The quality of the process you run to sell your business will make a material difference to the price you get; this is true whether you’re taking on an equity investor for the first time or embarking on your third or fourth private equity buy-out. Louise Kingston gives her advice on preparing to sell your business.
Following these three steps can make a big difference to the value you achieve:
1. Understand the ecosystem you play in and the value everyone has to trade
At Livingbridge, we start to think about the ecosystem of possible buyers for our investee companies many years ahead of our planned exit. We will often start to cultivate relationships with the best potential buyers well before we expect to sell.
In particular, we dedicate significant energy to understanding trade buyers, as this group is the most diverse; each buyer thinks about the same acquisition in a totally different way. Our aim is to build up a database of key potential buyers globally and to develop a clear understanding as to why each of them might want to acquire your business. Once you understand this, and the potential impact of your business on theirs - on revenues and cost synergies, for example – you can begin to make an educated assessment of what they would be willing to pay.
We work on the assumption that an average trade buyer will take two years to move from introduction to deal completion, but you also need to be ready to act quickly. Trade buyers usually can’t – or won’t – proceed according to someone else’s timetable. If they are shoehorned into a process alongside a private equity bidder, there are unlikely to be able to compete due to their more complicated decision-making processes and due diligence requirements.
Private equity buyers, by contrast, will always be interested in great businesses and they are used to auctions with tight timetables if that is the process you choose. But it will still be important to assess your industry ecosystem - investors will want to understand the M&A opportunities available as well as the buyer landscape for their eventual sale. If you already have this information and can control it, it will help them to understand value during the transaction process.
The third option, an initial public offering, is less common but fairly similar to a private equity deal in that you are dealing with professional financial investors; they will all have similar cost of capital and information requirements from you. But running a listed company is very different to running a private company, and you will need to reflect whether this is right for you personally and your business.
At Livingbridge, we use the expression “build for private equity, position for trade”. If you build a brilliant business that will be attractive to professional financial investors, you’ll have done much of the work necessary for a trade buyer if you find the right fit.
2. Fail to prepare, prepare to fail
Comprehensive advance planning will hugely increase your chances of maximising value from a transaction. Ideally, you should start planning a number of years ahead of your intended date of sale. Be very clear as early as possible about exactly what you want to achieve and how you will seek to achieve it.
One really useful exercise is to write down what you want the first page of your Information Memorandum to say about your business in two years’ time. In doing so, you’ll be setting a target for your strategic implementation plan for the next few years and creating a clear checklist of statements that you’ll need to be able to evidence as true.
For example, if you are claiming to be “the market leader in the XYZ space” you will need to prove to buyers that you really are number one. With enough time to prepare, you can start to build the evidence necessary. That might be, say, a Gartner report showing your company in the “top right” quadrant, a commercial vendor due diligence (VDD) report sizing your market and ranking you ahead of your competitors, or a database of customer feedback showing how you outperform your rivals.
In practice, we prefer to appoint sale transaction advisers a few years ahead of a sale to start thinking all this through. A corporate finance adviser will usually be your first and most important appointment. In addition, with vendor due diligence now becoming standard, it is often worth commissioning a “pre-VDD” study a year or two ahead of a transaction date to provide intelligence on any gaps you need to address.
You will need to produce a broad range of documents to market the business to buyers throughout the transaction process. A corporate finance advisor will help you craft compelling documents in the right language to appeal to buyers.
Remember, it isn’t enough just to have a great business. In a sales process, you need to be able to describe it in a way that appeals to each buyer. You will need to build up detailed plans, analyses and data rooms to support the transaction; getting a head start will help you achieve a better result.
3. Maintain business as usual
The sales process tends to build in intensity over a couple of years to a “live deal process” period of at least a few months. During this period, the CEO and CFO may be spending 50% of their time working on the transaction; there will be days or weeks where they need to spend almost all of their time on it. Be aware, however, that this will also be the time when the performance of your business is more closely scrutinised than at any other moment; prospective buyers will not make allowances for the fact you have been distracted by the transaction process.
Indeed, it is crucial that the business performs according to plan over this period – another reason to make sure you have the time required to plan to set it up for success.
Work with your corporate finance adviser to decide on the best time of year to bring the business to market. It makes sense to aim for one of the three peak deal completion periods in the calendar – pre-Easter, pre-Summer and pre-Christmas – but try to pick the one that falls during a relatively quiet time for your business.
Similarly, avoid material business change projects that coincide with your sale transaction – that means no warehouse moves, ERP system implementations, transformational mergers and so on.
Most important of all, you need to build good management bandwidth. Ideally, a few years ahead of time you will begin to develop a second tier of managers able to step up and hold the fort for the directors while they focus on the sale. If that hasn’t proved possible, don’t be afraid to recruit interim or consultant resources, either to cover the day-to-day work of the directors or to help with specific elements of the transaction.
Selling a company is not an everyday event for even the most successful serial entrepreneurs. Investing in additional experience and resources to do it well will help ensure you secure the greatest possible value.
We are always interested to meet with business owners and managers thinking about selling or buying a business – if this is you, we would love to talk! Please get in touch on firstname.lastname@example.org to arrange a meeting.