How Scalable Operations Affect Your Exit Valuations
Exit events – acquisitions in particular – are often seen as an opportunity for high-growth businesses to achieve a greater scale. Whether that is increased production, geographical expansion or simply vertical integration largely depends on the type of deal and on the scalability of the company’s operations, and that of its acquirer if the target is going to be integrated.
Scalability is defined as a business’s ability to rapidly increase output by orders of magnitude to cope with increased demand in a cost-efficient manner. Crucially, this means that the cost of producing 1000 units or providing a service to 1000 clients is less than 10x higher than the cost of 100 units/clients, increasing margins together with revenue.
Why scalable operations matter during an exit
The importance of scalable operations varies depending on what potential buyers are planning to do with your company once they acquire it.
For example, if you are looking to merge with one of your competitors it’s important to make sure that your operations can keep up with theirs and match their growth trajectory without impacting your bottom line.
Perhaps, the types of buyers who will be most interested in the scalability of your operations are market leaders within your macro-industry who are looking to acquire your company to help boost its growth by—for example—marketing your products globally thanks to their existing channels.
In this scenario, ensuring that your operations are scalable means showing the buyer that they can use their existing infrastructure to multiply your company’s earnings without facing internal friction and maintaining high-profit margins.
How to prove your scalability
Because of the reasons above, when approaching an M&A deal potential buyers will want to see proof of your scalable operations.
It’s not always easy to provide hard evidence that your business can be scaled, here are a few ways you can do it:
- Present an in-depth analysis of your business’s operations, showing your prospective buyers and investors that you know them like the back of your hand. This will provide insight into the stress points that may prevent your company from scaling;
- Documented, standard operating procedures and automated processes;
- Make sure that your financial records show a consistent history of scaling operations while maintaining or increasing gross profit and/or EBITDA margins. This will be a strong basis to project future growth and will show that scalability has been at the core of your business model;
- Show your investments in technology, automation, machinery, and other systems or processes that are directly related to scalability. This will show potential buyers how much effort went into making sure that your process is able to grow flexibly without impacting the bottom line;
- When walking potential buyers through your business model, make sure they understand your deep knowledge of the unit economics of your company. Showing them that you are fully comfortable talking about marginal costs and revenues in relation to volume will provide confidence in your approach towards scalability.
Proving the scalability of your business’s operations requires deep knowledge of your business, rigorous study of your financial model and years spent analysing, tweaking and growing your business’s operations. This is time-consuming, yet key.
Therefore, we advise Founders to plan ahead and continuously review their business plan to ensure that they are adapting their strategy and investing in training, automation and technology, constantly working towards higher demand and production levels.