Situation: A private company creates a liquidity event every 3-5 years: selling pieces of the company, product-based spin-offs, or potentially the whole company. Most frequently, engineering efforts spin off opportunities for new product-based companies. How do you measure company or business valuation with the objective of maximizing shareholder value and liquidity?
Advice from the CEOs:
- Look at a model to create productized service offerings that are replicable and predictable. This can create a stream of spin-offs to generate ongoing liquidity events. Jack Stack’s company, Springfield Remanufacturing has done this very effectively over the past two decades. He describes his methods in The Great Game of Business.
- Regarding selling the whole company, the most important measure is strong company performance in recent quarters. Focus on internal metrics as well as revenue and profitability performance. Put together a solid 3 to 4 quarters of profitability with an upward trend to increase appeal to potential acquirers. The current market requires both a longer history of profitable performance and more data points of performance than was required in the previous decades.
- To compliment internal measures develop a relationship with a business broker who can help you assess the value of either product or company spin-offs. A broker can determine the current value of the opportunity as well as a timeline and critical actions to enhance opportunity value.
- Consider a roll-up of your company and one or more of your business partners.
- Look for similar or compatible financial structures and complimentary capabilities.
- A roll-up can broaden your range of products and services. As a bigger entity you have more options, and can enhance your ability either to generate spin-offs or become a more interesting acquisition candidate.
- The downside is the time that it takes to complete the roll-up if you feel you have a short window of opportunity.