Your financials tell your real story.
The challenge
The founder had built something special. Through almost two decades of intense work, trial, error and perseverance they had carved out a unique position in a small, but highly profitable sub-segment of a huge market. And now they were ready to cash in.
There were just two problems. One, their price expectation didn’t match the market. We might get lucky with a couple strategics getting into a bidding war, but comps didn’t support the expectation. I could see the disappointment on the founders’s face. It’s hard to have invested so much of yourself overcoming countless hurdles for so long to have cold water poured on your daydream price. And to have the likely number be maybe a third of what you had in mind hurt.
Two, the financials weren’t helping us tell the story. I understood why. The founder had consistently delivered moderate growth with profits from the beginning. But the books weren’t in the right format for the business. With my buyer’s hat on I could see several questions and potential red flags that presenting these financials would raise. And there was no model. ‘Set annual goal, hit annual goal’ had been the founder’s modus operandi. The results were there in testament to the products and the founder’s skills. But as a buyer, it was hard to know why the business was successful. And maybe worse, was success largely dependent on the founder? Could a buyer come in and achieve the same success or do better?
The Solution
We reset expectations, timing and plan for the exit. Instead of planning to launch a process by the end of the year, we decided on a process that would play out over two years unless a buyer came in earlier. Our process had 3 parts.
- We would get the financials and model in the right format to tell the amazing story of this business.
- We would hone the founders’ pitch so we could have everything from a couple sentence email blurb to an elevator pitch to a longer conversational pitch. This pitch would be backed up by the financials and data. And then we were going to use this pitch to really tell the story of the company to potential buyers. Many in the sub-segment and adjacent in the larger market knew the founder and the company, but almost certainly didn’t know how amazing this company was. We were going to re-introduce ourselves to strategics and introduce ourselves to PE with this sharpened and consistent pitch.
- We would vet and build our transaction team of investment banker and attorney so that we were ready to either handle inbound or transition to a process when the team felt the time was right.
Learnings
There are two important learnings for founders from this.
- Decide on your wealth creation strategy. Your goal is wealth creation. And if you put all your wealth creation eggs in the exit basket and an exit doesn’t happen or isn’t as big as you hoped, you will miss out on the second way to create wealth from your business which is cash distributions. So, ground your exit valuation in market comps early in your journey. This doesn’t involve a lengthy investigation or hiring an investment banker. But you should have a good feel for which companies get outsized valuations, which get OK valuations and which can’t sell at any price. If you decide an exit may not be the right wealth creation path or will be a nice to have, but you need to rely on cash distributions, you will make different choices regarding pricing, margins and use of cash.
- Your financials need to tell your story. Yes, your books and model are tools to help you better run the business. You may weave a great tale, but your financials are there fact-checking you all along. Imagine every time you tell your story, your financials are there besides you in the form of Dr. Spock, unable to not tell the truth. Which would you rather have - ‘That’s not exactly what happened. That growth came at the expense of large hits to profits. Those products have negative Contribution Profit. We are acquiring more customers, but they buy lower priced items on discount, have increased returns and buy less frequently.’ Or, ‘Yes. Everything that has been said is supportable by the financials. See for yourself.’ As a founder, you need to get your story aligned to what the financials say and your financials should be in good enough shape to support you, not detract from you.