Building a more valuable company before an exit increases economic returns and the likelihood of getting a deal closed on terms more favorable to the business owner. Understanding how sophisticated buyers value a company is a key step to building a more valuable company. There are different styles of private companies that fall along a continuum ranging from “Lifestyle” companies on one end to “Equity Growth” companies on the other end. One style is not “better” than the other; it is a matter of preferences reflecting the business owner’s personal and corporate goals, appetite for risk, and expectations of financial returns. However, Equity Growth companies are inherently more economically valuable than pure Lifestyle companies. Consequently, building Equity Growth companies require business owners to make some difficult choices and weigh various trade-offs that impact a company’s valuation.
Building a more valuable company is not for the faint of heart. To drive a company forward requires having a clear understanding of your corporate and personal goals that you carefully think through and commit to. Stephen Covey crafted the phrase “Begin with the end in mind” as a way to help people visualize where they are heading and then constructing a plan to get there. Applying this concept to building a more valuable company is straightforward: take note of what sophisticated buyers value in a company and build it into your company’s DNA.
There are several aspects to consider when building a more valuable company:
- Where you fall along the Lifestyle – Equity Growth continuum.
- The potential and desire to “take the company to the next level” or to exit at your current size.
- Understanding how private companies are valued by sophisticated buyers.
- How building “value that matters” creates core equity value in your company so it is worth more than the book value of its assets. (This implies profitability and investing for the future.)
To set the stage, let’s start by taking a look at a dozen recent trends affecting valuations and exits.