A Surefire Tactic to Improve Your Valuation at Exit

Mind the Gap!

When I saw this phrase in the London Tube I was perplexed. What gap?  Where?  Why was this warning plastered all over the walls and floor of the subway stations?

Then as the train approached the platform and a thundering herd of commuters jockeyed for position on the trains, I soon realized the warnings purpose:  the Gap to be Minded was between the curve of the platform and the straight line of the train.

In that small and seemingly insignificant space tremendous danger lurked. A missed step is all it would take to lose a foot, or worse.  And then it hit me.  The Gap is where all danger resides.  And so often we overlook the Gap, especially when it seems inconsequential.

So I have made ‘Mind the Gap’ my mantra because it is where overlooked risk resides. And as a business owner, it is the number one place you should focus when evaluating your exit strategy.

You are not alone if your Gap looks like:

• Running out of time to ‘fix’ the company before needing to transition.
• Realizing the business is overly dependent on your relationships and reputation with customers, vendors, professional advisors and bankers.
• Acceptable, yet somewhat status quo operating performance, and little motivation among your key managers to change.

As you examine the Gap, does it seem to grow deeper, and darker? 

What you are looking at is a Value Gap:  characteristics of your business that will increase risk and marginalize performance.  And this means not getting top dollar from an acquirer.  External buyers will compare your business to others, especially as the market gets crowded with other sellers hoping to exit. If a buyer sees impediments to growth, marginal performance or an over reliance on your management of the company, they discount your value, or worse take a pass.  

How to Bridge the Gap?

There are dozens of good solutions but only one that will absolutely yield a positive ROI: invest in your management team.

A Kaufmann Foundation whitepaper on valuation indicates professional investors weigh the strength of the management team as 3X more valuable than the quality of the sales channel; and 2X more valuable than the competitive market position.  This is because management teams make things happen.

Getting your key managers on top of their game prior to exit will increase that valuation multiple. But it will also improve the business basics like top and bottom line performance. Buyers see this and conclude the prospects are good for future performance, reducing their risk and increasing your reward!

Three Mission Critical Action Steps to Improving Management Team Value

Focus your attention on these pivotal activities and you will realize a substantial ROI:

1. Provide your key managers with the skills and motivation to function as a high performing team.
2. Transfer your ‘institutional equity’ to your successor, or to your management team members.
3. Keep key managers engaged with compelling incentive packages which support your exit goals.

Acquirers, both strategic and financial look for exceptional teams and will pay up for them.  As an owner, you want such a team too. 

So start Minding the Gap by investing in your team today. You can begin by making a few lists:

• What are your team’s strengths and weaknesses?
• What do only you know that is critical to company success?
• What incentives do your managers have to stay with your company?

In our next three blogs we will share details about how you can implement each Mission Critical Action Step to improve management team value.  Check back often to make certain you don’t miss these surefire tactics to achieving your valuation goals.