How your business exit strategy affects what buyers will pay
“I’ll probably just do what my friend/former colleague/sister-in-law did when they sold their business.”
I hear this a lot from entrepreneurs when we start talking about their exit strategy. My first question back is almost always, “But what if you could get a better deal than they did?”
Simply getting the job done shouldn’t be the goal. There’s a pervasive assumption that a fair price and favorable terms are all that you need to make an M&A transaction successful.
But you owe it to yourself to understand what separates good and great exit outcomes, and what you could do to make your company more attractive to buyers.
So how can you actually increase your chances of earning a truly remarkable premium like those in the top 20% of Class VI deals? The data we’ve compiled makes a clear case that systematic preparation using what we call the Value Creation Formula can contribute to how a final deal turns out. Following a pattern of measurable behaviors over time is what will drive increases in how your company is valued.
What makes for a top-tier deal?
Our Elevate Your Valuation report highlights a startling statistic: the top 20% of deals achieved a median premium of 248% above fair market value (as estimated by the BizEquity valuation tool). By contrast, the bottom 80% of deals earned a median premium of 55% over fair market value.
The difference is massive, and that spread is what we want to analyze. What strategy is most likely to get to the upper echelons when you sell your business?
What the highest valued companies do differently
Among the top 20% of transactions, nearly half undertook our program of strategic, intentional preparation that aims to increase business value before a sale.
Note that even unprepared companies beat their valuations from the BizEquity tool 88% of the time—working with an experienced M&A advisor lifts baseline outcomes across the board. But it’s especially notable that companies that intentionally prepared earned median premiums of 109% over their fair market value estimates compared to 71% premiums for businesses that didn’t go through guided prep.
That’s a lot of extra money traveling over the wires on closing day, often in the millions of dollars!
The Value Creation Formula can frame an exit strategy
The Elevate Your Valuation report shows that deep, intentional prep improves scores on our Value Creation Formula, which in turn leads to more successful business exits.
The Formula framework consists of four components: a credible growth story, a well-functioning team, operational excellence, and strong financials. Companies scoring 8–10 in any single Value Creation Formula category achieved a median premium of at least 98% above BizEquity. Clearly, strength in even one dimension helps move the needle.
But improving along all four axes made an even more profound difference:
- The median total Value Creation Formula score was 28 out of 40 for top-tier deals versus 23.5 for the rest—a seemingly small gap with an outsized impact on outcomes.
- Companies scoring 35+ on the full Formula achieved a median premium of 168% over their fair market value, and even companies with scores of 30+ earned a median premium of 114%.
The data strongly suggests that the Value Creation Formula can unlock real advantages in the M&A market. Here are some of the most common Formula-based fixes we recommend to entrepreneurs:
- Filling gaps in the C-suite to reduce reliance on the company owner
- Widening the customer base to mitigate concentration risk if a contract gets canceled
- Instituting financial controls to lower the chances of fraud and waste
Even if your business has good Formula scores today, spending time to improve the four elements may help yield great returns down the line. After all, 30 is a good score, but 35 is better—and it could be the difference between 114% and 168% over fair market value!
Set yourself up for success
The gap between good and great business exits is quantifiable and actionable—if you’re not as strong in any area, there are steps you can take to improve.
Strategic preparation doesn’t guarantee a top-tier outcome, but it can dramatically improve your odds. If you’re 1–3 years out from a transaction, it’s time to get to work on preparing for your deal, which means assessing your Value Creation Formula scores, investing in your weakest areas, and making sure you’re going to market with the strongest fundamentals possible.
If you need an advisor you can trust to guide you through this important work, we’re here to help. Reach out today.
AUTHORED BY:
Zack Gibson | Managing Director | Class VI Securities, LLC
Zack joined Class VI in 2008 and currently holds the position of Managing Director. Zack’s primary responsibilities include leading Class VI ‘s investment banking division in executing and closing transactions involving the sale or financing of mid-market clients across a broad range of industries. He oversees pre-market preparation, financial modeling, creation of company marketing materials, client management and transaction negotiation.