In the first part of this series we explore how a seasoned consultant can help the owner of an SME, be this a founder-entrepreneur, a management team or a mid-market private equity fund, approach the early stages of a potential business sale. Selling a business is an important, complex and risky event. From the decision to realise the value of your business to narrowing down exit routes, and from tailoring market positioning for each prospective buyer and timing considerations, a poorly managed sale can be irreparably damaging to the business.
A sale process will require significant management/shareholder time, thus detracting from running the business, which may adversely impact its performance. It is unlikely that a company’s management team will have the experience to manage the process and prepare the company for a sale, whilst a corporate finance advisor is often not positioned to prepare a business for sale, typically preferring to act as a process manager seeking to book a transaction fee in a short period of time.
An experienced consultant with several successful exits in their portfolio can bring a wealth of experience and provide bandwidth to maximise value and reduce risk. This is achieved principally by avoiding procedural and tactical pitfalls and thorough effective process management in a way that a first time seller is simply not able to. You would not permit a first time manager run your business – do not let a first time seller (such as management or yourself if you are a founder-entrepreneur) manage your sale.
Deciding to sell your business
Selling a business is a complicated process: it will require time, human and financial commitment, pose risks and require effective project management. A withdrawn sale, a low valuation or a drawn-out value destroying distraction are all possible outcomes of insufficient preparation, inadequate project management and inexperience. The decision to sell will be driven by any number of reasons, from the culmination of a life’s work and the accompanying decision to enjoy its monetary value, the requirement for a significant capital injection to fund further growth, mounting business complexity, a private equity fund reaching the end of its hold period or a refocusing disposal by a large business.
There are several types of potential buyers and routes to market, though in practice the most likely ones for SMEs are partial or full exits to either a trade buyer or a financial sponsor (such as a private equity firm, family office or high net worth individual). Determining which route to focus on (or possibly both) and narrowing down the field of prospective buyers to approach is a time consuming task that requires specialist experience. Nonetheless, it is worth ensuring that this early decision is not take lightly. Every buyer is different, each with its own agenda, requirements and expectations on a wide range of commercial considerations.
Positioning your business
The value of any business is neither static nor alike to all. A competitor may be willing to pay a premium to remove you as a threat, obtain your know-how or access your clients. A large corporate customer may wish to acquire you to secure the supply of specialist services or an intermediate input good, whilst a financial sponsor may feel they can add significant value through operational know-how, contacts or buy & build expertise. Thus, each buyer will approach the process differently, view and analyse your business through their own lenses and have specific negotiation pressure points and considerations.
In order to maximise sale value, obtain the best terms (such as form and timing of consideration and minimise your risk retention as a seller), it is imperative that as a vendor you identify each individual prospective buyer’s deal drivers and position your business accordingly. An experienced consultant can help you prepare your business for each buyer’s due diligence process and to position it accordingly, drawing out the desired characteristics for each and provide you with the knowledge and opportunity to take corrective actions in those areas which could reduce the perceived value to any one specific buyer.
It might be that you think every private equity firm should have an interest in acquiring your fast growing company, or that it would be the jewel in the crown of any trade buyer through the strategic edge your offering gives them. The reality is that once strategic considerations, cultural fit and external market aspects are factored into the process, there will typically only be a handful of prospective buyers for whom your business will make the ideal acquisition. Unfortunately, without the appropriate experience, a seller can devote a significant amount of time and financial resources figuring this out and possibly never arrive at the desired outcome. This is where a consultant with experience of sell-side M&A and strategy can make a difference – by identifying your company’s most important differentiators in combination with knowledge of the relevant buyer landscape, the consultant is able to generate a shortlist of prospective buyers to approach, most of which should have an interest and be credible.
Identifying the most likely buyers for your business early on is critical in drawing out your company’s most attractive characteristics to them. The ideal acquirer will have a similar culture to that of your business, represent a quality asset to which they can add significant value in the long term, be an ideal strategic fit and not necessitate significant management and financial resources to purchase. Whether this is a competitor, a player across your value chain, or financial sponsor, an experienced consultant that can arrive at a high quality short list that can create competitive tension and maximise value (including valuation and consideration structure) is invaluable. A long list of mostly lukewarm prospects will require considerable time to sort through and put a sale process at risk.
When you launch a sale process it is a critical driver of monetisation. Waiting to implement operational improvements, win new contracts, conclude a value-enhancing acquisition, strengthen management or have a longer period of demonstrable growth are all excellent reasons to delay a sale. A consultant that can assess these initiatives and make an informed recommendation on where to strike the balance between which ones to conclude ahead of a sale and which ones are best left for the owner, ensures you do not leave value on the table but do not squander time chasing a marginal benefit.
The most important decisions impacting a sale take place before a process is launched. Ensuring your prepare the business, positioning it accordingly, get the timing right and know who will be most interested in a transaction will enable a seller to run a successful, tight and quick process that maximises value and reduces transaction risks. A company sale is complex and risky – the cost of advice from an experienced advisor will be insignificant compared to the value they can create for you or can ensure is not destroyed through an unsuccessful process.
Get in touch with Talmix to find out more about using independent consultants to prepare your business for sale.
About the Author
José has over 15 years of private equity, private debt and investment banking experience at blue chip institutions across Europe. His experience includes sourcing mid-market acquisition opportunities, executing on these, conducting due diligence, spearheading commercial negotiations and transaction documentation, closing acquisitions and managing portfolio companies. This experience includes developing and implementing organic and acquisitive growth strategies (including buy & builds/industry consolidations), cost rationalisation and optimisation programmes and cash conversion improvements. José is also experienced at raising capital, including equity and debt through direct lending strategies, as well as structuring alternative investment funds in Europe.More Content by José Benedicto