Preparing a business for sale is an important part of any owner’s exit process and, in our experience, is often the difference between an exit and a good exit.
Good preparations for the sale of Human Capital businesses fall under one of four headings.
Owners should set and follow a corporate strategy which ensures that by the time of a sale their business has a strategic position that buyers will regard as valuable to their own strategy.
To identify strategic improvements, it is often best to start with a business’s current strategic position and direction, and refine these according to what the likely groups of buyers value the most. For example, focusing on existing or new sectors that are especially prized by buyers and being able to demonstrate the metrics that they value highest (e.g. in relation to sales mix, gross margins, consultant numbers, and the nature of clients and client concentration).
Similarly for geographic expansion, owners should focus on countries and regions that the identified buyer groups have not yet penetrated or are already successful and seek further depth.
Refining a business’s strategy with buyers in mind ensures that its energy and resources are channelled most effectively into maximising future exit valuation.
Being able to present the highest level of normalised, maintainable and growing profits to buyers at a time of exit, in the current and two to three preceding years, is a key determinant of exit valuation.
To achieve an optimum profile of earnings usually requires careful planning of growth and defensive initiatives as well as in the efficient management of cost base. It may also necessitate the deferral of investments in new strategic initiatives or, where these have to be undertaken by a Business to maintain its competitive position or future growth, in adding the costs ‘back to profit’ in a defensible way so that they will be acceptable to buyers when valuing the Business.
Other financial areas in exit preparation may include improving the mix, concentration and general quality of sales, identification of possible revenue and cost synergies for a buyer, optimisation of free cash and any surplus balance sheet value, and minimisation of possible debt-like price deductions (e.g. CID facilities) and retentions.
3. Corporate and Shareholder
Corporate and shareholder issues affecting exit may include overly complex and exotic corporate structures, which can often harbour hidden tax issues including liabilities. These may require less-than-ideal exit deal structuring solutions, for example ring-fenced sale proceeds in an escrow account or the need for expensive warranty insurance. In other cases, hidden tax issues may prevent a deal from happening as either vendor or buyer walk away.
Equity structures (by which we mean “who owns what percentage”) may have become out-of-date and require reorganising in order to sustain the motivation of a business’s leader over the medium-term to an exit. Thought may also be given to the use of EMI schemes for the wider employee base. In all decisions over equity structure as part of exit planning, care needs to be given the likely perceptions of future buyers over the distribution of sale proceeds, care being taken to ensure that employees do not gain the means to set up in competition or stop working.
Operational improvements can cover a wide range of areas depending on individual company circumstances. Of these improvements, we find that management succession planning is the most important (and overlooked) in the sector. Without a business having implemented a succession plan by the time of sale, buyers are likely to regard it as more risky and therefore of lower value.
Other examples of operational improvements may include the implementation of new management information systems and KPIs, more effective financial management, or new remuneration structures to ensure better employee retention.
An appreciation of the operational characteristics that buyers in the sector like to see in acquisitions helps determine the best operational improvements in preparing for sale.
Usually the easiest to make of all preparation for sale improvements, cosmetic changes often have a tangible influence on buyers, particularly in the early stages of their assessment of an acquisition. Examples of cosmetic improvements include the tidying up of organisational structures and titles, physical office reorganisation, better alignment between marketing materials and website, and the selective use of media coverage. Collectively, such measures will ensure that buyer perceptions are as positive as possible.
When should owners undertake preparation for sale?
In our experience it is really never too soon for owners to begin preparing for sale. This is because in making strategy changes in particular, the later these changes are left, the harder it is to implement them to an extent that they positively impact on valuation.
Many operational changes also require long lead-times, first to implement and then to establish the necessary cultural change across the business, for example ensuring that employees adopt the KPIs of a new management information system.
As a rule of thumb, at least three to five years before sale is a time by which to have exit preparations underway (although it has to be said that even on this timetable we often see time running out for vendors to do everything necessary to maximise exit value).
As to how to get the ball rolling on preparation for sale, a good M&A advisor will have sector and exit experience with which to assist owners in exit planning. A structured exit review methodology (ours is called ValuePathTM) also helps as does a sector specific understanding of the buyers in the sector, their strategies and preferred acquisition characteristics.
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