EXIT STRATEGIES: Identifying strategic value

Entrepreneurs with experience of multiple exits will acknowledge that strategic deals are not only possible but desirable, however, very few can set out a formal methodology for identifying which firms lend themselves to strategic sales.

Nor do they have the methodologies to help them identify which assets or capabilities inside those firms could be used to leverage a strategic sale. This problem is compounded by our training in business valuation where we see only profit generation within the existing business as a measure of worth.

To move to a strategic value based valuation, we have to completely break away from conventional valuation norms. Furthermore, we have to be willing to go on a discovery mission to look inside our business to discover what we have or do which can leverage such deals. The fact that our business may not be using the specific asset or capability to generate revenue, or may not even be aware of its existence or may be incorrectly applying it, simply makes the task harder.

Strategic value is found in an asset or competency within the acquired firm which a large corporation can leverage to solve a major problem or generate a significant revenue opportunity. To understand its potential, we need to look inside the buyer’s organisation to see how it might be exploited. But, if we don’t know who the buyer might be because we have yet to identify the strategic value we are at an impasse.

The strategic potential to a buyer is only relevant within the context of the buyer’s organisation and marketplace. If the vendor is working in a different marketplace or does not have the capability to exploit its underlying assets and capabilities, it may be harder to work out which asset or capability is the one to leverage into a strategic deal. We should never assume that the asset or capability being used by the vendor is the one which will generate the highest exit value. To be brutal, the vendor may simply not have the capability to exploit it, might be in the wrong marketplace or simply using it to solve different problems. Of course, there will also be those firms where the strategic value is obvious and they have already made significant progress to prepare the business for a strategic sale but lack resources or knowledge to see the process to a conclusion.

Whatever the situation, it is worth taking the time to review the underlying assets and capabilities of the business to ascertain whether the firm has strategic value potential. In 90% of the situations I examine, I have been able to find and enhance strategic value potential.
What we need to do is to go back to basics and build a model of a strategic asset or capability and then look inside our firm to see what we can find. We can do this with a set of metrics around what creates high strategic value. This may end up confirming what we already know, but it has the strong probability of uncovering additional potential.

Strategic assets in this context are those things which a business has which can eliminate threats or provide opportunities for the buyer.

Examples are:

• Intellectual property (patents, trademarks, brands)
• Customer base
• Distribution channel
• Technology or a technical process
• Documented or codified knowledge
• Agreements or contracts
• Physical property, equipment and inventory
• Locations
• Advisors, Directors, managers and employees
• Access to specific institutions and organisations
• Licenses, membership status, authorizations
• Social, government or business networks

Strategic competencies or capabilities are things which the firm does especially well which can be leveraged or can solve a problem for the acquirer. Competencies are based on the knowledge and skill of the people employed. Thus, while an asset might possibly be sold in isolation, competencies go with the people.

Examples of strategic competencies are:

• Marketing and promotion
• Product development
• Product design and manufacturability
• Sales and after sales support
• Procurement and quality control
• Networking
• Managing distributors
• Managing large complex projects

With any potential strategic asset or competency, the key is to think in terms of how this might be used by a potential buyer. Often firms don’t appreciate what they do well. Very often the most valuable skill is part of an overall process but not the most obvious. Firms often focus on their sales results or their bottom line without recognising what they do well to get there. Their most valuable skill might be product design rather than sales. In the hands of a strong marketing and sales company, such a skill might be used to leverage considerable revenue.

An asset or competence which the firm has may not necessarily be contributing to the existing business. The key question here is, not whether it is a key asset or competence within the business being sold, but whether it would be strategic to the buyer. Often a smaller business simply does not have the resources to exploit all the assets and knowledge it has. There may be patents registered but not used in the business. There may be offices, warehouses or factories underutilised or in excellent locations which could be better exploited in a different business.