Unlocking your Company’s Value
This article is the thirtieth in the “Corporate Finance/M&A Corner” series. To mark this occasion, I am pleased to announce the publication of a book entitled “Unlocking your Company’s Value: The Keys to a Successful Business Exit” (available at www.lesnemethy.com). The book has drawn considerably upon material used in these articles.
In the same way as planning a mountain climbing expedition, a company owner should plan not only for reaching the summit, but also for descent (which can be at least as treacherous). In the corporate world, we should strategize not only on how to make our companies bigger and better but, from the beginning, also for eventual exit and succession.
The value that corporate owners create is never in the abstract or according to their own tastes; it must be created with a view to what investors are likely to value. A homeowner might think that he or she is improving the value of a house by adding a swimming pool, but it is actually a fact that they will almost never recover the incremental value of that swimming pool when selling the house. Similarly, every decision made by shareholders during the course of building a company will either add to or detract from the future saleability of a company—such decisions are seldom neutral. What I am driving at is that building a company and selling a company are not two separate acts but part of a single continuum. From the beginning, value will be optimized if one builds a company with at least one eye on how investors are likely to perceive its value.
It is unfortunate that the word “exit” has something of a negative connotation in Central Europe. Often it is associated with failure, with giving up. Yet it is interesting how in some cultures, exit is associated with success—particularly the Latin cultures. (In Spanish, “exito” means success, or in Italian “riuscire” (to succeed) comes from the word “uscire” (exit)).
Getting into a war (think of Afghanistan or Iraq) is easy—it is the exit that is the trick, and the event which will ultimately decide whether the intervention was successful or not. Similarly, it is difficult to judge the ownership of a company as a success or failure until after it has been sold. One explanation for the success of private equity investors is that they generally have an exit strategy even before they invest in a particular company.
Of course, buying shares is easy; it’s selling at a profit (the exit) that is the challenge. As Henry Kravis, the American financier, once said: “Don’t congratulate us when we buy a company. Any fool can buy a company. Congratulate us when we sell it and when we’ve done something with it and created real value.” The book covers many ways to create value, ranging from corporate governance to risk management.
“Unlocking your Company’s Value” deals with two major subjects: Business Exit Planning (a subject that has been popular in North America for one or two decades, but is only now starting to become known in Central Europe), and how to manage a transaction (e.g. raising capital, finding a strategic partner, selling a minority or majority interest). The subjects are dealt with not from the perspective of a corporate finance professional, but so as to outline what business owners should know about these two subjects in order to unlock the theoretical and illiquid value of his or her business. I have done my best to distil the thousands of conversations I’ve had with business owners over the past 25 years into one easy-to-understand book and I hope you will find it useful.