In the first two blogs in this series, we discussed valuation methods and drivers of value, before then reviewing the various potential exit options and buyer groups and what they may be looking for. But what do you need to do to ensure a smooth and successful sales process?
It’s a key question because the way that you prepare for the sale can make a significant difference to the outcome. The preparation phase is everything. If you prepare well, assembling detailed, evidence-based information, a clear growth plan and equity story, whilst beginning to understand the buyer population and what they’re looking for, then the actual process should in theory run more smoothly and value should be enhanced. On the flip side, if the information or story doesn’t stand up to scrutiny then buyer confidence may wane, leading to bidders dropping out and offer levels falling as you lose that all-important competitive tension.
Rounds of the formal process
Broadly speaking there will be three rounds to the formal process. In the first round, an Information Memorandum (IM) carefully crafted with your advisors will be distributed to interested parties, Vendor Due Diligence (VDD) will be undertaken, and initial conversations with bidders will be held, before receiving initial bids. The second-round steps up the granularity – where you will open up the Virtual Data Room that you have created (with advisor support), issue your VDD report(s), give management presentations to bidders, encourage buy-side due diligence, and receive final offers. Stage three sees completion, where you agree exclusivity with a preferred party, finalise terms and complete the deal. These three phases may in theory take only 4-5 months in total – although in practice this often extends over a longer period, to deal with any queries or outstanding matters as they arise through the due diligence process.
As simple as it sounds on paper, going through a process is an intense and very demanding time. A sale or investment round represents a milestone event, de-risking or exiting a business that has been carefully nurtured over multiple years; potentially the conclusion of a life’s work and the springboard onto the next venture or stage of life. It matters deeply on a personal level too – and there is the added responsibility of ensuring a good outcome for all of the staff who have helped make the growth of the company possible. While proper preparation cannot cure all of the demands a process brings, it can certainly lessen them.
Preparation is key
It’s no surprise, therefore, that one of the things we hear most often from owners who have completed a sale process is that in hindsight they wish they’d started preparations earlier and more thoroughly laid the groundwork. In fact, we recommend starting some of the steps as long as 1-2 years in advance if possible – for example, in areas like technology and data-capture where you are likely to need some time to implement enhancements and modernisations and feel the benefit.
It's starting early that gives you the mental space to think more deeply about what makes your business different, about what changes you could make to your model to increase the value of your business, and then what levers you could pull to realise them. These may fall on either the earnings side of the business – revenue opportunities and operational efficiencies – or enhancing the multiple - through tweaking pricing models and the “quality of earnings”, creating differentiation, enhancing your addressable market, pursing internationalisation or developing an M&A track record. The earlier you start thinking the better – giving you time to assess which levers you can pull, the impact, and then what order to undertake them.
Business Plan
One of the key components of any process is being able to articulate your Business Plan. It doesn’t need to be War and Peace but should clearly bring together the story of what you do, the problem you’re solving for your customers, why you’re different from your competitors and your future plans. It will also form the centrepiece of due diligence - where the assumptions that underpin your future growth will be assessed and hopefully validated. In addition, having the Business Plan clearly laid out can also be a great means of generating employee engagement, sharing your vision and enabling them to understand their role within in it.
If the Business Plan is the story, the Financial Model is the numerical translation of it. It’s an integrated P&L, balance sheet and cash flow model with around four years of projections, ideally with outputs clearly displayed in dashboards and summaries, and able to be sensitised for scenario planning and updated with recent financials to make it a ‘living’ Excel. Don’t underestimate how complex it can be to build these, and get a head start where you can otherwise your process may be left waiting while you do.
Covering all the bases
Your growth plan will by its nature be a positive portrayal of your business and the opportunity ahead but don’t overlook addressing any “skeletons in the closet” or considering the challenges you may face in delivering your plan.
For example, in today’s labour market many sectors face resource challenges or skills shortages. So how is your workforce structured and optimised? Do your operational capacity levels and utilisation support future growth? Allied to that, your management team is also critically important – is there any ‘key person’ risk and how can this be mitigated? And what about technology – is your architecture fit for purpose and future proofed. Could it be enhanced to deliver better information or delivery? Then there is cyber – a critical risk issue. Buyers will want to be reassured that you have a coherent cyber strategy and adequate defences, including for example regular penetration testing. Last but certainly not least, there is ESG. This has become a key consideration across the market. Do you have an ESG strategy and how does this link to the business strategy? Do you have clear ESG metrics across E, S and G – and can you show actual evidence of progress, evolution and change?
