After successfully growing and scaling your business, you should be preparing for an ever-important exit. An acquiring company wants to know the value of your enterprise but traditional valuation techniques only articulate part of the story. EBITDA (even minus CapEx) is often considered a flawed measure of profit and value, so how do you demonstrate long-term value to a prospective buyer?
The answer lies in the most valuable asset of all: the strength of the relationships your company has with its customers. A faster path to future cash flow, reducing your churn rate by only 5% increases profitability by anywhere from 25 to 125%.
Through over 20 years of serving the Private Equity community, LRC has found that your Loyal customers typically account for around 65% of your total enterprise value. Unfortunately, many prospective sellers view this as an intangible metric and have very little proof for the breadth of that strong segment.
This can be an issue in and of itself. We’ve worked with PE companies to help both sides assess the strength of that relationship, and we often see that the numbers validate what was already said and provide insight into future opportunity areas for continued expansion. The importance of concrete, reliable customer data is intangible into successfully demonstrating the value of an enterprise.
But why do 70 to 90 percent of mergers and acquisitions fall through? This can in part be explained by the inadequacy of diligence or resistance into the insights of customer relationships by the target company’s leadership. If you have grown the business, wouldn’t you be open to demonstrating the strength of relationships through primary research?
We take diligence one step further by providing a differentiated lens through a partner network of expert witnesses, panels, and market insights to validate strengths of relationship beyond what may have been cherry-picked by the target. In one past engagement, we were able to successfully identify a key risk prior to the transaction through the absence of a critical key account included in the customer list.
As you look to creating your exit plan, consider how to prove the value of your company. If you are selling strength of customer relationship, you need to be able to demonstrate it and provide concrete metrics into the attractiveness of the opportunity.