7 QUESTIONS TO ASK IF YOU ARE CONSIDERING YOUR EXIT OPTIONS
If you are running for the exit what should you be thinking about? Deciding on the best exit route is one of the most important decisions that you can make. In many ways selling your company in whatever form is also one of the most stressful – with so much riding on the decision it can be a daunting call. The right call will reap exceptional dividends and the wrong one will bring a whole host of problems. So when it comes to deciding on your exit options what are the questions to ask yourself to make sure that you get it right?
Are we ready?
M&A transactions that succeed in creating enhanced value always seem to follow the same principles. In short the best thing is to:
Prepare meticulously for a rigorous process. Think ahead, buckle down for the long haul and appreciate that the whole process is a marathon not a sprint.
Plan to stay in control. Keep your options open and do everything simultaneously – not consecutively as though it is a step by step process.
Promote the activity. Manage your information strategy and be clear with your messaging. Preparation is everything. It isn’t just about getting your sales pitch ready but is about ensuring that your financial records are fully up to date and properly documented, board meeting minutes are properly signed off, staff records, sales records and major contracts are suitably packaged and any other relevant documents are speedily available for any potential purchaser or investor.
Having these types of documents, ready in advance of the Due Diligence phase, fully prepared in an organised manner and easily available underpins trust in your organisation – which in turn significantly improves the chances of a better outcome.
Investment is all about selling the future; but an investor will want a clear picture of the past. If it takes time and detailed explanations for someone to understand your business then you have everything inside out and upside down and have not prepared properly. The ball is in your court to ensure that your basic business model can be clearly expressed in as succinct a manner as possible.
How do I kick-start the process?
On the assumption that the planning is complete, the important thing is to assemble the right team. It is worth considering very carefully who should be on the “internal” team, and this is not always obvious as a wide variety of skills will be required. The team should not just include the most senior people in the company, and don’t forget that more often than not, the Accounting function needs to be beefed up to provide ever more detailed financial analysis as the process takes its course.
In terms of hiring advisors, it is worth conducting a properly structured beauty parade, with a written brief and double checking that they have direct experience of relevant transactions. Bear in mind that whether the agreements with advisors are performance led or not, your advisors will never be as committed to getting the best possible deal as you will. Remember they are your advisors; not the managers of the process.
What do I need to be concerned about during the process?
The three key points that you can specifically influence during the exit process are:
Current trading. Meeting business objectives is one of the best exit tactics of all.
Control. Ensure that you keep control of the process or it will run away from you.
Communications. The rumour mill will hit overdrive, so it is important to have a pro-active communications strategy in place or else the business can suffer.
Current trading during the sale process is one of the most important pillars of the whole exercise. Any downturn, for whatever reason, is likely to scupper the transaction. Conversely meeting business objectives and hitting or exceeding budgets vastly increases the chance of success.
Control of the process is the next point to consider. It should never, ever be a question of handing things over to a posse of advisors – Accountants, Lawyers and the like – and then leaving it in the lap of the gods and hoping everything will turn out alright. Take that route and it won’t.
Communications is an often underestimated consideration. What do you want to communicate to your staff and how much do you want the marketplace to know about your plans? More often than not your competitors will try to hype up an impending sale as a distress sale and, in any event, if the sale founders then staff morale can suffer. However many NDA’s are signed, the news that there is an impending sale will quickly resonate in the marketplace and the rumour mill will hit overdrive. So it is not just a question of ramping up the PR activity but vital to have a well thought-out and well-documented communications strategy.
What are my options?
Basically there are three main types of sale – a Trade sale, a Private Equity sale or an Initial Public Offering (IPO). There is a fourth option which is a RTO (Reverse Takeover) but we can leave that for another day. Of the three main types all have their place and their advantages but their appeal depends substantially on what is driving your sale.
If you think about things from a buyer’s perspective (which you should) then it’s not a question of one size fits all. The three options involve different approaches which command different routes with different value propositions. A trade buyer (or indeed a direct competitor) might for example be interested in your business to get their hands on new products, or penetrate new territories, get greater market share or enjoy potential cost synergies. A Private Equity company, on the other hand, will be looking for the quality and depth management, an explosive growth story and quick and clear exit opportunities.
An IPO would be a different kettle of fish, as it would give you greater opportunities (albeit in a highly structured environment) but would be more of a lottery and investors would want to get in at the bottom of the market to ensure that their investment increases in value.
As is evident, all three routes have different buyer drivers and need a different approach. The important thing though is to keep all in play and to produce a form of competitive tension. So the irony is this … don’t narrow your options but keep them open.
How do I value my business in the first place?
This is the million dollar question. It is of course all about the valuation and challenges abound because there are a number of accepted, but different, ways of valuing a business. To name a few these include:
Asset-based valuations – straightforward but not fit for growth businesses as earning potential can be overlooked
Profit or turnover multiples – often the best way for growth companies but the challenge is to establish credibility and agree on both future projections and multipliers
Discounted cash flow – focuses on cash flow rather than earnings but is not always suitable for start-ups, growth and capital intensive companies if the future cash-flow cannot be easily determined.
Consideration should also be given to looking at the “comps” – that is the comparable multiples that have been paid for similar businesses in recent years in your industry.
How can I get the highest possible value for my business?
Simple as it might seem the starting point for improving business value is basic organisation. Straightforward things like keeping careful financial records, documenting employee policies and procedures and running a neat and tidy workplace – these small points all count when it comes to the amount buyers are willing to pay for your business. Being fully prepared for the Due Diligence phase and providing documents instantly, also has a surprisingly beneficial impact on the final negotiation.
Simplicity has value. The easier it is for buyers to understand your business and visualise themselves at the helm, the more likely it is that your business will sell for a higher value.
A well respected brand, the strength of the business model, longer term contracts, clarity on long-term sustainable growth, visibility of earnings and serious barriers to entry would all have a significant bearing on the value. You can of course though, influence a number of important and immediate trading factors that will improve your case – like increasing the length and strength of contracts, lowering your CAC (Customer Acquisition Cost) and reducing the churn rate.
Nevertheless the two critical factors to getting a better valuation are:
Differentiation – highlighting why you are different and accentuating why you should command a premium.
Competition – no not your competition in the marketplace! Ensure that there is competitive tension in the process so that you can play one suitor off against another.
But the bottom line is that a business is only worth what you can negotiate and what someone is prepared to pay for it. So you need to keep up interest in the sale by ensuring that it is an auction. This means only agreeing “exclusivity” with the other side only at a very late stage and only if it is absolutely necessary. Better still, go to “BAFO’s” – Best And Final Offers with a set deadline.
When is the best time to sell?
In order to answer this, let’s start with the worst time. The worst time is when business is down, you are missing targets, are running out of runway and you have exhausted all the other options. Come what may, the best time is when business is on the up. So identify the best time, put a timetable on it, control the process and encourage competition. This brings us full circle. Selling a business gives everyone an excellent excuse to take one’s eye off the ball, but if current trading stacks up during the exercise (and remember it is a marathon!) – then the sale is all the more likely to be successful.