Sell your Business at Maximum Value – using STEG
- July 5, 2018
- Jeremy de Constantin
- No comments
Many company owners don’t know when and how to sell their business to get the best possible sale price. To maximise the money you make when selling your company, you need to sell at the right time and have a strong end-game. Our STEG tool helps company owners achieve just that.
True quote? Not exactly. But it’s definitely representative of the reluctance we see in many business owners when it comes to business exit planning.
Retirement is expensive, so maximising the cash you get at exit time is a no-brainer. If only it were that simple though.
Company exit strategies are complex
Exiting a business is a complicated undertaking. You can’t compare it to selling the family home or other property. It is complex both emotionally and transactionally.
The emotion for an owner in letting gobest explains the kidney quote above. But that’s a topic for another day.
Back to the transactional complexity. A lot of value can be lost if you get it wrong. One misstep can cost you millions. Hiring the wrong ‘sell’ team is among the most common missteps we see.
Example: A business owner engaged the family solicitor to advise on a cross-border transaction. The solicitor had no experience in this whatsoever and ended up way out of his depth. This added significantly to costs and put the entire deal in jeopardy. The obvious advice here is to: make sure you have the right people doing the right things right!
A Strong End Game (STEG) maximises your company sale price
When it comes to maximising cash at exit, founder of global investment firm KKR & Co. Henry Kravis is someone worth listening to. He built his $5.5bn personal fortune by buying companies, fixing them up and selling them. It’s crucial to note that Kravis never buys a business without having a clear end game and a plan to get there.
As Kravis put it:
The plain reality is that you will exit your business one day. One way or another, everyone does eventually.
Wouldn’t it make sense to proactively set a target number and plan for the sale of an asset, one where the bulk of your personal wealth is likely tied up?
“I will get around to it one day” is not an exit plan.
Find the best time to sell your business
Let’s talk timing. As with most things, timing is everything. Like Kravis, you need to identify where on the curve you plan to exit and how you will maximise the cash you get.
And be sure to time it such that revenues and earnings are growing year-on-year. There are other fundamentals a buyer will look at as well, of course, but these are the two main ones: at least 2 years of good growth for both revenues and earnings.
As in the graph below, you need to find your STEG. Not someday, one day. Now.
The risk of a business exit without a STEG
A recent turnaround project springs to mind. One where we lost the STEG timing.
We’ll call the company in question Meanderthal Inc(a fictitious name), a family business just out of survival mode.
The project started with all 4 owners of the company wanting to grow the business in the lead-up to an exit.
Everything was tracking to plan. However, after about 6 months, things started to unravel. The 4 family owners were now at cross-purposes as to whether to sell or not sell the company.
The ground had shifted. Dad still wanted to sell. The eldest child now changed her mind. The other 2 siblings were not so sure. Stalemate! No end-game.
Rather than seeing an exit plan as good business practice, the kids saw it as a negative. Again, this was about not wanting to let go. A decision based on emotion. As a result, the turnaround project lost its impetus.
It could be argued that any business without a STEG and a plan to get there is like Meanderthal, meandering.
Few business owners have agreed, either singularly or collectively, on an end-game; nor on a plan to get there.
Get clarity on your end-game and it will serve as a goal for everyone within the business to work towards – board, leadership and operations.
STEG – a specially developed tool to achieve a Strong End Game
Over the past few months, with the experience of Meanderthal Inc. and other companies like it, our team has developed a tool to help business owners achieve better results when selling their business.
The tool we have created helps business owners to:
- firm up ontheir end-game, and
- specify how to get there.
We have named this tool STEG – short for STrong End Game.
STEG is a combination of McKinsey’s value driver tree concept and a best-practice valuation methodology used by global investment banks, including JP Morgan & Deutsche Bank. We are fortunate to have 2 individuals on our team who have worked in these firms.
Working from right to left in the above chart, STEG links a company’s earnings to its enterprise value. It can be refreshed monthly with end-of-month financials, providing an updated and defensible business (re)valuation, every single month.
STEG identifies the important operational drivers for a company to grow profitably. The owners will see first-hand the flow-on effect these operational drivers have on the company’s enterprise value.
When owners start appreciating how much additional cash STEG puts in their pockets at exit time, it will likely become a standard for private companies.
How the STEG tool works
Let’s assume the STEG tool was available for the Meanderthal project mentioned earlier.
A simple objective along the following lines would have worked to align the 4 owners:
This statement has all the elements (target + timeframe) that makes for a strong end-game.
It also serves to narrow down the options for the type of exit strategy. For instance, armed with the above objective, a family transfer (succession) would not be the ideal option.
This objective would have driven the business towards a trade sale and the strategies required to grow revenues and earnings over a 3-year period.
With STEG, all stakeholders will have a very clear visual of the company’s end-game.
Figuring out how to get there is where owners may need external assistance.
Invitation to try the STEG tool
The STEG tool is currently in demo mode. If you are interested in implementing this tool at early-adopter rates, we are keen to talk. Contact Jeremy de Constantin on 0402 242 670 or email@example.com