How To Position Your Company For A Liquidity Event

Article written by: Joseph Safina | Published by: Forbes Finance Council

Any exit strategy must be well planned and executed to yield maximum benefit. In the American corporate world, many investors don’t plan the liquidity processes of their companies, the end result being undervaluation. Whether your company is going through a sale, initial public offering, private equity or leveraged recapitalization, a liquidity event is a critical process every business should take seriously.

Having worked with lots of business owners and investors in the past, I’ve found that liquidity events tend to be problematic. While a strategic acquisition is an ultimate goal, several themes emerge that hinder and drag the process for years. With the liquidity risk being a key factor, investors ought to strategize on how to position their companies for a liquidity event. Here are some tips on how to prepare for one.

Determine Your Company’s Value

Determining both the intrinsic and relative value of your business is imperative to an accurate liquidation. Figures on shares of assets and current ratio act as the main bargaining chip during this process. Other parameters such as price-to-sales, price-to-growth and price-to-earnings ratios may also help reach the accurate value of your company.

The most professional ways to execute company valuation include:

• Asset-based valuation (liquidation and book value).

• Scorecard valuation method.

• Market and transaction comparables.

• Discounted cash flow.

• Berkus Method.

• First Chicago Method/venture capital method.

Valuation goes beyond the dollar value of your company. However, with the right strategies, it’s easier to arrive at accurate figures.

Identify Potential Buyers

Finding a buyer is the ultimate process and can take from a few days to years. It can be challenging if your business is recording dismal performances or operating in an uncompetitive space. Your company setting highly determines whether buyers will come by or not.

Finding the right buyer for your company requires not only a strategic approach, but also a network of contacts. Your buyer might be a competitor, a capital group, a hedge fund or even an ecosystem partner. Hedge firms and private equity firms that invest in your space might prove more reliable. You need to master the art of communication to keep buyers in your domain. I suggest identifying investors in your space and making it a point to reach out and keep updating them as your business progresses. Keeping investors engaged is critical.

Get A Comprehensive Financial Audit

If you want to liquidate your company quickly, putting your financial records straight is crucial. It helps avoid some unseen pitfalls that might come along on the way. Your financial department might be reliable, but you still need to hire a third-party, nonpartisan auditor to put records straight.

I’ve found that when company owners rely solely on internal audits during liquidation, the results often turn out to be catastrophic. Internal appraisal functions might not be entirely credible due to business interests, coverups and lack of independence. If you want maximum surety, consider third-party audits.

Build Your Team

Liquidation can quickly become hectic and challenging. It can go beyond your scope of control and realm of expertise. Getting a team of advisors can help alleviate the pressure that comes with strategizing and planning various undertakings. Your equity and long-term investment are at stake, and you need big players to give you a hand.

If you do not prepare for a liquidity event from day one, the burdensome nature of the process could interfere with your company’s earnings when shifting focus from your core business to selling your company.

Your team of professionals should include liquidation experts, financial managers and legal counsel. An all-inclusive team working in a collaborative setting can impact the outcome of the liquidation event significantly. Financial managers can help in IPO preparation, debt restructuring and complex business valuation. A legal counsel takes you through all the legal aspects of the business and can also act as a curator.

Get Your Timing Right

Timing is a critical factor many business owners do not put into consideration. Not paying attention to business cycles might largely affect liquidity and final equity. Optimizing a liquidity event involves proper timing, and this is when the business is on form. The best time for liquidating is when the business is on a boom and experiencing minimal risks. Good timing is a value driver that you should not take lightly. In my experience, a large percentage of companies that do not strategize on timing end up losing huge equity.

The Bottom Line

Implementing these initiatives successfully will not only reduce liquidity risks, but also boost profitability. Adhering to these tips will ultimately increase your company’s marketability, attractiveness and overall value.


Joseph Safina is CEO of Safina Capital, specializing in large-scale funding,
M&A, business development and marketing.