Exit preparation permeates every decision made when operating in a private equity-backed context, says serial FD Tom Boucher the “Entrepreneurial FD” conference, held by Real Business’ sister publication Real Deals on November 27th at the London Marriott Hotel Grosvenor Square. “When I first joined Data Explorers in 2009, planning for exit touched every aspect of the business from strategic direction to operational execution,” he explains.
Can exit planning start early enough? Not according to Charlie Johnstone, a director at mid-market investor ECI. “Increasingly we are thinking about exit before a deal has even completed,” he says. “That way you can make sure you hit the ground running.”
Indeed, selling a business has certainly become a lot tougher, as sell-side corporate finance specialist Howard Leigh can attest. “In the old days we would simply stick a for-sale sign up and give half a dozen private equity houses a call,” he jokes. “We would have our feet up by the weekend. Inevitably things are now a little harder.”
In particular, throwing together an IM and sending it out to the world, is proving an ineffective sales strategy. A lot more thought, and preparation, is going into identifying probable buyers. Indeed, Leigh says his firm frequently shuns the traditional IM together, opting for a video version or else bypassing the stage altogether. “We know that these days it is management presentations that sell,” he says.
If strategic acquirers are expected to show an interest, the process itself must be even more deftly handled. An early start will almost certainly be essential.
“If you think you are going to be selling to trade you will probably need to start moving two or three years ahead of the event,” says serial private equity-backed chairman Nigel Guy. “You will certainly want to have the CEO and other senior executives cosying up to their equivalents. That needs to be handled with care, of course, and can seem counter-intuitive. But every opportunity for feedback from potential buyers is valuable and enables the business to be shaped so that it becomes the perfect fit.”
Guy adds that this type of communication also enables trust to be built up. “If you start to throw out a few snippets with regards to strategic objectives and how you are progressing against those objectives – if you make trade feel as though they are in some way insiders – that can take a lot of the perceived risk out of the transaction for the buyer.”
The trick can be to make the buyer feel as though they are taking the initiative. “Sometimes we engineer a situation where the purchaser is forced to approach us because of the smoke signals we are sending out about a possible sale,” Leigh explains.
It is also vital to ascertain who within the potential buyer is likely to champion the acquisition.
“In some cases you can only go to the chairman because unless he buys in the deal will die,” says Leigh. “In others you have to start with the corporate finance assistant’s secretary and work your way up or they will kill it. There is no text book. You have to know each of your potential buyers inside out.”
Another important element of preparing a company for sale, is ensuring that there is something left on the table for the buyer.
“The best exits I have been involved in were undoubtedly those where the buyer believed there was something in the cupboard,” says Boucher. “If the buyer gets a sniff that the company has been bled dry or has been underinvested, you won’t just have to offer a discount, you’ll get a bargain basement price.”
Equally, it is vital that a company is seen to be forecasting – and delivering – on a promising set of numbers, a particular challenge for the FD, Boucher adds.
“One of the hardest things to manage is setting financial targets in the year you are going to go after a sale. You have got to pitch a plan that is stretching enough that is shows you are on a trajectory that is going to deliver value for the new owners, but it has also got to be achievable because you can’t go out trailing. You have got to get that balance just right.”
Guy, meanwhile, says that mis-forecasting is just one of the bear traps that a seller can fall into. “Management can take their eye off the ball. You can get trading drift. You have got to have bullet proof numbers,” he explains. “I have also seen cases where a carefully crafted coalition of interests starts to fall apart as the exit approaches. That, of course, is largely driven by greed.”
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