An exit or sales process is perhaps the most important transaction a business owner will ever engage in. Its therefore surprising how common it is that some owners participate in these transactions without first rigorously preparing and planning ahead of the transaction.
We believe preparation and planning are key and is perhaps an obvious point to mention but not always an obvious point to understand how to apply. Entities that prepare properly tend to run smooth exit processes and realise optimal value for the owners.
Preparation starts with a critical review of your business. This critical review is an assessment of the company’s stage within its lifecycle and ultimately its attractiveness to a potential buyer. We refer to this as the Independent Business Review (IBR), the IBR is the starting point to enable the building blocks to be put in place to affect a successful exit, in whatever form that takes. It is important to recognise that not all businesses are ready to be sold despite what the owner may think.
The IBR provides a roadmap of activities, including change management, that need to be actioned through to the planned exit date.
This includes:
• Scale building, including new market entry potentially;
• Company structuring to facilitate a smooth transaction;
• Governance, controls and compliance considerations;
• Developing balance sheet strength and building value;
• Addressing transaction stumbling blocks; and
• Transaction preparedness.
By being disciplined and structured in the approach to preparing for an exit, most owner- managed businesses unquestionably optimise the process both in terms of the speed of execution but also in terms of the value realised.
Being honest about your strengths and weaknesses is also critical to a successful transaction. You can guarantee that a potential buyer will find any weaknesses, through their diligence process, and so being honest about potential weaknesses ahead of the transaction enables you to address them before they become a potential problem. We find this is generally difficult for some owner managers where the blinkers are firmly on but an important hurdle to jump nonetheless.
The IBR approach will identify those weaknesses and how they can be addressed. Experience tells us that entities that do not take a critical look and address weaknesses before the sale process commences, ultimately lose value in the negotiation process as buyers look to exploit them as part of their diligence and price negotiation process.
As with many things in life, timing is everything and this is no more so true in a business sales process. There are many things that will be outside of your control such as general market sentiment and the impact of external events such as the recent Covid-19 pandemic. It is therefore important to be on top of what is within your control and factor these matters into your timeline.
Certainty of cash flow and of profitability are always key considerations when attracting a buyer, so if for example you are looking to move into new markets, it’s important to demonstrate a track record in those markets before you can expect to recognise value from it in a sales process. Similarly, if you are in the process of transitioning your business model, its important you are far enough into the process of doing that before you consider a sale.
If you are growing your business through acquisition its important the acquisition is embedded, that synergies identified are being realised and that you have affected the right control structure to enable asset and cash flow security.
It is highly likely that as part of the sale negotiation process that the potential buyer will incorporate both earn-out and lock-in clauses to ensure that you as the owner and driving force behind the business remain in the business for a minimum period post sale. It is therefore important to recognise you don’t “leave” the business immediately on sale.
Consequently, finding the right buyer who you can continue to work with after the sale is of paramount importance:
• You will both be partners in the business, and possibly shareholders, so a unified approach to running the business is key to smooth continuation.
• Your team may well be unnerved by the transition so it is important for you that your buyer is one that will continue to work with, and act in the best interests of, the team.
• Your future earn-out will be dependent upon the strategic decisions that the buyer makes about the business, therefore alignment of strategic outlook is key to maximising value.
• You have worked hard to make your business a success and so finding a buyer who recognises the legacy and can take the business forward with your values is also important.
Your primary focus has always been and will continue to be, running your business. The sales process itself will take time and there will be several milestones to clear along the way. To enable you to keep your focus on driving the business forward it is crucially important you seek support from advisors who have the experience to support you throughout and manage you through to a successful exit. Key criteria to consider when making your advisor selection includes:
• Technical capability – seasoned professionals who have experience of the issues you are likely to encounter and importantly, how to deal with them.
• Chemistry – you need to be able to build a trusted relationship with your advisor so have the right chemistry is crucially important.
• Sector experience – the owner-managed segment is very different to the corporate sector so an advisor that is used to leading transactions in the SME segment will serve you well.