Exit Strategy

How To Work Out The Best Exit Strategy Before You Get Too Far Down The Road…

Most business owners and entrepreneurs dream of building a business to then sell it for a high end multiple. Many envision selling for hundreds of thousands or even millions with a buyer chomping at the bit to take it off their hands.

The problem comes when most business owners or management teams are so busy with the day to day running of the business that they fail to value the business correctly.

Unfortunately, even when those in charge have an exit strategy mapped out, they often miscalculate the price of the business and derail the sale process from the start.

So the first big lesson when selling a business is to get a realistic valuation on the business.

Now ‘right’ or ‘realistic’ doesn’t mean low, but one of the biggest factors of a valuation revolves around the type of sale you’re intending.

There are two types of business sale – strategic or pure investment. Now it’s more than possible for both to come into play depending on the buyer but it’s important that the seller is aware of both.

roiAn investment buyer is interested and focused on things like the earnings multiple, ROI and is driven to minimize risk. The earnings multiple is often decided by taking the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and multiplying it by the expected growth over time. In a service business that will be measured over 3-5 years, for example.

A strategic buyer on the other hand is thinking about different things and therefore the price of the business is put together with some investment metrics but also with the strategic value depending on the context of the sale.


With a strategic purchase, the buyer may be able to add customers instantly growing the potential sales revenue with their compleme
ntary products and services or the purchase may remove a competitor from the market.  In  this case the value add customersof the business is calculated differently and is much more biased towards perceived profits rather than actual earnings.

The cash upon sale may be lower than a pure investment sale but there may well be an ‘earn out’ agreed with a share of the profits over an agreed period.

For example, if you were selling a technology business and the buyer only wanted to take a competitor out of the market and really just wanted to buy the client base, it would be feasible (depending on the estimated lifetime value of a client) to structure a deal where you could agree something in the region of 20-30 times EBITDA, if the buyer isn’t picking up the business overhead. In this example nearly all of the business revenue from the client accounts would go straight to the bottom line allowing the buyer to make back this type of  investment within a year or two.
When you’ve worked out if the sale is going to be strategic or investment based, you want to start clearing the way so you can make the sale process as smooth as possible.

In an upcoming post we’ll look at 6 things you can do to make this happen…