Exit Equation

The Exit Equation helps you calculate and visualise your potential exit value

Gain clarity on your potential exit value and make informed decisions with our easy-to-use Exit Equation tool that helps you understand your value creation drivers and to visualise your baseline and first-class exit scenarios.

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The Exit Equation allows you to:

  • Get clarity of your potential exit value and understand whether to exit now, soon, or later.

  • Understand the revenue or profits required to achieve your target exit value, and the impact of your multiple.

  • Know how much additional value you could get at exit if you achieved a first-class exit, compared to your baseline.

We can help personalise the Exit Equation for you with Exit Essentials

  • We work with you to build your personalised exit equation

  • We’ll enhance it with up-to-date market data (including a detailed a company comparables report)

  • We’ll walk you through our findings, providing insights into the market landscape and similar business valuations

  • We’ll review your exit assessment to identify potential issues and opportunities, and help prioritise actions to maximise your business's value for an exit

  • You can use this to understand key drivers for your target exit value, the ideal time to start the exit process, and what is required to achieve your target exit value

About the Exit Equation

The Exit Equation is a framework to estimate the potential exit value of a company. It can be a helpful frame for companies that are working towards a first-class exit or are considering their funding and liquidity options, or growth initiatives.

It is expressed as:

Headline price = [unit] x [multiple]

Where:

  • Units: the economic unit being measured (e.g. revenue, EBITDA, or in a strategic sale, it might be number of customers or users etc.)

  • Multiple: the valuation premium applied to the Units (e.g. the multiplier used to capture the current and future value)

In essence, it translates various abstract qualities of a business into a concrete number, allowing for a quantified assessment of the company's potential exit value.

Example

An Ecommerce company with $5 million in EBITDA and a multiple of 8 (based on its market position and growth rate, considering repeat purchases and other factors) would have a potential exit value of: Headline price = $5 million x 8 = $40 million

Notes

  • It is important to have a margin of safety in the input assumptions.

  • The choice of unit is often aligned with the company's growth rate, stage of maturity and the core drivers of value within the business.

  • The multiple reflects a variety of qualitative and quantitative elements, including the company's position in its market category, competitive strength, growth rate, operational and financial metrics, together with the perceived attractiveness of the company, both now and over time.

  • Sometimes an exit is based on a completely different metric (e.g. number of customers/users or depth of product/technical breakthrough/IP). However, this is more common for companies that don’t have meaningful revenue and have deep value to a strategic buyer in another form.

  • There are often adjustments to the headline price (e.g. net cash/net debt) and holdbacks (warranty, earn out etc.), with various multipliers or discount factors that come into play, affecting the final value.

  • Other elements are just table stakes (e.g. IP ownership, quality due diligence materials etc.) to be able to complete a successful exit.

Benefits and Limitations

The Exit Equation works well for established or growing companies that have a reasonable level of scale and/or are working towards an exit or liquidity. It can help:

  • Simplify complex valuation factors

  • Provides a tangible measure of a company’s potential worth

  • Facilitates strategic planning and decision-making by identifying key valuation drivers

There are some limitations to the framework, including the need for accurate input data and potential variation required due to unique business circumstances in some situations.

By understanding the components and drivers of the exit equation and considering your company’s unique aspects, founders of established and growing ecommerce companies can use the Exit Equation, together with Contributed Capital Return and Rule of 40, to help make better decisions on value creation when working towards a first-class exit.