You’re getting closer to finalising a potentially life-changing transaction, and now, as your exit is in sight, it’s vital to do your due diligence to avoid any nasty surprises and 'cardinal sins'. Timeline? Where possible plan 12-18 months in advance.
The best-prepared business owners, as we show in our Road to Exit guide, keep their exit options open throughout. That way, if a chosen route becomes unavailable, plans B, C and D are ready to go and you have the time to change tracks. After all it’s your life’s work, be sure to value it.
The market view
Optionality is the best strategy because there are key differences between the trade, private equity and public equity exit routes. You need to understand not only what these different buyer groups are looking for, but also your ideal outcome. Do you want to sell for cash and realise a clean exit? Would you rather retain a stake following a private equity deal or IPO and play a role taking the business to the next level? Or if yours is a family business and you want to keep it that way, how do you plan for a smooth succession?
“Over the last 12 months, there has been a large amount of deal activity, and market conditions have been very favourable to the seller,” says Jonathan Boyers, head of the Corporate Finance practice in the UK. “From an earnings multiple point of view, prices achieved have been higher than I can remember. It has been a bumper time for business owners seeking to realise the value of their life’s work.”
The private equity community has raised huge amounts of funding (€27.1 billion in 2017) and is hungry for high-quality deals. Moreover, the IPO market has been active, with investors showing interest in both rapidly scaling businesses and late-stage companies.
What story will your business tell?
It’s essential to have a compelling and credible growth story and to protect and ideally enhance value through “competitive tension”. By way of example, Jonathan cites a client providing software services that received a pre-emptive £80 million bid from a private-equity-owned US trade buyer. KPMG Enterprise was appointed a year before the exit and helped convert many of the firm’s contracts from one-year rolling agreements to longer-term five-year contracts that had greater buyer appeal.
Jonathan explains, “we did thorough due diligence on the market to show on a granular level how it would grow. In that particular case, it was possible to demonstrate almost on an actuarial basis the growth coming to the market – and our client had a very high market share.”
The prospective buyer initially refused to raise its offer. So we ran a process to court rival bidders and simultaneously advanced “quite a long way” down the IPO path. As a result, the original bidder improved its offer at every stage and eventually won. But at a much higher £100 million price tag.
“There can be a lot of tension in sale processes with buyers, often private equity houses, competing with each other to pay high prices,” says Jonathan. “That is brilliant. However, it means there is no room for error in the way you manage the final due diligence process.
“So, if in the last two or three weeks an error is identified it would cause questions to be raised, when prices were more reasonable, a solution might have been found to that type of issue. In the current market where prices are so high, a small error being can shatter the confidence of the buyer, which could lead to a total withdrawal rather than a price renegotiation.”
Why robust due diligence is essential ?
Holding a dry run of the due diligence process can reduce the risk of such nasty surprises. “If a business has never been subject to a due diligence process, it can be quite demanding,” says Jonathan. “It’s important to make sure information can be cut in all the different ways the due diligence team or the buyers might want it to be cut. It might be that forecasts need to be redone in a more sophisticated manner. It might be that you need to provide evidence that problems can be dealt with or won’t crystallise.
One issue that can come to light is over-inflated forecasts. Jonathan describes this as a “cardinal sin” of the sales process and urges sellers to be realistic in their projections. If trading begins trending downwards compared to forecasts, buyers will lose confidence and may reduce their offer price or pull out entirely.
There are several bread-and-butter basics you need to get right as you prepare for exit, among them a full understanding of the contract you’re signing and its implications. Of course, you must put the right team in place for the transition. That includes figuring out how to support your finance director and other key senior people so that they can continue in their “day job” running the business while also driving forward the transaction.
Acquirers want reassurance that the right quality of individuals will remain in place to lead the business, so there must be clarity on who in the senior team will remain in post. Also, if your business has liabilities such as a defined benefit pension scheme, this could be the elephant in the room that scares buyers away. Address this issue clearly, so that it can be factored into the transaction and does not suddenly become a barrier to sale.
If you get all of the above right, yours is much more likely to be a smooth and valuable exit.
Exit takeaways
- Warm-up the more obvious buyers in advance by engaging with them informally ahead of the process.
- Sustained, carefully managed competitive tension almost always drives higher value than faster execution of the deal.
- A management team explaining its business is among the most valuable tools in a sale process. Make sure they are well prepared to do that.
- Acquirers are paying high prices but it’s important to know when to stop pushing for more and close out a deal.
For more on getting your house in order to complete a successful exit, download our Road to Exit guide or get in touch with us to talk about your own strategy.
Join the conversation: #ItsYourLifesWorkValueIt
"Over the last 12 months market conditions have been favourable to the seller and prices higher than I can remember."
Where prices are high, a small error can shatter the confidence of the buyer, and could lead to a withdrawal rather than a renegotiation.”