How to prepare your business for a successful exit

As a business owner, you may have a vision of exiting your business at some point, either to cash out your value, pursue a new challenge, or partner with a private equity (PE) investor to support your growth. But how do you maximise the value of your business and achieve a successful outcome? In this article, we will explore the main factors that drive the valuation of a business, the different exit options available, and the preparation steps you need to take before and during the sale process.

The value of your business is determined by two main components: the multiple and the earnings. The multiple is a ratio that reflects the attractiveness and potential of your business, based on a combination of qualitative and quantitative features. The earnings are a measure of the sustainable cash flow generated by your business, usually based on revenue, EBITDA, or EBIT. To calculate the value of your business, you multiply the multiple by the earnings.

The multiple can vary significantly depending on the nature and the market of your business, but it is generally influenced by two key drivers: resilience and growth. Resilience refers to the quality and stability of your earnings, your customer base, your barriers to entry, and your team. Growth refers to the level and potential of your revenue and profits, your market opportunity, your M&A strategy, and your cash flow conversion. To enhance your multiple, you need to demonstrate that your business has a strong and differentiated position in a growing and scalable market, with a clear and achievable plan to increase your earnings and cash flow.

The earnings are based on the historical and projected performance of your business, adjusted for any one-off or non-underlying items that may distort the true picture of your profitability. You want to present a sustainable and realistic earnings figure that can withstand the scrutiny of due diligence and avoid any price reductions. To increase your earnings, you need to identify and pursue opportunities to grow your revenue, improve your margins, and optimise your costs.

It is important to note that the value of your business is not the same as the amount of money you will receive for selling it. You also need to consider the impact of debt, cash, and working capital on the equity value, as well as the terms and structure of the deal, such as deferred consideration, earnouts, or rollover.

If you are considering selling your business or raising funds, you have four main options to choose from: minority sale to PE, majority sale to PE, IPO, or trade sale. Each option has its pros and cons, and you may not need to decide on one until you have explored the market and received offers from different types of buyers. Your focus should be on creating and retaining optionality, by preparing your business for different scenarios and understanding the buyer population and their motivations.

• Minority sale to PE: This option allows you to de-risk some of your personal wealth by selling a minority stake in your business, while retaining the majority of the equity and control. You can also benefit from the support and expertise of a PE partner to help you grow your business and create value over time. Minority investors tend to be more passive, patient, and flexible than majority investors, but they will still require some degree of protection and influence over their investment.
• Majority sale to PE: This option enables you to sell a majority stake in your business to a PE investor, who will take an active role in driving the growth and performance of your business. You will typically be asked to reinvest some of your proceeds to align your interests with the PE partner, and you may also be able to offer equity to your wider management team. A majority sale to PE can provide you with access to capital, expertise, and networks, as well as the opportunity to benefit from a second exit in the future.
• IPO: This option involves listing your business on a public market, which can provide you with a high valuation, a diversified shareholder base, and a liquid market for your shares. However, an IPO also comes with significant costs, risks, and obligations, such as regulatory compliance, investor relations, and market volatility. You also need to consider the timing and availability of the IPO market, which can be influenced by external factors and events.
• Trade sale: This option involves selling your business to another company, usually in the same or a related industry, who may be able to pay a premium for your business based on the synergies and strategic benefits they can achieve. A trade sale can offer you a full exit and a high valuation, but it also means giving up control and future upside of your business. You also need to consider the cultural fit and integration challenges that may arise from a trade sale.

The sale process can be a complex and demanding journey, which requires careful planning and preparation. The way you prepare for the sale can make a significant difference to the outcome, as it can enhance the value of your business, reduce the execution risk, and accelerate the deal completion. Ideally, you should start preparing for the sale 1-2 years in advance, by addressing the key areas of your business model, strategy, and operations that can improve your attractiveness and potential.

Some of the preparation steps you need to take include:

• Developing a clear and compelling business plan that outlines your vision, value proposition, market opportunity, growth strategy, and financial projections.
• Building a robust and flexible financial model that translates your business plan into numbers, and allows you to test different scenarios and assumptions.
• Identifying and addressing any issues or challenges that may affect your valuation or deal terms, such as customer concentration, key person risk, cyber security, or ESG.
• Implementing strong systems and processes to capture and present your data, information, and KPIs, and to demonstrate your governance and control.
• Conducting pre-deal preparation and vendor due diligence to validate your business plan, identify and quantify any adjustments or synergies, and streamline the buyer due diligence process.
• Forming a dedicated transaction team within your business, who can support you in the various workstreams and interactions with buyers and advisors.

At KPMG, we can help you with all aspects of your exit readiness and deal preparation, from assessing your readiness and recommending actions, to conducting vendor due diligence and providing transaction support. We can also help you navigate the sale process, from identifying and approaching potential buyers, to negotiating and closing the deal. Contact us today to find out how we can help you achieve a successful exit.