ICT businesses looking to exit must invest in a comprehensive preparation process, writes Duncan Gregory, Transaction Director of M&A advisory firm Evolution Capital.
Preparation for exit is clearly key to success, but how many company owners genuinely practice this when embarking on selling their business? We see so many companies in the TMT sector make the decision to sell only to be disappointed after a long and arduous sale process in which the final price has been chipped again and again by savvy buyers. Selling your company is arguably the most important event of your business career. It would be foolish not to prepare fully for it.
Where to start?
The sales process is a multi-event sequence and requires learning a multitude of technical skills and abilities. While most entrepreneurs have plenty of passion and commitment it is unlikely that they will become an expert in the different aspects of selling a business, or even assemble a team that can deliver such a multi-skilled process. A first step would be to find the right M&A advisory firm with an in-depth knowledge of the sector to take you through the entire process.
When to sell and who to?
When to sell is a personal decision. Some entrepreneurs have a target value in mind, others might have to sell for personal reasons. There is no right or wrong time, as long as your business is ready for sale it will attract buyers. The TMT sector continues to expand and there are plenty of mid-market players looking to merge with like-minded businesses. Knowledge of the sector and the personalities behind it is paramount as due diligence advisers are known to be canny.
Get fit for sale
This can take time. Learning new skills is always hard, and only with total commitment to trial and error do we acquire new abilities to a reasonable standard. All the events or phases in a sales process are crucial. A platform of quality information and reporting needs to be designed and populated so the business will score the highest points through each event, and most importantly arm business owners with the right tools to defend buyer investigations in the transaction phase. Business owners who are determined to achieve maximum value must understand a buyer’s perspective of their individual propositions, strengths and weaknesses, before embarking on value improvement.
A full strategic review of your business is crucial. Most companies will want to raise KPI performance before populating an information memorandum template. It is critical for business owners to improve these metrics and remove any obstacles to a sale. Sale processes that do not commence with a strategic review, that have no robust due diligence platform to support the process through to completion, nor commit to a value improvement program from the beginning, are unlikely to achieve maximum value at transaction.
Simply squeezing your business into a template to attract offers without any bespoke analysis and metric training is not an option. In fact, research by Evolution Capital has found the biggest challenge facing a business ill-prepared for the sales process is not the lack of reasonable offers, it is achieving a value at transaction that has any semblance to the value agreed when entering exclusivity with a buyer.
Most processes lose more value than they gain in price maximisation through marketing and negotiation than they do in the period between signing heads and entering exclusivity to completion. Why not enter that phase in full knowledge that your business is fighting fit? It is not uncommon to see reductions of over 20 per cent achieved by competent buyers with specialist advisors. During due diligence, difficulties often arise with defending claims made in the company information memorandum document and this generally points to a lack of preparation in the beginning and due provision for specialist guidance in the final phase.
While brokers claim expertise with transactions, many lack the experience or fail to commit these expensive resources in the final phase of the project. Business models heavily contingent on success require high levels of transactions, which in turn necessitates resources being spread too thinly to deliver outstanding outcomes for shareholders. In many cases, the need for experienced transaction support is critically delivered over a demanding four week period, when business owners are most challenged to defend value. Our experience is that a successful mid-market business sale absorbs many hours of professional advice much earlier in the process, typically between 500 to 1,000 hours of professional advice. Of this at least 30 per cent is set aside for preparation.
It can all still fall apart if you don’t have the right team around you. While training and preparation are of equal importance to achieving ultimate success in a sales process, all can still be lost at the final crucial moment. A good M&A advisory organisation will manage the arduous transaction process, field questions and deliver the right information to buyers, ensuring the right price is achieved.