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Your exit strategy: Assess timing and craft your story

December 28, 2018 Article 3 min read
Ted Morgan

Maximizing value means much more than demonstrating an attractive EBITDA. Here’s what you’ll need to show to command the best price.

A woman looking at a chart and assessing her private equity exit plan.

Is now the best time to sell?

There’s no hard and fast rule dictating you have to sell within a particular time frame — say the standard five years. In fact, in our experience, many private equity owners hold onto assets longer than this to focus on value creation. If the timing of your sale is suboptimal, you’ll almost certainly be leaving money on the table.

Part of knowing when to sell is recognizing the right buyer. And for the buyer to get maximum value, you’ll need to demonstrate a number of things to command the best price:

1. Up-to-date or (better yet) leading-edge technology

Whether the asset is an engineering services company, a widget manufacturer, or a healthcare provider, buyers will be scrutinizing technology far more closely than they did even five years ago. Primarily, they’ll want to see how the company has used technology to enhance value. Examples range from implementing a CRM system to improving sales effectiveness to creating an e-commerce platform that broadens and deepens the customer base.

2. Add-on integration

By the time you’re preparing an asset for sale, it’s likely you’ve made one or more additional investments to increase the asset’s value. Buyers will look at how well these add-ons have been integrated to create a cohesive well-run whole, as opposed to a loose amalgamation of businesses. Examples include streamlined business processes across the combined enterprise, consistent internal communications, staff sharing, and synergies in functions such as purchasing, human resources, and finance.

3. Product and service positioning

You’ll only realize maximum value for your asset if it commands a unique position in the marketplace or you can provide evidence that investments made will set the company on a path to growth. Achieving this position should therefore be an important aspect of timing your sale. Buyers will also look closely at the company’s product pipeline, placing far more value on offerings currently in production than those still in development. By waiting to begin the sales process until a product or service launches and has achieved peak buzz in the marketplace, you may be able to significantly increase asset valuation.

Your story: How have you created value?

Window dressing isn’t going to cut it. Even if an asset’s EBITDA shows hockey-stick improvement over the holding period, potential buyers will scrutinize how you delivered those numbers. If it’s all due to cost-cutting — especially cost-cutting that could impede future growth — valuations are likely to be negatively impacted.

Even if an asset’s EBITDA shows hockey-stick improvement over the holding period, potential buyers will scrutinize how you delivered those numbers.

On the other hand, there might be a perfectly good explanation for aggressive cost-cutting — and this is where the credibility of your story is paramount. That story needs to communicate not only how you created value during the holding period but also long-term growth potential through new products and markets beyond the hold. Whether it’s reducing staff in a particular area or investing aggressively in R&D, your story needs to connect the dots and show how your actions have been consistent with a clearly defined strategic intent. Ultimately, your story will set the stage for future value creation for the buyer.

Going beyond financial performance, significant value creation can result from the growth potential of the business through new customer contracts, new products in development or near launch, and technologies used both in the product portfolio and to improve plant floor operations.

Their story: What’s the path to future growth?

Good historical performance is only part of the story. The number-one thing a buyer needs before moving forward with a deal is a path to growth. And you can do a lot to set up the sign posts.

The number-one thing a buyer needs before moving forward with a deal is a path to growth.

The key is to communicate market potential for the asset over the next three to five years. Are new products poised to capture significant market share, or are they unique enough to command high margins for the foreseeable future? Have you built a set of capabilities that have enabled the company to open up new markets? Do you have a specialized technology that might attract a deep-pocketed buyer once the new owner is ready to sell?

Present a convincing argument that there’s untapped value residing in the asset you’re selling — better yet, show you’ve laid some of the groundwork for realizing that value — and you’re well on the way to a successful exit.

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