Situation: A CEO is contemplating retiring in the next two years. The company is profitable but is primarily dependent upon a single large client for whom the CEO is the primary contact. Compared to national averages the company’s profitability is very favorable. The CEO questions whether his valuation of the company is reasonable. What is a favorable exit strategy?
Advice from the CEOs:
- The principal question from the group is whether the anticipated valuation on exit will yield the financial rewards that the CEO requires.
- The buyer will discount the value of the current business because the CEO is too important to the business, and because they will not assume that there is ongoing value to the current business beyond 2-3 years.
- The best option is to sell to a buyer who wants entry into the key client. They will have reasons beyond the value of the company to pay a premium for this access.
- For planning purposes put the value at 2-3 years of the cash that the CEO takes out of the company, discounted to present value plus some premium for the entry that the buyer seeks. Look at the dollars that this will yield and decide whether this sum is a satisfactory payment.
- Concerning the company’s relationship with the key client:
- The company’s reliance on the key client is two-fold – they are the key customer, and they drive the market which yields a premium price for the company’s products.
- Purchasers do not like to be dependent on a single supplier. Their purchasing department will always be looking for alternative sources.
- During the exit window it is critical to develop new customer relationships to sustain the company’s growth and reduce reliance on the single key customer.
- If the key client is #1, who is developing technologies that will compete with the key client?
- What are their markets?
- Where are they going?
- How are they trying to exploit the chinks in key client’s armor?
- What can the company do to secure a vendor relationship with the companies who may replace the key client?