Avoiding Exit Pitfalls: A Proven Path to Boost Your Company's Valuation

What is GTM Exit Readiness?

In 2022, I received a call from a tech CEO who was frustrated by a low valuation and few offers. His exit timeline was 18 months. The company’s product was quite good, but he had unknowingly sabotaged his exit valuation by stuffing the sales pipeline with garbage. The net impact was discounting excessively to win deals. This bloated his sales team without regard to their incremental contributions. Like many founders faced with this situation, he wanted a “white knight” to come in and turn it around. We advised him to take a proven path that I will describe in greater detail in this blog. Without this course of action, the CEO very well could have found himself, 2 years later, with even bigger problems.

Many of our clients are late in the hold period and are also facing a challenging market. In some cases, this is further complicated by reaching the end of their fund’s life. We are seeing increased demand for “Go-to-Market Exit Readiness” projects. Exit Readiness is a structured process that can make the most of the short time to address value leakage. Like our tech CEO above, the biggest hurdle to achieving an attractive deal is obtaining acceptable value for their assets. Exit Readiness drives rapid improvement to help maximize deal value.

How Does Exit Readiness Work?

At Cortado Group, we perform many commercial due diligence (CDD) projects every year. While every deal thesis varies, (which alters our scope of work slightly) inevitably the deal partner or CEO we work with on the buy-side wants to know:

• Is the market for the product or service large enough to attract buyers at exit?
• Is the Go-to-Market (GTM) process scalable?
• Is the forecast provided in the CIM possible or a stretch?
• Do they have the right management team in place and are there "A" players on the GTM team? Who are they?
• If we invest $XX into the GTM, (People, Process, Technology, etc.) what can we expect from the investment?

If these are the questions on the Buy-side, you have the perfect blueprint for constructing a GTM Exit Readiness process for the Sell-side.

Where To Start To Prepare Your GTM For Exit.

1. Market Size

The market you are competing in is finite. However, understanding how a buyer is determining the size can offer insights to maximize the TAM/SAM/SOM. While there are many ways to get at the estimates, we take a thorough approach. We pull 2-3 years sales data, extract the companies, match to a NAICs code, bounce those codes off a list and extrapolate to get a realistic approximation. We are also trying to determine if the market is growing, stagnant, or in decline.

Here are some things to consider that can make sure you’re accounting for the fully available TAM/SAM/SOM:

1. Capture the variety of business types/industries that you sell to. Often, salespeople code their customers in the CRM with easy drop-down menus that have limited options. Expanding or multi-tagging a business description can broaden your total addressable market.
2. SAM/SOM estimates are developed by determining the average contract value (ACV) of one company and applying it to another similar looking prospect. If Home Depot spends $1M dollars with you, Lowes should be good for $800k if you sold to them. But what if the total potential for Home Depot was $10M? If they used you for their entire company, your SOM would increase exponentially. The key here is to determine share of wallet before you face your buyers. Through a well-done segmentation process, you can get at account potential and bake it into your CRM.
3. Aspirational Customer Groups: Sometimes small product changes can have a big impact on the size of your market estimates. A recent client expanded their product’s SAM significantly by altering the product to accommodate Google Cloud rather than just AWS platforms.

If you sell software targeted to the finance community, there may be a solid use case to extend the product for functions such as procurement or taxation. The key here is to understand (ahead of the sale) where, when and how much investment it would take to reach this new target audience (including developer time, cash, etc.). The more defined the path, the more likely it would be taken into consideration.

2. Documented Processes

One of the first things we do when evaluating a target company for our clients is to try to understand their process(es). When we see a documented path (ideally in a RACI type format) that covers the key areas, we recognize there is discipline of execution. This typically includes documented process from Lead Generation all the way through to Renewal/Expansion. When we see this, it’s a clear sign the company understands sales and marketing as a discipline.

This level of process sets a positive tone for the remaining 2-3 weeks of CDD engagement. Often, however, we find ambiguity everywhere. Our direct questions regarding the responsibilities of GTM team members are responded with “well, that depends.” Dig a little deeper and we are likely to find significant gaps. These include role-corrupted salespeople, misaligned compensation plans, leads without timely follow up on, and SDRs/BDRs used for pet projects.

This is an example of a defined Lead, Opportunity, and Account management process:

The alignment makes sense to the Acquirer, and they can imagine how deals can move sequentially through to generate future revenue.

3. Predictable Pipeline

Companies that are near exit are more valuable when they have many deals in process to generate future revenue. Typically referred to as “Coverage” or just “Pipeline”, we apply historical win rates to pipeline opportunities. That is then tested with the age of the deals in the pipeline. For example, if the average sales cycle is 6-months, the probability of closure on deals +1 year is nearly zero. Likewise, new deals with high probabilities assigned are a red-flag. The presence of these types of opportunities is an indicator of poor CRM hygiene. A company with 4x or 5x coverage against a stated forecasted goal is in good shape unless the quality of those deals is poor. There are many ways we determine if deal quality is poor:

• The Lead/Opportunity/Account Management processes are not mirrored in the CRM with clear stages and predetermined exit criteria by stage.
• The number of named and contact buyer personas in the CRM is low (on average, 3-5 are necessary for ACVs from $20k-$100k deals).
• A significant percentage of total prospects are not aligned with the company’s Ideal Customer Profile. If the prospect is too far outside of who they typically sell to, (or it is a strange use-case) those deals typically require discounting to win.
• Close dates that all seem to magically align with the end of a fiscal period (typically a quarter). If half the close dates are at the end of March, June, September and December, your sales team has low confidence knowing when the customer will actually buy.
• Actions that will need to be taken to the close of the deal are not specified or documented.
• The lack of activity reporting is a definite sign of poor pipeline quality. The best reps log every call and email knowing that these touchpoints add up. If the opportunities tied to your forecast suffer from any of the above, chances are there will be less confidence in the other opportunities in the CIM.

4. Talent

A big question in the eyes of prospective buyers is the level of talent in the GTM team. If the quality of talent is suspected to be poor, it can negatively impact the offer price. Here is a recent example from a CDD engagement that put fear into our clients:

Only 42% of the sales reps in this example achieved plan vs. the best practice modal distribution observed for attainment below 50% and above plan.

2023 Net New ARR Quota Attainment

The fact that this company was carrying so much “dead weight” meant that much of the team would need to be turned over for this company to see profitable growth. The talent question extends beyond sales. A marketing team that is incapable of generating reasonable numbers when asked to report on common KPIs can foreshadow a gap in talent. Marketing teams should be able to report on Marketing Return on Investment (MROI) and be excited to share their effectiveness. Likewise, Customer Success and Customer Marketing should be able to share reports on the impact to revenue retention and growth. An inability to share business reports to show impact likely means significant changes would need to be made to optimize those functions.

5. Future Investments

A big concern for any buyer is what it will take to fix a company with an immature GTM function. I met a wealthy investor – he told me that the biggest reason he walks away from otherwise great companies is that the Sales and Marketing functions are so poor that the effort to fix them is not worth it.

After a lengthy CDD engagement, one of our clients identified a long list of improvements needed to optimize their GTM functions. They hired Cortado to execute those changes. It was the largest project in our history, involving nearly half of the company. The important thing for our client was that the cost of the change had been baked into the deal thesis. Knowing the path and the resources needed to move a company from under-performance to benchmark levels is critical to know ahead of time.

Here is a partial list of things that we see often that are both expensive to fix and risky to overcome the deeper implications of the gap’s existence:

• No CRM system
• No Marketing Automation
• Lack of Training and Onboarding Materials (Sales Playbook)
• Little adherence to established pricing
• High salaries and commissions paired for average-to-poor results
• Nepotism or Romantic Entanglements... not kidding!
• No targeted Prospect List (Segmentation)
• Lack of documentation around the Sales Process
• Flawed GTM structure (Example: Field Sales organization used for a transactional product)

Exit Readiness accounts for situations like these and ensures potential buyers are not frightened away by the effort needed to overcome major obstacles.

Summary

Theoretically, the entire hold period should be about value creation, and that should extend to the GTM team. Often, it is not. A great product (or leader) can mask the shortcomings of a company until the day the product becomes more commoditized. The window is often small to ready a company’s GTM function for exit – CEOs and PE firms may not realize the upside opportunity associated with implementing Exit Readiness for their company.

Happy Ending

The Tech CEO, referred to in the first paragraph, exited extremely well. It took only 11 of the 18 months he had thought it was going to take to make the turn. He reported to me that the company exited for double the multiple he was offered before the project. The CRO later revealed that it was closer to 3x. His story makes the case to look at Exit Readiness as an option to address value leakage.

Don’t hesitate to reach out to schedule a conversation. I’m open to a discussion to talk through how Exit Readiness might look for your unique scenario.