02 Mar 2018
Value can be lost or won on an exit transaction. Here's Ten Top Tips to ensure you maximise and boost your exit value.1. Business performance during the exit process
Selling a business typically takes around 6 months from the start to popping the champagne corks. During that period it is really important that the business performs according to plan. The number one reason that destroys value during a deal is deterioration in the business performance during the due diligence (DD) process.
Selling a business requires a considerable effort from a team of people. You need to be prepared. DD can in some cases be a very gruelling process that will involve legal, financial, technical, commercial, property and HR teams. You will need to be prepared for that and have the information available for the buyer in a virtual data room.
During DD any skeletons left in the cupboard will be revealed. To maximise deal value it is far better to resolve disputes or upgrade systems and processes well ahead of an exit, as surprises rarely go down well with an acquirer.
4. Management structure
Technology acquisitions tend to be about enhancing revenues rather than cutting costs to improve profits. Buyers will therefore tend to want to keep staff. If you have attracted interest from acquirers in adjacent verticals, the retention of the management team could well be crucial. It is therefore important that the management team are aligned and have appropriate incentives. Value can be lost if 2nd tier management are not aligned.
Recurrent revenue models with multi-year contracts are really popular with acquirers and are a key determinant of value. It increases the quality of revenues and so reduces the buyer’s risk. However, growth is also really important, so make sure you have good visibility of revenues and a solid pipeline before starting your exit. Short term forecasts need to be realistic and so it may be best to wait until key new contracts have been secured or renewed before kicking off.
An exit process needs to be controlled to maintain momentum and reduce risk. The longer it takes the greater the risk. As the ex CEO of Aveva Plc, Richard Longdon commented “time kills deals”, after an initial deal with Schneider fell through following protracted talks that dragged on and on. All processes need managing to keep all parties on track and maintain momentum. The longer it takes the greater the deal risk.
If a business is too reliant on one particular technology, one supplier or customer it will increase the risk, irrespective of the length/depth of the relationship. Just ask Imagination Technologies who were significantly reliant on Apple, which was great for a while but when Apple pulled out, meant they ended up accepting an offer that valued then 75% lower than 5 years previously. Don’t put all your apples in one basket.
8. Competitive tension
While it may be tempting to accept an offer as a result of a direct approach, there is no doubt that if you want to maximise value then you need to have competitive tension. In a recent sale, vendors added 30% to their exit value by approaching other potential bidders after an unsolicited approach. Equally, without any competition there is always a greater risk of price chipping later in the process.
9. Unknown unknowns
There is always the risk of something coming from left field to derail a process. Obvious examples we have seen have been 9/11, credit crunches and of course the Brexit vote in 2016 – all major events that changed the buyers assessment of risk – and therefore value. These are outside your control, but it’s really important that adequate funding is in place so that sellers can always walk away from a deal, if agreed terms are threatened.
Selling a business requires the commitment of a number of different parties (management, lawyers, advisers and shareholders) to successfully close a transaction. Negotiation never stops, even after the close the value can fluctuate so remember Cash is King.