A difficult environmentActive buyers need to be reassured, as buying a business in a changing market dynamics need to be negotiated and there has to be a fundamental shift from an emphasis on demonstrating that a company is recession resistant to showing that it is fully geared for growth. Even if there is an uptick in an economy, buyers can still remain wary, conscious that historically more firms fail coming out of a recession than during a downturn. Previously supportive market trends can change. For instance big financial buyers, such as the larger private equity houses, which had been looking to improve deal flow by moving down to the mid-market over the past few years, are now moving back up to complete large bracket deals as funding and access to debt have both improved. There are also likely to be a greater number of potential targets for buyers with the return of economic growth giving a fillip to most businesses. It’s therefore even more important for you to ensure your company is properly prepared for sale and stands out against your rivals.
Planning your exitGiven this backdrop, there are a number of key steps to take to ensure that you successfully sell your business. The starting point is planning your exit. We often advise clients to start the process 18 months before a sale to help address any weaknesses in the business and identify an initial list of potential buyers. This is even more important in an upturn as the marketplace is more competitive and buyers have more choice. The fundamental adjustment is to show that your company has evolved from being recession-proof to being gunned for growth. Clearly it’s vital to have a business plan, which charts your growth track, but it needs to be very robust and credible. It will probably come under even greater scrutiny than during the recession because it’s likely that your sector rivals will also be expanding. To attract potential buyers’ interest you will probably have to show you can outpace your peers. Although a compelling expansion strategy and strong business plan are important, they will not be convincing to a buyer unless it can be clearly demonstrated that your business has the funds and finance to execute them.
Credible finance optionsIn the initial stages of an upturn funding for SMEs is still difficult and many potential buyers are only too aware of this. Therefore it’s important to have credible finance options in place, a facility agreed with your bank, a cash injection from an investor or forecasts showing that expansion can be covered from the cash generated by the business. In terms of your products/services, the emphasis has to shift from positioning them as being essential even in a downturn to having strong growth potential, so playing up their innovative aspects, new technology, ground-breaking applications will help convince buyers that your products/services have a strong future not just a distinguished past.
The importance of timingTiming is important. During periods of strong economic growth, such as the years immediately prior to 2007, timing an exit was more or less irrelevant because the values of businesses in general were continually rising. We are not yet back in such heady times so it is important to try and align the timing of the sale of your business to hot trends within your sector in this nascent upturn and position your revenue streams as coming from the most exciting areas. For example, many publishers are now recasting some of their revenues as coming from ‘digital’ while tech companies are looking to characterise portions of their revenue as coming from cloud-based services. Of course selling in an upturn should deliver a strong value, but proper planning and positioning ahead of exit can ensure you secure the maximum price your business deserves.
Joe Stelzer is managing partner at Cavendish Corporate Finance.Image source
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