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Maximize Your Exit Valuation Multiple

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Maximize Your Exit Valuation Multiple

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Mark Hess shares an article he co-authored with Stenning Schueppert on how to increase a firm’s exit valuation multiple. 

Successful private equity (“PE”) firms generally execute well in the three commonly accepted phases of portfolio company value creation: 1) Buy right, 2) Grow EBITDA, and 3) Sell that EBITDA at highest multiple possible. In our experience, many PE firms are missing critical low-hanging fruit by not maximizing their exit multiples because they do not have a detailed understanding of all of the different “levers” they can pull – which ones and how hard – to achieve the greatest amount of value creation. These levers can influence EBITDA growth (both top-line sales and bottom-line efficiencies) and/or their applicable exit valuation multiple. For this discussion, we’ll focus on the latter.

Many PE firms concentrate on a handful of core industries – they will get better deal flow, diligence the opportunities more effectively, have a network of applicable personnel for operations, and generally help their companies more meaningfully. The firms believe the selected industries are those with attractive macro characteristics and where the principals have experience, knowledge, or other related insight. The overall investment criteria and deal- specific investment theses are driven by the principals’ perspective. The less acknowledged challenge, however, is that when a firm exits an investment, the various buyers’ perspectives on value will drive the market-bearing exit multiple: not the principals’ perspectives. When the firm first invested in the business, the critical valuation “levers” may have been A, B & C. When the firm (or the market) decides it is time to sell the business, buyers may see the critical valuation “levers” as B, D & E.

 

Key points include:

  • Clarity on the Valuation Levers
  • Inflection Points for Valuation Levers
  • A More Valuable Go-Forward Strategy

 

Read the full article, Maximize Your Exit Valuation Multiple, on MavenAssociates.com.