? If they get valuation multiple of 10x on ARR ￡300m x 10 = ￡3 billion! Note: it is unlikely that you would get ￡3b ?. There’ll be heavy negotiations. However, this helps you set the tone for discussions.

Valuing your business using revenue multiples is a common approach. It involves multiplying your annual revenue by a specific number based on industry benchmarks, growth rate, profitability, and competitive advantage. For instance, if your business generates $1 million in revenue and the average industry standard multiple is 3x, your business value would be $3 million. However, this method does not consider expenses, assets, liabilities, or future potential, potentially leading to an inaccurate valuation. It is important to be aware of its limitations and consider other factors when determining the true value of your business.

Many start-ups in the University spin-out or accelerator space will have either fundamental IP or a significant portfolio of IP providing an effective barrier to market entry. These companies will likely be valued on their IP, especially if they are pre-revenue or pre-scaleup. Many intellectual property companies can support in the valuation process. Lastly, merchant banks (related to your industry) can help orchestrate and facilitate the sale, however, it is advisable for the founder or CEO to be "warming up" potential acquirers in the months (years?) before the planned Exit.

Based on my experience as an investor and corporate finance adviser, several criteria are typically associated with a revenue based multiple, sector dependent. - recurring revenue streams supported by contracts - low / well managed customer attrition - revenue growth rate >20% pa - deep understanding of customer acquisition journey and cost The multiple applied is typically based on precedent transaction data within an industry but to be comparable it is essential the business can point to similarities in strategy and metrics, a subjective process so for that reason the revenue multiple is usually sense checked to associated profit multiple and adjusted accordingly if costs are not as well managed as the benchmark comparator.

This description of how multiples translate to valuation is accurate but several factors should be considered when identifying the most applicable multiple to for valuation. This involves identifying comparable businesses with recent transactional activity against which strategy is compared and value drivers identified. Question: What attracted the buyer to pay that multiple for the “comparable” business? Value drivers include factors such as: ?Ability to lead niche ?Low customer concentration ?Multi channel route to market ?Integration synergies ?Technological innovation ?New product launch success ?Significant growth potential Financial metric benchmark performance would also be assessed to establish quality of earnings.

Discounted cash flow is my preferred method to value any business. While it requires to research the needed data for the assumptions (company's growth rate, cost of capital, the inflation rate, and the tax rate). These should be well defined and analyzed.

Using a DCF method is the most sophisticated method and likely to provide a justifiable and fair valuation. As is also outline in this article, the price achieved will relate to the value the acquirer places on your company and product. So, if the DCF calculation is based on your projected sales, do bear in mind that the acquirer may have a larger client base and hence value the business more highly. In the end this will be a negotiation.

This is the reflection of applying EBITDA or revenue multiples referred to above. Precedent data is available from publicly available listed company P/E ratios but it is not comparable given differences in scale and liquidity status. For eg P/E ratios are typically discounted by at least 20% to derive private market multiples but, arguably a premium would also be applied to P/E ratios to reflect the minority nature of public share subscriptions. Public data is therefore not reliable for a plethora of reasons, as such interrogating private market transactions, identifying similar commercial models and growth strategies against which direct comparisons can be made enable value to be defended based on real life examples.

It’s a huge advantage if you have a board and a CEO/MD in the business that is not you. The better your business can run without you, the more valuable your business is likely to be. Having a strong board and management team also gives you options as an exiting founder. You can exit completely or decide to stay on the board, for instance.

The first step of exit planning requires the business owner to identify the most appropriate route for sale and / or succession based on their personal objectives. Factors such as target shareholder net proceeds from sale to define valuation target and legacy factors including protection of brand identity and workforce security should be considered, from which a target transaction and buyer profile can be defined. Analysis of ideal buyers to identify acquisition criteria and value drivers enables the strategic growth plan to be set in line with meeting that criteria, achieving value and timescale targets. This form of exit planning enhances profit, aides strategic decision-making and increases the likelihood of successful sale outcome.

Understand What it Means to be "Ready:" Readiness isn't waking up one day and saying "I'm out." That's a bad mood, not readiness. An attractive & ready business is one that can thrive without its owners. New prospective owner(s) sees the potential rewards sufficiently outweighing the risks and investment. A ready owner is one that is prepared to thrive without their business, despite still loving it. Neither acheive "readiness" without purposeful preparation well in advance. Thus, it's crucial to run your business as if it was always ready for sale - optimized, attractive, and driving value so you could step away if you had to. (According to the Exit Planning Institue, 50% of owners are actually forced to exit before they planned!)

Ultimately the business is worth what someone is willing to pay for it. It can be difficult to use comps and multiples for very small businesses, say less than 10 employees.

The first thing to consider is Why? Why are you "exiting"? Bored? Broke? Overwhelmed? ... If you don't know what why, from way down in the heart of your bottom, you can't do a useful job of evaluating any of the technical / bean counter reasons above.

It pays to get expert advice about the value of your business early in the game - this way you can shape your business growth plan around what will maximise its value and build in the due diligence required as the company grows. No one wants to be ready to exit only to discover your perceived value is way off or you have several years of infrastructure still to develop. Build it right from day one. Understand what factors affect its value and weave these into the fabric of your business from the very beginning.

By focusing first on the personal objectives of founder and shareholder you can define the most appropriate buyer route rather than leaving the sale event uncertain by focusing only on business improvement and governance. My client developed a strategic partnership with an ideal buyer and through that was able to undertake his own diligence to understand how well the organisational culture met with his own values. When the strategic partner offered to acquire the business they set a fair valuation reflecting a deep understanding of the business, it’s capabilities and synergy potential. The founder defined his role in the wider group and reinvested a stake of his value such was his level of confidence in the union.

The most important part of the exit strategy, in my experience of selling a business is to plan for it. 1. We made sure we had various revenue streams in place 2. We had someone else running the company- structure already set up. 3. A good sales and operations/production team that was willing to stay 4. We made things very attractive for the buyer We looked at comparables for the valuation in the beginning, then as we got closer to selling, and finally looked again to see how we had increased the value and were able to justify it in the marketplace. Planning for your exit goes a long way to getting the outcome you desire. Then it's just finding that right person!