Why Growth Still Matters When You're Preparing to Exit

There is a natural instinct that kicks in when a business owner starts thinking seriously about exit: to consolidate.

To protect what you have built. To reduce unnecessary risk. To keep those costs down and under control. To make sure that the numbers remain healthy, and in doing so avoid taking on commitments that somebody else might not want.

That perhaps means holding off on that next new hire, that investment into a bespoke CRM, or that expansion into another territory you had in your five-year plan but which now feels like an unnecessary roll of the dice.

That instinct is entirely understandable. But there is a danger in taking consolidation too far.

Because while you may be thinking about protecting the business you have today, a prospective buyer will probably be thinking about the business they could own tomorrow – and if the direction of travel has lost its exciting edge, that can change the way they look at the opportunity.

 

Buyers look forward as well as backwards.

Any serious buyer is clearly going to spend time examining historical performance.

They will, quite naturally, want to understand turnover, profitability, recurring revenue, costs, liabilities, retention… all those fundamentals that tell them what sort of business they are looking at.

But they are not buying the past performance – they are buying what they believe the business can produce in the future.

Which is precisely what makes the direction of travel important.

A business that has increased revenue, strengthened its recurring income, improved profitability or grown its market share over the previous few years presents a fairly easy story to understand.

The business is moving forward.

Contrast that with a business whose curve has started to flatten out into a line.

Standing still? Or treading water?

That doesn't necessarily make it a bad business. It might be profitable, well run and perfectly stable.

But it might also lead to questions the seller hasn’t considered, in their quest for the safe and sound.

Why has growth stopped? Has the business reached the natural limit of its market? Has the owner begun stepping back? Has investment reduced? Is the management team capable of taking it further?

Perhaps even: does the seller know something we don’t?

None of those questions necessarily lead to a damaging answer. But once a buyer has started asking them, the proposition itself might just become slightly less straightforward.

 

Growth gives a buyer something to believe in

None of the above means that a business needs to be growing at a spectacular rate immediately before sale.

In fact, chasing dramatic growth purely because you intend to exit might even be counterproductive.

What matters more often than people might realise, though, is evidence of momentum.

That might be an increase in turnover. It could be stronger EBITDA, improved margins or a higher proportion of recurring income.

In an estate or letting agency business, of course, it might be growth in the managed portfolio, an improving market share, expansion into an adjacent area or the successful addition of another service.

It could also be less obvious than all that.

Perhaps the business is achieving more revenue per employee. Perhaps a stronger management structure has allowed the owner to become less operationally involved. Maybe the company has developed a more consistent lead-generation process or improved retention.

All of those things help demonstrate that the business is still developing.

The key distinction is between maintaining something that works and showing it still has room to grow.

A buyer wants to see an opportunity.

Ideally, they should look at the business and immediately begin seeing where they can take it next.

 

Not all growth creates value

There is an obvious caveat.

Growth for the sake of growth is not the objective.

Turnover can be bought if fees are heavily reduced to win instructions, for example. Marketing expenditure can be increased dramatically – but how is the ROI?

Bigger businesses, perhaps, but not necessarily better ones.

What a buyer wants to see is the quality of that growth.

If turnover has increased by 20% but margins have collapsed, that will require explanation.

If an agency has rapidly increased its managed portfolio by taking on poor-quality landlords at unsustainable fees, the headline number might initially look attractive. Still, the underlying value will get called into question.

The same principle applies to acquisition.

Buying another company simply because it adds turnover is not necessarily a growth strategy.

What matters is whether growth makes the combined business stronger.

Does it improve recurring revenue? Does it strengthen market position? Does it add good people? Does it create efficiencies? Does it improve profitability? Does it open up a market that would otherwise have taken years to establish organically?

Above all, are the earnings you are creating sustainable and transferable to a future owner?

Those are much more important questions than simply asking how much bigger the business has become.

 

What happens when organic growth slows?

For many good businesses, there comes a point where organic growth gets harder.

That does not necessarily mean anything has gone wrong.

You may already have great local market share, but can’t find a way to convincingly penetrate that neighbouring territory. Recruiting another fee earner might take time. Opening in a new location carries cost and uncertainty. Building a substantial managed portfolio property by property is possible, but it doesn't happen overnight.

This is where acquisition can become particularly interesting.

The right acquisition, strategically made, can compress years of organic growth into a much shorter period.

Rather than slowly building a presence in the neighbouring town, you may be able to acquire a business which already has the people, customers and reputation there.

Rather than adding management properties one landlord at a time, acquiring an existing portfolio may bring several hundred properties under management in one transaction.

The same principle can apply to people, expertise, complementary services and infrastructure.

But the starting point should never simply be: we want to buy something.

It should be asking the right question:

What does buying this business allow us to become?

That keeps the focus on strategy rather than the transaction itself.

 

Acquisition can be part of an exit strategy.

There is sometimes an assumption that acquisition is something you do during the aggressive growth phase of a business, whereas exiting – or, more to the point, getting ready to exit – is about tidying things up in readiness.

But truthfully, an acquisition could form an integral part of preparing the business for sale.

The journey might be: acquire, integrate, improve, grow, exit.

A business owner planning to sell may decide that acquiring a complementary company today gives them the scale, recurring income or geographic coverage needed to create a considerably more attractive proposition by the time they come to market.

Timing matters, however.

An acquired business needs time to bed in, which means bolting an acquisition onto a business immediately before putting it up for sale could create additional uncertainty for a buyer.

Done early enough and done properly, however, an acquisition can alter the trajectory of the business considerably.

 

Growth should not depend entirely on the owner.

There is another element which becomes particularly important as exit approaches.

Growth alone is not enough if it depends entirely on the person leaving.

This is a common issue in founder-led businesses.

The owner may be the biggest fee earner, the rainmaker, the person who wins every important instruction and the individual who holds the key relationships with customers and suppliers.

That’s all well and good while they’re there in the hot seat, but for a buyer, it can create significant risk.

The more a business can demonstrate that growth comes from its people, processes, systems and reputation, rather than any one individual – owner or otherwise – the more transferable that growth becomes.

Building a management team, improving processes, developing consistent lead generation and giving other people genuine responsibility are therefore not simply operational improvements.

They become part and parcel of a more valuable asset.

Ideally, the business should continue moving forward whether the current owner is sitting behind the desk or not.

 

Don't put the brakes on too early.

Preparing a business for exit absolutely should involve reducing avoidable risk.

That does, of course, mean understanding the numbers, fixing weaknesses, improving systems and ensuring that what is being presented to the market can withstand proper scrutiny.

But preparing for exit isn’t a reason to put the business into preservation mode.

There is a significant difference between selling because a business has run out of road and selling because you have decided this is the right point for somebody else to take it further.

That difference will show up in the numbers, but it can also show up in the story.

A buyer should be able to see what you have built, understand why it works and, importantly, see the opportunity that remains for it in the future.

For some owners, continuing to grow organically will provide that momentum.

For others, it really could be about the right acquisition to accelerate it.

But in both cases, the principle is the same: handing something on that is still moving forward.

Book a confidential conversation with Joel and the Realise team – before you take your foot off the gas.