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Preparing a business for sale: take aim well before pulling the trigger

12 December 2019

SME owners need to plan ahead to maximise value, says Michael Coupland, Portfolio Manager. Here’s how…

After years spent working hard to grow their business, vendors of small and medium sized companies (SMEs) want to realise maximum value when they decide to sell all or part of their shareholding, either to a strategic trade acquirer, or, a private equity investor.

Achieving maximum value on exit involves much longer-term planning and shaping of the company for exit than many entrepreneurial vendors think. In our experience, this process can take between 18 – 24 months if maximum value is to be achieved and the thinking should start well before that. There are a few key areas for all shareholders to consider and we’ve highlighted some of the main ones below:

1. Alignment of shareholder interests - It may feel obvious, but ahead of launching a sale process, it is important to make sure all shareholders are aligned and committed to the exit process. Misaligned shareholders, with conflicting aims, can lead to a failed process which costs time, money and reputational damage which may impact a subsequent sale process later down the line. This can be doubly the case in a private equity backed management buyout where a management team might be small shareholders but ultimately will end up with divergent drivers to the vendors, given their ongoing roles. Honest and open discussions about the exit process and its aims will greatly enhance the chances of the transaction completing successfully.

2. Management team – Honestly assess the strengths and weaknesses of your team. Companies often fill out the posts at the top level but don’t have an appropriate second tier coming through or persist with square pegs in round holes for too long. Fixing this takes time and hence, needs to be addressed well in advance of any process. Fundamentally, buyers of SMEs back management teams, so it is crucial to ensure you have implemented succession planning and additions to the team to build a futureproof and fit-for-purpose management team for the next phase of growth, well in advance of the proposed exit. A well balanced and strong team will also help reduce the risk of a failed process by ensuring the company has the appropriate level of bandwidth to manage both the strains of the sales process and equally importantly, the day-to-day, so that the company maintains performance throughout the sale process.

3. Engage with Corporate Finance (and other) advisers early – Engaging early and selecting the right advisers will help achieve maximum value on sale. While they may seem expensive, with appropriate time and exposure advisers can fully familiarise themselves with your business which will enable them to develop a high-quality process, input into strategy and help the company target performance and decision making towards identified buyer groups, to increase the chance of securing a strategic premium and successful sale. They can also advise and assist in selecting other important advisers e.g. legal advisers, vendor side diligence advisers (if appropriate) and tax advisers, all of whom can help protect and make incremental gains in value for a seller of an SME.

4. Understand value drivers and eliminate value drags –
These elements ultimately influence the multiple of profits a buyer will pay for the company, either positively or negatively. Articulating your growth plans clearly, with supporting evidence, will help maximise value. Again, the key takeaway is that if a company is going to influence these elements engaging early, at least a couple of years ahead of the planned exit, is necessary. Advisers can help you understand these drivers, how buyers will perceive them and how you can present your business in the best light to positively influence the eventual value, however, many of the changes required e.g. increasing the diversity of end markets to reduce customer concentration, will need time to deliver.

5. Financials – manage budgets and capex carefully. A track record of delivery is crucial, financial and other due diligence providers will not just look at the historic trends of the business, they will also look at the company’s performance against its own budgets as a means of identifying how credible the forecasts presented as part of the deal process are. In addition, at some point as an exit get closer, capex investments and other decisions with long ROIs may actually only pay back in the tenure of the buyer, so it is important to strike the appropriate balance between ensuring the company has the tools at its disposal to demonstrate it can continue to grow and trimming unnecessary spend to present the best profit and cash generation possible.

6. Getting data room ready early – In simple terms, this means making sure the company has all the necessary information complete and available that buyers will want to review during due diligence. This means undertaking housekeeping across most areas of the business to make sure, for example, historical financial information is available and consistently presented, all major legal (supplier and customer contracts) and HR contracts are available and signed for buyers to review. Presenting a fully populated data room to potential buyers will create a great first impression, will give buyers confidence and will help drive a more efficient sale process with a lower risk of failure.

In summary, a well-defined and properly staged approach to exit, that is planned a long way out, should not only minimise disruption to the business during a transaction – it should also serve to create positive first impressions that will attract and give confidence to prospective buyers, allowing them to bid more aggressively. This is fundamental if shareholders are to realise optimum value for the business. By the same token, a poorly prepared sale process can be value-destructive at best or at worst lead to a failed process.

While the advisory support suggested and long timescale of preparation outlined above can seem overblown in an SME context, in order for shareholders to get their best shot at maximising value, it pays to line up the sights carefully well in advance of pulling the trigger on an exit process.

 Russell O'Connor
07760 282 586 or Email

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