Articles
5 Key Steps to Maximising Your Exit Value
ICON66, July 2011
If you want to maximize the value of your company on exit you need to plan properly - but what exactly do you do to prepare for your sale?
5 Key steps and areas to Maximise your Value
Planning for the Exit properly
Identify strategic acquirers
Creating competitive tension and leverage for the deal
Negotiation
Avoiding the Bear Traps
1. Planning for Exit
If you want to maximize the value of your company on exit you need to plan properly - but what exactly do you do to prepare for your sale?
Timing / Valuation expectations
Timing is a key considerations, as far as timing is concerned the best time to go to market and to get your best valuation is when all your stars are aligned, not only does your company need to be growing fast, be highly profitable ideally but also your sector needs to be hot, and the general M&A market needs to be buoyant.
Second Tier Management
It's also very important to build and incentivise your second tier management team. Certainly if you want to leave the business day one after the transaction and go off to your next project, then the business needs to be able to run on a stand alone basis. So it's pretty key that you make sure there is a management team on board who can help to sell the business, and help during that process.
Housekeeping
There's a number of things you can do, but this is really all about getting your house in order' before you go to market. You may have major contracts which you're heavily reliant upon, but the contracts are not signed or they are not finalised. Or you might have an OEM relationship - you've always been meaning to get that strategic agreement in place but haven't quite got round to it, these are all key bits of documentation which by the time you get through to the due diligence process, are critical to making sure you tick all the boxes and get the deal completed. The problem is that if you don't have this sorted out well in advance, it can make the due diligence process drag on, so try and get these things sorted out upfront.
Intellectual property
Certainly if you're heavily reliant on patents, make sure you're right on top of the patent application process; if you're a software business then make sure your code is properly documented, these are basic things but very important to do upfront.
Disputes
If you've got any outstanding litigation or there are claims against you, get them settled. If there are any disputes, you are invariably going to be asked to warrant against any potential liability that might come out of existing claims, so you want to think about whether it's worth your while pushing for an early resolution to sort these things out upfront, so that at least you know exactly where you stand as far as liability is concerned.
Grooming
It's important to align your business to the interests of your prospective acquirers and present the business in the best possible light. Grooming is all about ‘cleaning up' the operations of the business, such as clearing out any non-business assets or stripping off non-operational expenses from the P&L.
Public profile
Check your website, make sure it's up to date, make sure there's relevant and positive articles. It's very important to have a strong public profile, and it comes across very poorly if your website is out of date and you don't have any good stories. As soon as somebody hears you're on the market, the first thing they're going to do is go to your web site, so think about boosting your public profile and maybe even commissioning some additional PR.
Working Capital
Working Capital is always a sensitive area as far as companies are concerned. In the first respect, what you don't want is anyone thinking that you're going to run out of cash during the process. So you want people knowing you can walk away from the deal at any time, if it's not good enough. Conversely, if you've got excess cash on the balance sheet, what do you do with it? Nobody wants an acquirer to buy their business with their own money, but having said that, different companies or different owners have different cash and different tax circumstances, so have a chat with your tax adviser up front about whether it's best to strip out surplus cash in advance of the exit, in some cases it's better to leave it in for tax reasons.
One of the overall principals is have a clear and sensible idea of a reasonable level of working capital going forward, and make sure you've got a number and obviously make sure you know what the acquirers idea of working capital is, because anything plus or minus that comes straight off the purchase consideration.
Advisers (legal, tax, corporate finance)
Advisers, up until now you might have only needed lawyers for IP related issues or maybe minor contractual negotiations, but certainly when you are selling a business it's different, it's a totally different type of transaction and depending on who your lawyers are, you can bet that if you are selling to a big global multinational IT Giant, they're going to have some of the best lawyers out there, so you certainly want to make sure you've got top legal advice.
As far as tax advisers are concerned, get tax advice up front, it's not necessarily going to be significant but just in terms of planning, it's certainly worthwhile. Then as far as corporate finance advisers are concerned, you might not actually have had corporate finance advisers before, but whether you decide to choose somebody like ICON or whether you choose someone else, make sure that you engage somebody at the start of the process, as there are lots of things that you'll need to be fully aware of upfront and prepared for, before going out to market. Also very importantly, make sure you get a corporate finance adviser whose has experience and expertise in your particular sector, who knows who the key players are in your market place and hopefully, will have done deals in your space and they'll know the pros and cons of selling your type of business already.
As far as planning is concerned, it can take anywhere from 2 months to 2 years to plan for an exit, depending on how ‘clean' your level of operations are and, how well you're doing on plan. However, typically it takes about 6 months.
So, even if you're particular sector is still going through a tough time, it still might be time to start building for exit.
2. Identifying Prospective Acquirers
So say your business is ready to go for Exit - but who are you going to approach and why are they going to be interested in you?
Strategic Fit
There are many reasons why acquisitions happen: acquirers might be looking to get into a new market or geography; they might be wanting to buy your customer base, so they can upsell their own products, they might be wanting to buy your product because it gives them differentiation, they might buy you as you're a market leader, or they might buy you as they want you out of the market because you're a threat to them. You might be a specialist in your sector so as far as a services businesses are concerned, if you've got a specialism, whether it's a particular affinity with public sector or defence or financial services, it's a point of differentiation or someone may buy you as a straightforward ‘buy & build' or consolidation play.
Synergies "1+1=3!"
If you are looking to maximise the value of your exit, one of the key things you want to have with your acquirer is a strategic fit. If there's a strong strategic fit then it's all about benefiting from synergies. Synergies arise such as cross-selling opportunities, accelerated entry into a market, or even if its gaining a technical advantage. What synergies do is to make sure the combined entity is greater than the combined sum of its parts, and hence "1+1=3", if that's the case, then an acquirer has the ability to pay more for you then you're worth on a stand-alone basis.
Existing contacts
You might already have a pretty good idea of some of the specific contacts that you might like to approach; it may be that you already work closely with them. They could be people you have a reseller's agreement with or you work in partnership with or have an OEM agreement with. The great thing about existing contacts is, not that you can just pick up the phone and call them up and get a meeting straight away, but the great thing about existing contacts is hopefully you've already established a ‘strategic fit' with them and more than that, you've already established an element of trust with them, so they get some reassurance that you're going to continue to deliver on the deal, should they decide to go ahead and acquire you.
Competitors
Competitors, on the other hand, can be a whole different ball game. There's similarity, in as much as there's a strategic fit, you operate in the same market sectors, but they don't trust you. Or probably more to the point, you may not trust them.
How do you go about trying to sell your business to competitors?
Well the quick answer is that in many cases you don't. The last thing that you want is competitors getting even a whiff that you are up for sale and have them go talk about it on new pitches, or use dirty rotten tricks like calling up your existing customers and telling them that you're about to go on the market, or trying to poach your key staff. However, there're are things you can do as far as managing the process, maintaining confidentially throughout, making sure that when you contact people, it's on a "no names" basis and your corporate finance adviser will make sure there is a Non-Disclosure Agreement in place, prior to releasing any further information.
The fact is whether you like it or not, going out to your competitors and certainly in many cases you won't go to your closest competitors, but you could go to competitors who are working in maybe different geographies or ones that you get on with and think there's a cultural fit. If you do go out to competitors where you do have an established strategic fit, make sure the contact is done on a highly controlled basis and in the Information Memorandum, you'll most probably want to strip out all the information about your customers and anything sensitive about your forecasts or pricing.
Research Potential Purchasers - from Complementary Sectors
You may have a good idea of some specific parties who you might want to approach, here's one of the areas where your corporate finance advisers can add significant value by identifying people that you may not have considered going out to, or haven't even heard of or didn't know that there're interested in acquisitions.
At ICON, over the years we've built up a proprietary M&A database of about 2,500 contacts at acquisitive tech companies all of whom we've already dealt with and also all of whom we also know exactly what kind of sectors they're interest in and it's not just their own sectors as well, so certainly we've got a vast resource in terms of identifying additional targets that maybe you have not thought of before.
It's also important to think laterally when you're putting together your target list so that you can identify potential acquirers from "complementary" sectors. So the main aim of this step in terms of maximising value, is to get a broad range of strategic acquirers, and certainly the greater the ‘strategic' fit - the larger the potential multiple.
3. Generate a competitive process
So generating a competitive process, this is critical if you want to get the best deal, obviously if you don't plan properly, then you're not going to show the company in the best light, and if you don't approach the right targets you're not going to get the best offers, but the fact is, even if you do get an offer for your business, the one thing that you can bet your granny on is that the first offer is not going to be the best one. So actually, how do you tease out the better offer or the best offer from the acquirers? One sure fire way to do this is to get some leverage, get some competition, so you have competitive tension in the deal.
Indicative Offers
Just as far as the process is concerned, one of the first documents you're putting together is the Information Memorandum, it's a key document for positioning the business, what you are trying to do with an IM is to put enough information into the document, so that interested parties can come up with an Indicative Offer for the business, based purely on the information in the IM. Now all acquirers are different and they come up with different questions and sometimes you'll have conference calls or additional meetings to expand on the proposition, but what you are really trying to do is get indicative offers as early as possible upfront, so you can identify the serious contenders to focus time on and rule out those who are just wasting time and bottom feeding.
Shortlist & "Mini" Due Diligence
Once you have Indicative Offers, you need to identify who is on your shortlist. It can be anything of two to four of the acquirers that you're going to spend some more time with and do what we term, a ‘mini' due diligence process. So what you are doing is showing quite a bit more information, giving quite a bit more face time to initial site visits, and in the process, trying to find out a bit more about what the strategic interest is of the party, before you go through to Final Offers.
Once you get the final offer deadline, what you've been trying to do during the shortlist and mini due diligence period is, not only give people additional information to make sure they give you a more detailed offer and hopefully a more robust offer, but also you're well aware of other parties' interest, so what you're trying to do is really use your leverage to sharpen up the initial offers. It might be that your corporate finance advisers tells them: "you're just not there on price", or if they're not doing too badly on price, then the "composition of the deal", may have a heavily contingent element to it or not enough cash in the deal. So that's a critical period and that's really one of the key times for maximising the value of the deal.
For example ICON sold a financial services software business, a couple of years ago, and we had quite a lot of interest in the business probably about 12 Indicative Offers came in straight away, 6 of those were already in the target valuation range of the client which was somewhere between £12 and £15 million. The highest Indicative Offer, we got, was £14 million although there was an element of deferred consideration in there.
We whittled the shortlist down to 4 interested parties, and during the course of the mini due diligence and negotiation and using the leverage of the interest in the deal, we managed to increase the best offer to £22 million during the process, so a 50% increase in the price and also the consideration was pure cash as well, so a cracking process and a great example of just exactly what you can do when you've got competitive tension in a deal.
4. Assessing Bids[/Comparing Offers]
Certainly the main factor in any offer is the Consideration, it's obviously the highest priority, but the consideration can come in many forms. Cash is obviously the most sought after, it's the one form of consideration that you can guarantee on Day 1. But there's many other ways of getting paid, shares or loan notes. There could even be a contingent or deferred consideration in the form of an Earn Out. So whilst cash is obviously the most attractive, alternative consideration can be attractive because it can increase the potential price that can be achieved on the deal.
Earn Outs obviously, make very strong commercial sense as well, if you're expecting the business to grow and you're convinced that you're going to deliver on your forecast numbers, then you certainly want the multiple to be on your forecast number rather than your historical numbers; depending on how confident you are in achieving your numbers. Obviously there's a risk with Earn Outs that you don't actually meet the targets, or you only meet them partially, so you only get part of the Earn Out.
Earn Outs can also be tricky to ‘protect', if you've got sales or profit targets on an Earn Out to achieve, your incentive is obviously to achieve those targets, however, the acquirer has an incentive to make sure you just miss them, so they don't have to pay the excess consideration. So what you don't want is them trying to divert some of your sales to the head company or load your business with additional management fees or head office costs, so you miss the profit targets. Certainly, if there is an Earn Out involved, you need to ring fence certain operations at least for the period of the Earn Out.
Culture / trust / behaviour
These are much more subjective things which you can't really see in the offer letter but they are nevertheless extremely important, culture is probably more important for the acquirer, if they are wanting to integrate your business or take your team on board, there is no point them buying a company where there isn't a cultural fit and as far as an Earn Out is concerned, if there isn't trust in place, or you are going to want to carry on working together following the deal, so you want to make sure that you're selling your business to somebody who is going to act fairly on the deal going forward.
5. Avoiding the Bear Traps
Beware the ‘price chippers'
Agreeing Heads of Terms represents a major shift in the sales process, you are going from a position of relative strength when you are asking people to compete for your business, to a position where actually the boot shifts pretty much onto the other foot, whereby somebody has won the deal, you have selected a preferred acquirer, you are agreeing to a period of exclusivity, where you can talk only to them, so you have to cut off communications with everybody else you're speaking to and really at this point, all you want to do is complete on the deal that you've agreed. For the acquirer, however, at this stage, they have a pretty strong incentive, now they have won the deal and have exclusivity, to actually highlight areas where they've been misinformed, got the wrong impression and they ‘chip away' at the price to get a better deal.
So how do you go about preventing price chipping?
Transparency
Transparency's one way, certainly documents that you put out during the sales process, the IM, you want to make sure there's sufficient information in there for somebody to put together an offer for the business, but you also want to make sure, that they are fully aware of all the salient circumstances that are relevant to the business. The last thing you want to do is go into the DD process and you've omitted a key fact about the business, a key potential liability or issue with a certain contract, you want this highlighted well upfront. So make sure when you're arguing at Heads of Terms that they are all aware of the facts about the business.
Minimise Exclusivity Period
The DD process is part of this, minimise the length of the exclusivity period, the longer the DD period, the more things can come back and bite you. The longer the time that they've got to find something wrong with the business and chip away, if you have a competitive process, negotiate the exclusivity period as well as the consideration. Try and get that down to the minimum time.
Momentum/Timetable
Know what the DD timetable is going to be. Know what kind of steps that they want to put into place, the key references they want to undertake, make sure you're pretty confident about what responses they are going to get. Be very, very careful about committing to an additional milestone which you haven't actually met before signing up to an offer which is reliant on that milestone, going ahead.
Detailed Heads of Terms
You can't put everything that goes into the sales & purchase agreement into the Heads of Terms, but there are key areas that need to be covered such as references to the type of warranties that are going to be required, the net asset position, make sure you get heads up well in advance of what the expectation is. You can't put everything in the offer letter but try and cover some of the key terms to minimise all the arguments the lawyers are going to have in legal DD.
Take due diligence seriously
Take the DD process seriously, it can be boring but it's critical. You've done all the fun stuff up to Heads of Terms, due diligence is obviously a verification process to make sure that everything you've said, stacks up, but the fact is, the acquirer is looking for areas to pick holes and chip away and you've got to make sure your house is in order and you run a clean DD process. The time you spend on that will be well worth it,obviously if you don't have good DD process your acquirer has more opportunity to chip away at the price.
Positive news flow / meet your forecasts
The sales process can take quite a long time, and all the way through that process you want to keep the momentum going, you want to keep the acquirer's confidence in the business and your ability to deliver on it. So things like major contract wins, new technical milestones achieved, and the fact that you know you're going to meet your forecasts, it's very important for positive news to keep flowing all the way through the process, right through to the completion. Sometimes, it's even worth holding some news back just in case some bad news comes in - so that you keep that positive news flow flowing through.
Most importantly, you MUST continue to manage the business throughout the entire process. Selling your company can be a major distraction to management and yet, if you take your eye off the ball and begin to miss your numbers during the process, then it can have a hugely negative impact on the outcome of the deal.
So there's no rocket science to selling your business, it's all simple common sense, but behind each of those points, don't underestimate what hangs off the back of it in terms of the amount of work that goes into it. The scrutiny that goes into the IM and all the way through the DD process, you've got to be on top of your game. You just can't underestimate how tough and how hard it is to sell your business. It's one of the toughest things in business that you'll ever do. There are no excuses, the buyer will not accept why the forecasts have gone from x to y, you can't say, "well, we've been spending all our time selling our business", it doesn't cut the mustard. You have got to deliver on the business; you have to deliver on the deal. If you don't get it right, things can result in the deal bombing out or a slice gets taken off the price and so you've got to go into it fully knowing what lies ahead. There are an awful lot of things you've got to juggle in the air, but the prize is worth it, it's the big pay day if you get it right.
