Preserving value: Are YOU the business?

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 If the business is reliant on you as the founder for key functions such as sales generation, customer relationship management, operations and supply chain it will significantly limit your options for exit and limit valuation.

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Any buyer will assess the cost to the business of your absence, if it’s a trade player chances are they will be able to replace you but either way it won’t reflect well on value if the wheels stop turning when you are not around.

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For private equity buyers, the more cash you take from the transaction the more likely they have will a contingency plan to replace you and, if there isn't a viable CEO in waiting or second tier team within the business, the transaction becomes inherently riskier as it takes time to embed new leadership.  Few investors are happy to back management buy in (MBI) deals for this reason and if they do the valuation will be significantly lower than market rate.

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Consider whether your existing team are capable of running the business without you there, as in no input at all.  Identify what doesn’t happen when you are not contactable and fill in the gaps through either development of existing team members or key hires

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This might require you to relinquish some value in the form of share options or profit but, if well managed, will lead to increased value when you can demonstrate your own independence from the day to day.

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Transition to working on the business rather than in the business as far as possible in advance of a sale process. Building the next generation of leaders and making yourself effectively redundant from anything that involves generating growth or winning, retaining and servicing customers will directly impact on the ability to attract a wider pool of buyers and, in turn, on valuation.

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Understanding value drivers through M&A activity

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Is there transactional activity in your market? Do you keep up to date with relevant deal flow to understand who is active and what the prevailing multiples* are?  To do this well requires access to relevant databases and further investigation to understand the story behind a deal as values are often undisclosed.

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Taking time to understand the deals landscape can be a valuable step to determining exit timescales, high levels of activity might accelerate plans and knowledge about value levers from reference transactions equips you to position the business in an informed manner.

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A lack of activity is usually a warning sign to revisit strategy in line with known value drivers, perhaps even into new markets and territories. Either way, being inquisitive about the deals landscape at any stage gives the confidence that you are building a business buyers will see value in.

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Mid-market** private equity generally follows the trend rather than set the precedent so if you see a pattern of investments in a space, chances are this will increase the appetite for the market from other players looking to put their funds to good use.

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Build a targeted network around your buyer

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Building a relevant network to support an exit process involves using market knowledge to understand who the key investors, strategic players and advisers are in the space and getting your business on their radar.

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Businesses who invest time getting to know a well-considered shortlist of potential suiters over time have a higher chance of reaching value aspirations and agreement of non-negotiables. Not only does this give the buyer the chance to get comfortable with risks and the team, it also gives you, the prospective vendor the opportunity to diligence potential investors and trade buyers over time. Most buyers want to engage early and develop their own networks.

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Following this process is also likely to highlight the most active and informed advisers in the space most of whom will spend time talking you through the market and sharing their experience.

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In summary

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There are a multitude of benefits to taking a longer-term approach to exit readiness, all put you in the driving seat to achieve an exit on your terms with the added bonus of refining and validating business strategy.

Most important of all, exit planning fosters confidence that a successful outcome can be achieved when committing to a sale process.

Want to learn more? Get in touch on: info@theimplicit.co.uk and don't forget you can sign up for our M&A newsletter on LinkedIn

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Notes:

*Valuations of trading businesses are often derived from a multiple of revenues or profits

** Lower mid-market definition is £10m-c£50m transaction value, definitions vary.

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