Preparation & The 3 Keys
It is always surprising to me how often smart people start a project or a new business without thinking through the steps to an exit. Yet that is the underlying reason for the vast majority of decisions to become an entrepreneur or an investor in technology, whether it is recognised at the time or not.
An exit, of course, is not necessarily the end of anything and, indeed, in the vast majority of cases is actually the beginning of a new phase of the business. But without thinking through how the exit is going to be achieved – at the beginning – you will almost inevitably make decisions that you will later regret.
Look at one sector. Because of the predictability of the "Software As A Service" model, such businesses have tended to attract higher valuations and are sought-after M&A candidates, In the USA in 2019, there were 1,248 SaaS M&A deals – a 27% growth on the prior year. As 2020 began, there was no reason to expect this to change. And then came COVID-19.
Source: Software Equity Group
While the pandemic rages and probably for some time after, unquestionably it will be more difficult to exit whether through trade sale or IPO. And in those businesses where an exit is possible, valuations are likely to come under pressure. However, in the words of Abraham Lincoln, this too shall pass, and smart shareholders will use this time to position their business, orienting activity towards those markets and 'polishing' those business characteristics that are being and will be sought after by buyers in a post COVID world.
The businesses that will weather the storm better are those that understand the importance of three things and CEOs should focus on creating this picture not just to make the business a more attractive target but also because it's fundamental for success:
- USP and Complexity. A unique selling proposition with a complex functionality that allows the company to build a differentiated competitive position with a defensible moat.
- PAIN. You can create a USP but if the function delivered does not resolve or reduce a 'critical pain point' in your customers' operations it is of little value.
- OPPORTUNITY. If you don't address an accessible market large enough to make the effort worthwhile, who cares?
Yes, businesses exist and even prosper addressing non-critical situations, improving more amorphous areas like quality improvement or customer perceptions, but it is much harder selling something like this. Why? Because it is harder to demonstrate the impact on the bottom line and if it is not a problem front and centre in the face of senior Company executives each day, it will not attract attention.
That is why at Wattco we always want to get to know the business and the market before deciding whether to go forward with a client company and why at least a refinement, if not a resetting of strategy is often the starting point in the renewal process, a foundation for creating growth and a key element in building value and obtaining an exit for shareholders.