Timing an Exit
Early exit planning is both necessary and invaluable. Take these steps to ensure you are putting yourself int he best position possible when it comes time to leave your business.
In my experience as lead advisor on over 100 company disposals, owners often delay planning the sale of their company because they are caught up in the day-to-day operational demands, or because they find it difficult to acknowledge that the time has come to think about letting go of their business. As a result, most companies are reactive when it comes to planning succession. This lack of pro-activity means, at best, a failure by the vendors to maximize value and, at worst, could see the company fail to sell at all.
In reality, an effective succession begins long before an actual exit. As a business owner, you need to give yourself time to manage the process in a calm and calculated manner, as this in all likelihood will be the single largest transaction you will ever be involved in. I tell every business owner I meet that in order to achieve a premium value for their hard work, they need to be committed and serious about an eventual exit strategy, and not just hope that serendipity will prevail. Whether you are thinking about selling your business in six months or five years time, making sure that these points are implemented fully will decide whether you maximize value or not:
1. Be able to demonstrate long-term relationships with customers and clients
Contracts with guaranteed revenue are desirable, but — if not practical in your industry — then you need to show that the clients have been happy with the products/services supplied for a prolonged period of time. This will give comfort to an incoming party that the relationship is solid and likely to continue for the foreseeable future, greatly increasing their perception of value.
2. Develop a solid management team which alleviates concerns that the business is dependent on the departing owners
If the shareholders still generate revenue, meet with clients or are the face of the company, then a purchaser will rightly be concerned about the negative impact of their exit post-sale. Therefore having a fully managed business (meaning day to day operational aspects, financials, client interaction and sales are not directly linked to the vendors) is crucial. This is an important step in the evolution of any company and, in relation to an exit, puts vendors in a much stronger negotiating position. By withdrawing from the front line and implementing a dependable management team, you increase not just value, but also the range of exit options, presenting the possibility of a debt- or equity-funded MBO or vendor-initiated MBO as a comparison to trade and, most importantly, also giving the real option of not needing to sell at all.
3. Review your strategy and operational plans, focusing on creating a more attractive asset for future sale
Often vendors are so busy with the day-to-day running of the company, increasing sales and winning new work, that they pay little attention to how the company’s model will be perceived by an outside party. Sometimes streamlining or consolidation can actually increase a company’s value both in relation to EBITDA margins and multiple, particularly if the restructured business is perceived as more of a niche player as opposed to being too diversified with no defined strategy. Going through the process of defining a clear 3-5 year business plan by stepping back and assessing how you would grow your business if you were purchasing/investing in the business today can be an invaluable exercise.
4. Get your finances in order
It goes without saying that any potential buyer will scrutinize the financial results over the past few years in order to understand the risks and rewards associated with this potential investment. If there are discrepancies or anomalies in your accounts, then a buyer will discover these in due diligence and the goodwill built up between both parties will quickly evaporate: either the buyer will renegotiate the price or, in the worst-case scenario, walk away altogether — potentially with devastating consequences if employees or clients are aware of your intentions. Equally important is understanding any difference between enterprise and equity valuations (being the calculation of net cash minus debt with a normalized working capital) and tax planning, as this can make a significant difference to the total consideration that shareholders walk away with.
5. Create and organize regular management reports to help buyers understand the key metrics and performance indicators used to manage the business
Demonstrating how the company is run from top to bottom, with proven efficient policies and procedures, will give comfort as to the caliber of your company as an acquisition when compared to peers, and justify the premium price that you are seeking.
6. Develop a message around quality of earnings and performance, and anticipate the questions and concerns of a buyer
Knowing what information a buyer is going to request during due diligence will allow you to prepare the documentation thoroughly and methodically in good time, removing a significant proportion of the stress involved in a sale. Selling a company is far more time- and resource-intensive than selling a property, and therefore any preparation which can be front-ended will pay dividends in the long term.
7. Start considering who the ideal buyer will be and their subjective value
Understanding a buyer’s view regarding valuation drivers can position your business to highlight these points and accentuate the positive aspects further. In correlation with point 3, understanding who would be best positioned to benefit from future growth (whether this be a defensive, a diversification or an international purchaser) will allow you to identify synergies, which would enhance both EBITDA and the respective multiple. Presenting this in a detailed and credible business plan to the right purchasers at the right time can make a significant difference to the value you achieve on exit.
8. Realistically understand the strengths and weaknesses of your business
The better understanding you have, the better prepared you are to talk to a potential buyer. This understanding can be used to shore up relevant weaknesses in the short- to medium-term prior to approaching the market, whilst also ensuring you fully highlight all of the key drivers and investment considerations at the right stage of negotiations.
In summary, regardless of a particular investment or economic climate, early and thorough planning will always optimize value. Allowing yourself the time at the earliest possible stage to invest in and develop a coherent strategy, alongside building your team, will increase value whether you ultimately decide to sell in the future or not.
Written by Adam Croft
Adam has been a lead advisor in the UK for M&A for over 10 years. His insights and advice come from a successful history of the due diligence involved in solid valuations to complete successful mergers and acquisitions.