Approximately 90% of companies are not ready for primetime. These companies will attract little interest and are highly likely to see buyers walk away long before due diligence. The main reason lies in the owner’s flawed approach to building value. Bigger is not necessarily better. Owners are not looking at their business through the lens of a buyer to assess the company’s readiness to enter a sales process, and exit the other end with a great deal for shareholders
Symptoms of this behavior include;
- Failing to continually invest in new products may save you money and produce attractive cash flows for a period, but it kills long term value.
- And doing every key element of your business yourself may be satisfying and fun (if a little stressful) but it’s not creating a business with long term sustainability.
- A lack of investment in talent performing key roles will stifle innovation, suppress moral, encourage mediocracy, and fail to challenge the owner’s strategy.
- Ultimately we are creating unsustainable businesses.
In the beginning, during the first five years of a company’s life the owner(s) are just trying to make money. They are trying not to run out of cash. As the company hopefully grows, then sales and profits start to climb and a certain comfort sets in. However we believe at The Portfolio Partnership (TPP) that this is exactly the time when owners should start to worship a new Report Card.
The earlier that leadership looks through the lens of a buyer, the quicker that company starts to scale in a more sustainable, safe and profitable way.
Look, assessing your business through the lens of an acquirer will potentially uncover uncomfortable answers. That’s normal. But those answers, those insights will put you on a path of safety not risk. It’s not about an Exit Strategy, it’s about an Options Strategy. By scaling your business and measuring increased shareholder value using our Saleability Test you will prioritize the right stuff. You will give yourself the option of selling your business or attracting funding. It’s easy to work on the wrong stuff. The stuff that’s comfortable.
So returning to the theme of this blog post – the odds of exiting. Using the 2022 M&A Statistics & US Census Data, we posed a question: How many private companies sold out for $10 million or more?
We’ve looked deep into the 2022 US M&A deals from Statista to answer that question.
- Total number of US firms running a payroll is 6.1 million. And 98.% (6 million) employ less than 100 people. That’s the landscape.
- During 2022, 18,072 US companies were acquired. That breaks down to 5 public, 314 Private Equity sponsored deals and 17,753 private companies.
- However of that 17,753 only 4,297 disclosed values or 13,775 gave no value! And we find that out of the 4,297 around 3000 exited for $10 million or more.
- So even if we assume approximately half of the undisclosed pile (say 7000) sold for $10 million or more – and that’s being generous, we could say that around 10,000 companies exited for $10 million or more.
Conclusion: That’s 0.17% of a total number of 6 million companies. I’m comparing apples with oranges? Of course, but you get my central argument. A retirement type exit is a rarity!
How many companies attempted to sell and failed? We think at least 90,000 who were just not ready. And how many met an Investment Bank and were turned away and didn’t even get off the starting blocks?
Our hypothesis: Not every owner should or want to sell their baby whether it’s first or sixth generation. However there is a huge inefficiency of effort with entrepreneurs scrabbling around focused on the wrong stuff, building risky businesses that are not saleable and not sustainable.
Solution
To improve these odds and to transform how entrepreneurs look at their business, we need a different approach. This approach requires owners to address much earlier in a company’s lifecycle, the value drivers that acquirers (or investors) cherish.
This approach measures not just the P&L, Balance Sheet and Cash Flows but uses other stress tests. Tests that measure:
Dependency:
- On the owner
- On legacy products
- On a few key customers
Competition:
- Market share
- Competitive value propositions
- Relative margins
Predictability
- Accuracy of forecasting
- Quality of earnings
- Quality of order books
Growth
- Innovation engine
- Velocity of Revenue & EBITDA
- Consistency of results
Storytelling & Sales
- Strategic positioning that’s understood by prospects and employes
- Solutions that resonate with customers
- Differentiates you from peers
Culture
- As Jason Fried (Basecamp) said recently it’s the weather not a forecast. It is what it is.
- So if the culture sucks you change it over time with actions to inspire and motivate
- You give folk a purpose other than just a paycheck
Control
- IP is filed
- Accounts are audited
- Risk has mitigation plans
- KPIs measure the right stuff and people are accountable for fixing them
This approach builds safer businesses that can last for decades or be sold if so desired. We call it Scaling through Operational Excellence. The secret is to build meaningful playbooks that work in your industry and that can be managed by the talent you’ve mentored over the years. This is what successful Public Companies and PE Houses do year in year out to build shareholder value. They focus on drivers that make their businesses stronger, safer and more profitable.
This is the work of TPP and we are relatively agnostic on sectors but we tend to get involved at the $3m EBITDA and upwards level.
