Proper preparation and tight execution are key to achieving best price on sale, says Caroline Belcher in her latest "exit planning" article.
Failure to prepare properly before selling your business and neglecting to tightly manage the sales process itself can result in a disappointing outcome. You may not find a buyer, may fail to achieve the price you want for your business or the sale may fall through in the later stages of a deal because of due diligence issues or other disruptive events.
However, there are steps that you can take in the pre-planning stage of a business sale and during the execution phase of the process that can minimise these risks and help you push a deal across the line at your target price.
Search broadly for buyers
The search for potential buyers must be as broad as possible. Look across both trade and financial buyers, even if your business appears to be the obvious fit for one versus the other. To assume just one sort of natural buyer is to limit your options.
Look internationally – some 50 per cent of buyers that Cavendish has been involved in over the past 18 months have been based overseas. For example, when we advised on the sale of the Royal Berkshire Shooting School Group in 2010 we used our international reach to facilitate a sale to a Chilean private investment group. This certainly wasn’t an obvious buyer – partridge and pheasant shooting is more Sandringham than Santiago – but resulted in the best price.
Have strategic conversations with companies well before a sale. Large businesses are very much following their own corporate agendas in terms of the timing of their purchases. With the market being dictated to by corporate agendas, it is wise for enterprises that may be considering a sale to sound out in advance whether and when key players may be looking to make acquisitions.
Achieving a high valuation
The critical issue of pricing can derail the sale of a business at two points: either at the outset, if you do not prepare the groundwork sufficiently to support a strong valuation, or at the later stages of a deal if you are unable to pre-empt "price chipping" by buyers in negotiations.
An initial valuation must be based on comprehensive and tightly managed forecasts. Make sure that you hit your targets to justify a high price, ensuring that they are accurate rather than too aggressive or conservative.
Prospective buyers may likely look to "price chip", citing reasons for making a revised, lower offer. It is important to be prepared for this, and the key tools for doing so are:
- A strong market report. Buyers may express concern that the market’s prospects are less good than initially perceived. You must be able to pre-empt this with a compelling case for the strength of the market and sector outlook. Conduct in-depth market reports focusing, in particular, on your sector’s growth potential.
- Compelling financial forecasts. As an enterprise you need to be able to demonstrate that you have met targets and show that your future prospects are strong, with clearly delineated forward targets and a compelling rationale for your expectations that you will meet them.
- A comprehensive management plan. Potential buyers will often look to lower the price with concerns that the management platform of the company is not as strong as it had looked. Again, by clearly outlining the company’s strategic future in terms of personnel issues – who will stay on after a deal and what lock-in terms will ensure a strong management going forward – you are in a position to show that the right people will be in place to lead the business and defend against price objections.
Pitfalls to avoid during the sales process
As well as preparing in advance to counter any price depreciation during a sale negotiation, be wary of process-related problems that could cause a deal to founder.
When you go exclusive with a potential buyer, ensure that all relevant data – whether good or bad – is available to the other party.
Make sure that everything is in the price data room from the outset, in order to give the potential buyer no opportunity to come back with reason to make a lower offer. Be certain that all elements to do with due diligence are addressed by the information available to a buyer – issues surrounding pensions, change of control and client referencing must be comprehensively handled, so that there is no scope for the potential buyer to demand a lower valuation. The less due diligence they have to do themselves, the less likely they are to stall or hold up the process.
A particular stumbling block can be the issue of earn-outs and earn-out performance targets after a deal, so ensure that you pay attention to dealing with this, with terms and target expectations tightly dealt with. For private equity deals, issues surrounding the availability of bank debt can be vital to the success of a transaction, so be certain that this is an area you have addressed.
Business risk factors can change rapidly, so try to ensure a tight frame for a sale. If the process takes more than six months then you open yourself up to greater risk that events may conspire against you and damage the value of your company. A key company may drop from your client list, for instance, so the more speedily you can close a sale the more likely you are to maintain a high price.
Going exclusive with a potential buyer does not mean that you should not have another potential purchaser lined up in the background. Be sure to make, and continue, contact with other possible buyers in case the current sales process stalls.
Cavendish has an 80 per cent success rate in closing the deals in which we are involved. Unlike other corporate advisers, our business model depends entirely on us completing a deal. We are therefore as keen as our clients on achieving the very best valuation for their businesses, and know that preparation before a sale and tightly managing the sales process are vital to successfully executing a transaction and getting the best price for our clients.
Caroline Belcher is a partner at Cavendish Corporate Finance, which specialises purely in advising owners on how to get the best price when selling their businesses and then successfully leading on the deals.