Start With the End to Get to the Beginning

New Zealand businesses – particularly high growth businesses – routinely sell for less than they are really worth.  

There are a number of reasons for this: for instance the use of historical financial metrics (like revenue multiples) often doesn’t help New Zealand businesses because of our naturally smaller market and revenues.  You may have built a great engine, but if you allow a buyer to focus on traditional EBITDA or Revenue metrics, you will be undervalued. Dr Tom McKaskill (aka Dr Exit) has published a number of books about how to refocus buyers on the true value of your business.

In addition to using the wrong financial measures, I see two more key reasons for loss of sale value:

• First, New Zealanders generally don’t build businesses that are ‘sale ready’ or ‘investor ready’.  This means that they have not built the kinds of assets and artifacts along the way that investors want to buy.  Things like a locked down and well oiled supply chain, well protected Intellectual Property and a strong ‘investable’ team of executives.
• The second reason (and linked to the first) is that Kiwi business people rarely start out with a strategy to build a company to sell.  This is a pity because the best strategies are built with a specific goal in mind, and a sale is a great goal to set. Even if you decide not to sell when you get there, designing a sale-ready business is the discipline that creates a great business.

Let’s tackle these in order.

Building a ‘sale-ready’ business is harder than it sounds, because it requires discipline over the life of the business.  Start by creating a secure folder for DD (Due Diligence). Put a checklist into that folder (contact me and I’ll help you design the checklist, or look at Dr Exit).  That list will have a large number of items on it that are specific to your business, and that you will want to have ready and waiting when you are looking for investors.

For example, the list may include a top level heading like ‘Supply Chain’, and under that ‘Contracts’.  This will help you focus on getting your supply chain contracts sorted out, and stored in this folder. A good DD list might also go down another level and specify certain clauses in those contracts (ie what is your foreign exchange exposure, your minimum quantity commitments etc).

The list will help you discover what you are missing (like contracts with every supplier, or Patent and Trademark filings).  You can then map out the necessary actions to build a complete DD package.  

Right now you will be reading this and saying ‘contracts, documents…whatever!’.  I promise you, when you go to sell shares, the lack of these things will severely impact your valuation.  Firstly because not having them means that the buyer has to go do it, but mostly just because this is a great excuse for the investor to screw down the price.

In many ways, making sure that your DD package is in good shape is a defensive move.  You are protecting yourself from the investor who will discount your price just because they can.

However, the right strategy for exit is an offensive play (as in Offence/Defence!), and by starting with the exit in mind, you will build a better company from day 1.

Define the desired (or possible) exits, and then build your strategy around that.

For example (warning, gross generalisations follow):

• If you decide that your objective is to IPO on the ASX 3 years from now, you need to focus on the Australian market, because investors are likely to buy something that they know and can see locally.  
• If on the other hand, your exit is likely to a financial buyer, then your focus will be on building a business with the right revenue/profit profile but with little debt – as financial buyers like to use leverage to goose revenue and profits after they buy a company.
• A strategic buyer (ie a competitor or other player in the market) may be more interested in how your technology fits with theirs, and how your customer growth can augment their own customer list.  Profit and debt may be less important than revenue growth, so putting all your surplus cash into marketing and sales could make sense.

These things might seem self-evident, but I see companies making strategic decisions by accident, without considering their actual targets.  Why are you really going to enter the Australian market – is it part of a strategy to list there, or is it simply because a potential customer reached out over the interwebs?  

In every case the variables will be different.  The key is to know what your specific desired outcomes are, and build a company that has those specific attributes from the start.  Strategies change, so you are not locked in to one approach, but you will have made a good start.

One feature of a strong strategy to exit almost always involves building a great ‘investable’ team.  New Zealand businesses are usually reliant on one or two founder leaders, with little senior support.  In most exits, the founder leaders will leave the company, so a strong leadership bench adds value in the company for the purchaser.  

Too many New Zealand business founders believe that they can, and should, do everything from product to sales.  In fact the best and most successful founders I have seen have elevated themselves to board and ‘visionary’ and ‘ambassador’ type roles, and built a great team to run the business for them.