Thinking of selling your company in the near future? Great. It's an amazing time of your life. A lifetime of hard work culminating into a single event. Similar to a wedding, only this is the end of the journey not the beginning, you need to broach important subjects to ensure you are making the best possible decision. For marriage that might be discussing with your spouse the want for children, where you're going to live, and values of importance. In business there are many issues as well, but one that often gets overlooked, and can make or break the big day, is data asymmetry.
You've likely never heard of data asymmetry, and you're not alone. But if you don't familiarize yourself, you could be leaving 10s, or even 100s, of millions of dollars on the table.
The private equity or publicly traded companies behind large scale purchases are highly sophisticated. They have scores of Ivy League MBAs that spend their time analyzing data with the sole purpose of estimating your company's worth five years in the future, and how they can justify "discounting" your company's valuation in their offer.
When a seller cannot compete with this intense data analysis, that's when data asymmetry occurs. Put another way, data asymmetry is when you know your business is worth more than the offers suggest, but you have no way of demonstrating why they are wrong.
It's a frustrating place to be, and quite frankly, it occurs more often than not. Private equity is banking on the idea that you can't demonstrate the full value of your business, and in return, their offers reflect that assumption.
You may be asking yourself, "but won't my investment banker help me through this?" Not exactly. Even if you go the investment banking route, think of the investment banker as a real estate agent. By that, I mean two things:
- Expediency of the sale is more important than final price. This is due to the cost-loss analysis, i.e. how much money do they stand to make on pushing for the best price vs. how much they stand to lose if the deal falls through.
- They are handcuffed with the data you give them.
Of course, investment bankers will clean it up, format it, and present the best possible view. But they can only work with what you have given them. And in a lot of cases it is not enough.
When I first went through this process I was shocked at just how little value the investment banker brought to the data side of the transaction. Still, they were worth their fee, just for their relationships in the industry alone, and that they knew what questions to get answered. But if you think they are able to take your raw data and present the case for the highest valuation, think again.
It is critical that data analyses occur before you hire an investment banker, or start talks with private equity firms. Truly, the time to think about/implement is one to three years before the sale.
I saw this first hand. My journey into increasing a company's valuations, via technology and data advancements, began when I was brought on board to increase a company who had recently received mid 8-figure valuation. Some might say, great, I'll take it. But the owners of this company had their sights set on a low 9-figure. But without changes that wasn't going to happen.
Those changes were simple to outline (data asymmetry and an inability to grow into sophisticated markets), but took expertise to solve.
Private Equity knew this and appropriately discounted their offers.
The owners, however, were smart enough to recognize the problem, implement a solution, and then bring the business back to the sellers.
In three years we were able to fix their data/technology systems which enabled:
- a more efficient operation (EBITDA improvement)
- entering more sophisticated markets (top line growth); and
- output sophisticated data when buyers came knocking
In the end, they were able to get an offer 3x higher compared to their original offer. 3 TIMES!! They earned their low 9-figures and then some.
If the above problem sounds familiar to you, and you'd like to hear more, feel free to contact us. We love solving data/technology problems and helping businesses prove their value.
Also, we promise to keep your intentions confidential, and NEVER sell your information.