AANZ September Expert Session with Josh Comrie | Unlocking the Exit Factor

This podcast link and below summary is of Josh Comrie’s Expert Session held online September 2024.

Podcast: Unlocking the Exit: A Comprehensive Guide to Navigating the Business End Game 

Imagine embarking on a journey through the intricate and ancient streets of London without a map. You might admire the beauty, but the likelihood of getting lost amidst the narrow, winding alleys and dead ends is significant. According to Josh Comrie, an expert from Flying Kiwi Angels, approaching the sale of your business without a clear exit plan is akin to this disorienting experience. 

In a recent insightful session, Comrie shared a comprehensive framework for understanding and strategically approaching the often murky waters of business exits. Drawing on his experiences, from a swift exit from his consulting business to witnessing numerous transactions in his portfolio as an angel investor, he illuminated the various pathways, potential pitfalls, and crucial considerations for founders and investors aiming for a successful outcome. 

The Four Corners of Exit: Mapping Your Potential Destinations 

At the heart of Comrie’s framework lies the “Exotometer,” a two-dimensional map plotting exit strategies against the axes of time and money. This isn’t a judgmental quadrant suggesting a linear path to success but rather an open landscape where the most appropriate destination depends on your unique circumstances and objectives. The four key territories within this landscape are: 

• Strategic Acquisition: This quadrant represents the pursuit of higher financial returns, often achieved through aligning your company’s assets with the strategic objectives of a larger organization. Such acquisitions capitalize on synergies like a strong brand, a dominant geographic presence, or the potential to facilitate an IPO for the acquirer. These deals typically command EBIT (Earnings Before Interest and Tax) multiples of 5x or higher, sometimes reaching even more exciting figures. However, the path to a strategic acquisition can be longer and more complex, requiring careful positioning and negotiation. 

• Acquihire: Predominantly seen in the tech world but increasingly influencing other sectors, an acquihire prioritizes the acquisition of talent over other business assets. In a talent-scarce environment, companies might pay a premium to bring on board highly skilled individuals or teams they believe can deliver a force multiplier effect within their own organization. Acquihires are quicker transactions and can be surprisingly lucrative for the selling entity, even if the business has minimal revenue or traditional assets. 

• Economic Exit: This route involves a rigorous and often lengthy due diligence process, where a team of analysts meticulously scrutinizes your company’s financial performance and fundamental metrics. Lasting anywhere from six to eighteen months, this process can feel like the acquirer is diligently “looking under the lamp” – focusing on quantifiable data and potentially overlooking intangible strategic value. Comrie uses a parable of a person searching for lost keys under a streetlamp, not because that’s where they were dropped, but because “that’s where the light is.” This highlights the risk of an economic exit where the acquirer’s focus on easily analyzed data might lead to a lower valuation than a more strategically positioned sale. 

• Succession: This quadrant emphasizes a swift and often less financially maximizing exit, prioritizing the smooth handover of the business to individuals who are already deeply familiar with its operations, culture, and values. This could involve a management buyout, a sale to business partners, or a familial transition. While potentially yielding a lower monetary return than a strategic sale, succession often ensures the continuation of the brand, customer relationships, and the founder’s vision. This can be the most appealing path for founders deeply attached to their creation and its ongoing impact. 

Decoding the Language of Value: The Bell Curve of Exit Multiples 

Understanding how businesses are valued during an exit is crucial. Comrie introduces the concept of a bell-shaped curve illustrating the distribution of exit prices based on EBIT multiples. The global average EBIT multiple at exit is 3.45x. This average, however, masks a wide range of outcomes: 

• The 3D Zone (1-2.5x EBIT): Representing approximately 20% of exits, this lower range is often triggered by distress events – death, divorce, or debt – forcing a rapid sale and significantly impacting valuation. In such scenarios, the situation’s urgency often outweighs the potential for maximizing price. 

• The Succession or Economic Exit Zone (2.5-4.4x EBIT): This central band encompasses the majority (around 60%) of business exits. These valuations typically reflect a more fundamental assessment of the company’s financial performance and future prospects, aligning with the principles of succession or the rigorous analysis of an economic exit. 

• The Strategic or Equihire Zone (4.4x+ EBIT): This upper echelon represents exits where strategic value or the acquisition of highly sought-after talent drives significantly higher multiples. In the tech industry, particularly for businesses with strong recurring revenue models, valuations can shift to a revenue multiple, though these have seen considerable fluctuation in recent years. 

The Players at the Table: Navigating the Transaction Landscape 

When the time comes to transact a sale, founders will encounter various types of advisors and intermediaries. Understanding their roles and fee structures is essential: 

• Business Brokers: Often operating at the quicker and cheaper end of the spectrum, business brokers function similarly to real estate agents, often holding real estate licenses. Their fees typically range from 4% to 8% of the sale price, primarily based on success, with generally no upfront retainer. They tend to handle sales in the half-a-million to $5-10 million range. 

• Accountancy Firms and Advisors: Your trusted financial advisors may also have Mergers and Acquisitions (M&A) teams capable of guiding you through an exit process. Their fee levels are similar or slightly higher than business brokers (4% to 10%), and they may request a monthly stipend or retainer. 

• Investment Banks: Operating at the more complex and higher-value end of the market, investment banks, including international players in New Zealand, typically command fees starting at around 5% and potentially reaching low double digits depending on the asset’s value and complexity. They will almost certainly require a monthly retainer, ranging from $10,000 to $20,000 or more. 

Charting Your Course: Planning for the Horizon 

Ultimately, navigating the landscape of business exits requires foresight, strategic planning, and a deep understanding of the various frameworks and factors. As Josh Comrie eloquently put it, starting a business without considering the potential exit is like venturing into an unfamiliar city without a map. By understanding the different types of exits, the dynamics of valuation, the key value levers, and the emotional journey of a founder, you can equip yourself with the knowledge and insights needed to chart a successful course towards your desired destination. Just as a map guides you through complex terrain, these frameworks can illuminate the path to unlocking the full potential of your business when the time for an exit arrives. 

Josh Comrie offers programs for scale-up companies and those preparing for exit. He has also written a digital book on the topic, available by contacting him via email ([email protected]) or LinkedIn.