Know the Exit Channel!!

Most business valuations calculate the value of a private company using fair market value, and this value is rarely suitable for making investment and financing decisions. Fair market value, although compliance-oriented and theory-based, fails to consider a business owner’s objectives or reasons for a transaction. The type of transaction will determine the owner’s exit channel, and the exit channel will identify the buyer or investor. Therefore, private company value is relative to the exit channel and the buyer or investor type, and may encompass numerous correct values at the same point in time! Each exit channel has a different value, and these values may include:

  • Synergistic value – value to strategic buyer
  • Financial value – value to investor (minority, management)
  • Collateral value – value to bank from repossession
  • Incremental business value – value added from an investment
  • Fair market value – value to IRS or Courts
  • Others – Insurable, Public, Fair Value
With cash flows and risk expectations (ROI) differing in each exit channel and with each buyer, business owners should consider working closely with an M&A Advisor to identify buyers with the highest cash flows and lowest risk expectations.