In the first instalment of this series we explored how a seasoned consultant can support business owners in the early stages of a company sale. In this second part we examine how having made the decision to sell your company, you can benefit from the support of an experienced consultant. They can support you to identify, prioritise and implement initiatives to increase sale value and terms by maximising profits in the short-term. Consultants can craft a viable growth strategy to convey the company’s prospects under new ownership and to prepare it for the due diligence (DD) process.
Acquirers will typically value a company on its profitability (measured by EBITDA in most industries), cash generation and growth prospects. Whether engaging with financial sponsors (such as PE firms, family offices or HNWIs) or corporate acquirers, identifying and implementing initiatives to increase profitability and cash generation in the short-term, in advance of a sale, will have a direct beneficial impact on the valuation an acquirer ascribes to your business.
A buyer is interested in an acquisition target’s ability to capitalise on growth opportunities rather than past financial performance. Growth opportunities are the principal reason why SMEs are bought. Identifying and articulating these through credible growth strategies supported by implementation plans is one of the most significant methods to make your business as appealing as possible to prospective purchasers. Growth might be derived from operational improvements (e.g. through synergies, cost rationalisation or personnel optimisation), the launch of the target’s existing products/services in new markets in which the acquirer is already established or access to technological know-how. Mid-market acquisitions are often underpinned by one or several of these.
How prepared for due diligence is your company?
How prepared your company and its management are for the DD process is vital to augmenting its attractiveness to buyers. The vendor and the management team must be able to present all aspects of the business succinctly, articulate complex ideas plainly and respond to gruelling and difficult questions. If this is not the case, then at best they will sow seeds of doubt in the mind of prospective buyers (and cast into doubt the survival of said management team post-acquisition) and at worst mark your business as an unviable and tainted non-target best left to its self-inflicted demise.
Where consultants fit in
Operational consultants can increase profits and cash generation quickly, strategic consultants are able to develop and present growth plans, while sell-side corporate finance advisors and management coaches help prepare you and your team for the DD process. These skillsets are not often found in a company (in particular smaller ones) and it can be costly (in terms of management time and possibly through value destruction) to not leverage off comparatively inexpensive external expert advice when addressing these areas.
Maximising EBITDA and cash generation
There are entire industries dedicated to increasing profitability and cash generation through the implementation of any one of a considerable number of initiatives. These may include pricing reviews, cost benchmarking, customer and supplier consolidation, working capital optimisation, capital expenditure rationalisation, tax planning – the list is almost interminable. Management will often not have the bandwidth or the experience to identify, prioritise and implement most of these initiatives in a short period of time. This is exacerbated by the fact that they will be running the business and the sale process concurrently. It is at this moment when an external consultant can make a tremendous contribution to rapid value creation. Through a combination of profound operational expertise, gained from having worked in the specific industry both as a consultant and an employee, they can bring a depth of knowledge difficult to replicate internally and access in a short amount of time.
Planning sustainable initiatives
A consultant can combine this knowledge with their understanding of your company’s strengths and weaknesses to determine which initiatives should and could be implemented pre-sale and which are best left to the acquirer as part of a value creation plan (and for which you should still be able to derive an increase in sale value). Sustainability of these initiatives is also essential – an acquirer’s willingness to pay for a company is predicated on the future value they expect to derive rather than one-off measures that may simply have permitted the seller to extract some cash out of the business. There is rarely merit in implementing unsustainable initiatives in these circumstances. Someone with the right experience can ensure you do not pursue one-off improvements at the expense of more complex yet sustainable initiatives for which a buyer is willing to pay more for.
Why a growth strategy is important
A buyer will not ascribe much value to your company’s historic achievements. Largely, historic performance gives context to future growth plans, the more these differ from what has been achieved in the past, the more explaining that will be required from the vendor and the company’s management. An acquirer is principally interested in the value they can derive from the company during the period of their ownership. Prospective acquirers are concerned with medium to long-term growth prospects. As a seller, you should ensure you have a well formulated, multi-faceted and implementable growth strategy plan to share with prospective acquirers.
How to develop your growth strategy
The company’s senior management and the board of directors are responsible for establishing and monitoring growth strategies. In practice most SMEs generally struggle to develop, let alone methodically review, update and monitor these. When a prospective buyer requests one in the early stages of discussions, management often scrambles to produce a few slides with some sort of plan, often lacking depth and supporting analysis. A strategic consultant with the experience of operating in your industry, and ideally having delivered projects to your competitors, suppliers and customers, will have the depth of knowledge to develop these – be these entry to new markets, the development or repositioning of products/services or possibly industry consolidations plays.
Preparation for the Due Diligence Process
A DD process run by an experienced buyer, such as a large acquisitive group, a financial sponsor or a corporate finance advisor is exacting, unforgiving and intrusive. If your company and management team are not prepared for the DD process, you will find yourself unable to answer many questions succinctly, providing prospective buyers with reasons to doubt the company’s viability as an acquisition target or your price expectations. A consultant can focus you on key areas of DD for your industry, by type of buyer, clean up your accounts, implement best-practice procedures and policies, run a ghost internal DD process (an invaluable tool to identify all necessary documentation and prepare that which is missing), conduct a confidential personnel review and prepare senior management for the presentations and dreaded Q&A sessions with experienced buyers.
How prepared are you?
Even the best run companies can let themselves down during a sale process – from not unlocking value through simple measure, having a substandard strategy or not being prepared for DD. External know-how engaged to home in on these discreet but important areas, which require several years of hands-on industry knowledge, can help ensure that once you have made the decision to sell you take all the necessary steps to position yourself to obtain the highest value for your business. It will help you avoid punitive risk sharing ahead of launching into a public, complex and risky sale process. We will explore in the third and final instalment of this series.
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