Top Tips to be Exit Ready!

This article appears in our Q2 2022 issue of Finance Transformation Magazine. To download the issue, click here

Vasu Majumdar, Senior Adviser Corporate Finance, focussing on Creative Industries and the Consumer Sector, explains his Top Tips for Private Equity Firms to be Exit Ready. It’s all about Preparation, Preparation and Preparation...

Before joining the world of Corporate Finance, I worked in the drinks industry which included a time at an owner managed business who were considering an exit for the founder shareholders. I was tasked with preparing and executing a 3-year business plan that focused on maximising the value of the business in the event of a future sale.

The result was that sale was successful, achieving doubling of EBITDA in 3 years and an EV/EBITDA multiple of over 11.5x. Combining my first-hand experience of working on the client side and then advising clients as a Corporate Finance adviser, I believe that preparing a business for a sale is a critical success factor in achieving a successful exit. To that effect, I am pleased to share my top 10 tips for becoming an exit ready business.

1. Don’t Do It Yourself

Parallels can be drawn with the world of professional sport, where teams have a group of experts working in tandem with one common goal to compete and win. In the context of the business environment, engaging with specialists in 3 key areas to form a Trusted Adviser team will help through the journey. You will need focus on Mergers & Acquisitions (M&A) Corporate Finance, Legal and a Business Mentor.

There is a misconception that if your business is worthy of your customers and suppliers then surely, you don’t need to do anything else to impress a potential suitor. That is of course true if the Buyer has an intricate understanding of your business but 9 out of 10 times, Buyers don’t, and Deals fall over during due diligence for a variety of reasons.

Hence, there is an adage that you prepare for the Sale, achieve the highest value during the marketing phase, defend and conserve value during due diligence and legal documentation. In terms of costs, if you can cap your overall Deal Advisory fees within 5% to 7% of the overall Deal value, that’s a good benchmark to aim for. This fee can be linked to milestones and will enable you to incentivise the Trusted Adviser team over 18-24 months.

2. Lead by Example

Having a Trusted Adviser team is a good start but staying involved and motivated during the entire M&A process is critical. If the Trusted Adviser team has come up with recommendations, then the onus is on you to implement those initiatives, by your personal involvement and leading the way.

3. Be SMART

Use Specific Measurable Achievable Realistic Targets (SMART) to identify the perimeter of the Sale and what a “good” Deal framework looks like for you. Once you have set a timeframe, stick to it, subject to of course to M&A market conditions and the Deal making environment.

Rather than saying that you want to achieve the highest possible value for the business, agreeing a Deal framework based on SMART criteria is an alternative way to focus everyone’s efforts in achieving the SMART objectives.

For example, Deal value, Deal structure (day 1 cash versus deferred/earn-out), timing of go to market and achieving a Sale, setting EBITDA or relevant value driver parameters, perimeter of Sale (share sale or trade and assets) is some of the aspects you need to consider incentivising your Trusted Adviser team.

4. Identify Top 5 Strategic Buyers

Starting the journey with the destination in mind is the essence of every M&A process I have undertaken. Personally, I invest a lot of time asking myself the question, which Top 5 buyers would be interested in acquiring my client’s business.

Your M&A Adviser should be able to act as an independent party to keep track of the Top 5 buyer pool and stay abreast with their Deal activities. This should provide you with good insight on what the buyers interested in and then depending on how strategic that buyer pool is, your M&A Adviser should be able to send some soft feelers out to gauge their appetite. This of course needs to be handled sensitively and this is where a good M&A practitioner is critical.

5. Quarterly Financial Health Check

Create a Template that is tailored specifically to an M&A process and review Quarterly. For my clients, I use a “Critical Check List” to track progress. The areas that I cover as part of exit readiness include strategic, commercial, financial, operational, contracts – employees, customers, and suppliers, and tax amongst others. If your business is well managed with information well organised, then in my experience a 12 to 18 month timeframe is sufficient for an exit readiness process.

6. Legal Contracts

Keep your legal contracts up to date and check change in control provisions are not onerous. For all Contracts I would advise revisiting them and use your Trusted Adviser team to identify contentious areas so that you can address those concerns before you embark on a Sale process. A common one that I have seen over the years is certain onerous provisions on change of control as in what happens if the business ownership changes, especially whether the contract needs to be discontinued on change in ownership or not.

7. Incentivise Management

As part of the Deal Framework, if your objective is to maximise day 1 cash proceeds, then a Buyer will test the quality of your 2nd tier management, especially where you are the majority shareholder and CEO of the business. Therefore, Incentivise your 2nd tier management team or set up a succession plan.

There is of course a fine art to managing the transition, taking some considered steps such as EMI option pool or EOTs (Employee Ownership Trusts) may help you articulate your plans in a cohesive manner without explicitly stating that you are preparing the business for an exit.

8. Maintain Momentum

Selling a business is an emotional process and can be testing at times, but one key advantage of being a seller is that you have control of driving the Sale process, as fast or slow as you want. However, exit readiness is actually not starting an M&A process but it is a pre cursor to a potential Sale. It’s a bit like “kicking the tyres” and that’s where a disconnect often takes place, where I have seen business owners becoming disinterested in an exit ready initiative and losing momentum.

9. Tax

Have good tax planning in place and stay on top of your tax obligations. If you are a taxpayer in the UK and your business registered in the UK, then there are several taxation incentives available to entrepreneurs in the UK. As part of establishing Deal Framework, it is a worthwhile exercise to determine post tax cash proceeds from the Sale. In my experience, there could be unforeseen value leakage due to lack of tax planning.

From a Buyers perspective, a clean acquisition, involving minimal contingent liabilities, such as unresolved tax matters, could be a value detractor during the final negotiations phase. The point being that it is essential to minimise the number of moving parts on a deal and tax is an area which is often neglected and causes problems down the line.

10. Working Capital

Last but certainly not least, get on top of Working Capital (WC management) and keep it in check. A Buyer would expect a Seller to leave sufficient cash on the balance sheet at the date of completion to satisfy the ongoing day to day obligations of the business.

A normalised capital mechanism is typically used to determine the working capital requirements of the business. I have seen value (in cash terms) lost during the final stages of a transaction and often it’s a function of mathematics and formulaic, therefore, being a seller, you have control over how you manage your customer and supplier payments.

Conclusion

It may sound controversial, but in my opinion an entrepreneur is not an entrepreneur until the business is worthy in someone else’s ownership. To achieve this surround yourself with a Trusted Adviser team who can help you prepare well, know your suitors, articulate your proposition factually and help you defend the rebuttals with robust information that is clean and not tainted.

About the author: Vasu Majumdar

Vasu has completed over 35 corporate finance deals with a combined deal value of over £5bn. His experience has included Williamson Magor, the world’s largest tea producer and Rubicon Drinks, the UK’s first exotic juice drinks brand. Followed by corporate finance advisory career at NM Rothschild & Sons Ltd and Grant Thornton UK LLP. He is currently working in a Senior Adviser role for Fortus Business Advisors and Accountants; and Collingwood Advisory in London. Contact him on +44 7890 528 996.