Strategic value sale: A boost you can bank on

It is often the unrecognised assets or capabilities of a small busuiness, which a larger corporation can exploit, that best gives greater value come sale time. By TOM McKASKILL.

By Tom McKaskill

Just after I started my last business in the USA in 1995, a company called Red Pepper was purchased by Peoplesoft for 25 times its revenue. Since then I have seen numerous examples of such deals in the internet space and in biotechnology.

Every time I mention these deals to friends I get the same response – “luck and timing”. Also that these things happen only in the internet and biotech sectors.

So if told you that I assisted a small sport travel business to get 40 times EBIT, you would start to question this view of the world. The fact is that any business that has the potential to enable a large corporation to exploit a large scale revenue opportunity can gain a significant premium on sale.

However, very few people understand how to set up such a deal. We have spent most of our lives believing that our businesses are worth some meager multiple of EBIT. In fact, if you talk to most professional advisers, investment bankers and business brokers, they will focus their analysis of your business on what profit you are achieving now and what your likely revenue and profit growth will be in the near-term future.

I will freely admit that such analysis makes good sense when you are dealing with conventional businesses, where the only value they contribute is the generation of revenue and profits through their own resources. But what of the business that can enable a large corporation to exploit a national or global opportunity?

Most private businesses are heavily constrained through lack of finance, limited capacity, poor access to large distribution channels, lack of skills and so on. The inhibitors to growth often prevent them from exploiting their underlying potential.

In the hands of a better resourced and more capable buyer, the underlying potential can be more quickly achieved. Even so, most companies can only generate reasonable increments of growth due to the competitive nature of the market they are in.

But what if you had a world class product or service that had a clear competitive advantage? Could you find a large corporation that could exploit this advantage on a national or global scale to achieve 50 or 100 times your revenue in a relatively short period? This is the basis of a strategic value sale.

The fuel for such an opportunity lies in the assets and capabilities that a large corporation can exploit, usually within an existing large customer base. The process of setting up such a deal starts with an examination of your own assets and capabilities. What do you have or do that could provide the basis for resolving a serious threat or enabling a large scale revenue opportunity for a large corporation?

Often these are things that now provide your competitive advantage, but they may also be things that you are not exploiting in your own business but which some other business could.

Next, you need to determine whether you can provide the buyer with some reasonable period within which they can exploit the asset or capability without it being copied, eroded or negated by an aggressive competitor. Something that can be easily acquired, assembled, developed or negated is of little interest to a large corporation. Next you need to identify which large corporations can exploit the opportunity.

Now you have the basis for setting up a deal where you potentially could achieve a sale price of many times EBIT or revenue.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.