Optimizing Asset Value at Exit: "It's Magic as Much as Math"

? Written by Joe Jackman

"It’s magic as much as math".

Years ago, I recall a rather spirited discussion with a CEO I was working with about asset valuation at exit. We and our teams were doing some very cool things that were beginning to stick and change the curve of the miserably under-performing company he was leading, which was suffering from flat revenue, stagnant EBITDA, and comp sales growing at a third of expectations. The progress spurred a series of future-focused conversations on how best to one day package up the asset for either an IPO or sale to a strategic buyer. The CEO — previously CFO at several companies before bumping up to top job at this one — was resolute in his views on how companies were valued: "It’s math, Joe. Demonstrate a sustainable trajectory of profitable growth with some believable upside and you’ll transact within the going range of EBITDA multiples in your category. The stronger the numbers compared to category benchmarks the higher the multiple." Further, "Whatever we do together, the only thing that matters at exit is the math. That’s the storyline, full stop." I say the conversation was 'spirited' as I couldn’t fully buy what he was selling. To me his formula was logical and defensible yet too narrow. Yes, a future transaction will be a multiple of EBITDA to determine the value of the business, but what influences determine the ultimate multiple? I countered that companies are valued on other dimensions that can substantially impact a buyer’s willingness to increase the multiplier, what I would refer to as the MAGIC.

Math + magic = more money.

Allow me to explain, first by noting that I’ve been involved in over 100 business transformations of one kind or another — from straightforward strategy sharpening and growth acceleration through evolutionary and even revolutionary transformations. When you factor in the full turnarounds, I’ve seen nearly every possible starting point and outcome. I mention this as, over time, I began to see patterns in how acquirers (or the public markets) valued any given asset, dimensions that seemed to matter as much as the math:

How well evolved and integrated were all the pieces and parts?

How well did the storyline earn full credit for what made the company different and special?

And lastly, how did it make people feel?

I’ll explain each of these in the next section, but the main point I intend to impress upon you is this: if monetization is on your mind, and your plan is to sell your company on the numbers alone — company performance, category tailwinds, population growth, etc. — you’ll be leaving money on the table.

Making magic.

Magic of the kind I’m speaking of — the kind that yields a higher multiple at exit — can be achieved by diligently doing three things leading up to it: Use design to change perception, Amplify your differences, and Go for the gut.

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Use design to change perception.

Design is not only a way of adding value by making aspects of your business work and look better — it’s a highly effective unifier. When each element of a company’s value proposition and customer experience has been designed to fit together into a unified whole, the whole is naturally perceived as more powerful and compelling. lululemon is a good example here, having designed a brand, product, and experience that intertwine to unequivocally scream top quality, strong community, and care for people and planet across every customer touchpoint. It shows in the numbers, with the company boasting a 2024 EV/EBITDA ratio almost twice the consumer discretionary average. A thoughtfully designed business — from what it sells to how it shows up — causes those evaluating it to conclude the company has its act together; that it is 100% ready to roll into greater and greater growth; that it is NOT a 'fixer upper'. This design effect can be readily seen in home buying. The more elements seen as unfinished, or outliers to the rest of the house, the greater the perception of 'work to be done' and the lower the price. Remember that perception is always reality, so always design to the overall perception you intend — the one that’s worth far more than the sum of its parts.

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Amplify your differences.

If you look carefully at the word 'differentiation' —?a term that gets bandied about a lot even though, statistically speaking, most businesses play exactly the same game as their rivals — you’ll find within it the word 'different'. That’s the point, to be DIFFERENT from other businesses that do similar things. When businesses are truly different, not interchangeable with one another, they are valued differently. By creating and amplifying what makes your company different and special you move from financial valuation alone into the realm of strategic valuation, where real competitive advantage earns a higher multiple at exit. To illustrate, look at Chipotle — who operates in the crowded fast-casual market where burrito chains are a dime a dozen. Despite this, Chipotle has become THE burrito chain — by amplifying their use of the freshest, highest-quality healthy ingredients, their small menu, and their no-franchise model to stand out from the pack. Again, this shows up in their numbers: in 2024, their EV/EBITDA ratio was nearly four times the industry average. To achieve this outcome, you not only need to truly be different (with the underlying point being it pays to have an actual strategy) it must be in plain sight and celebrated in the way you tell and sell your story. As it is for beauty, so it is for value: it’s in the eye of the beholder.???????

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Go for the gut.

While every business evaluator is unique in some way, they all have one thing in common: they are human. As such, no matter how logical and disciplined they may be in basing their assessments on 'just the facts' they can’t help but have feelings about what they see and hear as humans always do. M&A decisions are made in the Boardroom and by Executive teams — experienced and disciplined individuals but individuals, nonetheless. The more your story resonates with them emotionally — eliciting some kind of instinctive 'gut' reaction — the more desire creeps in beside logic. We humans want what we want, and we will go through walls to get it, even when it means upping the bid. One example comes from 2015, when Heineken took a majority stake in craft brewer Lagunitas for what analysts estimated to be a 4-5x multiple in a market where 2-3x was the norm (one of the biggest ever deals in craft brewing at the time). Heineken must have paid this premium for the story which Lagunitas was able to tell, with Heineken’s then-CEO crediting their founder for having built "one of the great U.S. craft beer brands." You can create this kind of desire in a number of genuine ways: by demonstrating how your company breaks new ground with exciting innovation; or how it shows up to the market in culturally relevant and even provocative ways; or through brand meaning, where the company’s purpose resonates on a deeper, more human level. Even the design approach I described earlier can yield emotional dividends. Whichever way makes sense for your asset — with the obvious caveat being it must be true — the more you mix feelings in with facts, the more those feelings factor into the equation.

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The path forward.

Math plus magic is the way I now look at every business with opportunity to optimize and monetize. After a brutally slow deal period, deals are finally on the upswing and expected to continue their upward trend into 2025. Now is the right time to be asking: How can leadership unlock 'transformative growth' to bolster the numbers and strengthen the base case for a higher exit multiple? Further, what magic can be made to bump that multiple up to its maximum: through design that changes perception, by amplifying differences, and going for the gut. Without coming across as too glib, even the CEO from the start of this article eventually came around to acknowledging that a little magic mixed with math makes for the most lucrative exit.