Exit opportunities don’t always come at the perfect moment
In the perfect world, you as a business owner would choose the perfect moment for your exit; when your sales are looking upwards, your team is settled, your data room is full of clean, perfectly organised and prepared documentation; there is competitive tension and a premium valuation is within reach.
For most, however, this is not a practical reality. An approach comes because the acquirer has a need when you are not quite ready so, you scramble to pull together information and analysis which paints your business in the best light.
On the positive side, you are responding to the burning requirement and need of a potential acquirer and this may very well drive a premium valuation. These circumstances are also a big test of how well run your business is.
You need to be able to prove your business is well run to achieve a premium valuation
Sadly, we’ve seen too many situations where a business is unable to articulate how fundamentally profitable they are and why; despite revenue growth, there isn’t commensurate EBITDA growth. The budget for the year is out of date and there is no updated forecast of performance for the year. Likewise, there is no 3-year plan so an inaccurate version is hastily put together, lacking rigour, accuracy and credibility.
If you can’t answer the basic questions, they (a predator) may think you are deliberately hiding something
We’ve seen many exits compromised and a premium valuation eroded because the finance team took too long to come back with answers to simple questions and they had little knowledge of the business’ working capital movements. These deficiencies telegraph a message of a poorly run business. They generate a scent of something nasty under the covers. The lack of detail is perceived as obfuscation.
These symptoms result in three possible outcomes:
1. A really good acquirer with a burning need pulls out of the discussion
2. A discounted valuation is proposed
3. A more onerous earn-out, which de-risks the transaction for the buyer, has to be accepted
Getting quality management reporting is easy
Generating sales growth is difficult. Developing brand awareness and new lead generation activities is difficult. Managing a cost base in inflationary times is difficult. But getting quality management information, basic accounting analysis, a regular pattern of forecasting and documentation of legal agreements, is relatively easy.
It is a terrible shame that companies put so much time and effort into delivering on difficult issues only to suffer value erosion by not ensuring that the easy things are done. And it is difficult to retro-fix these easy things once the process has started.
Time and money spent preparing for exit is a sound investment in your future
This is why we are so focussed around preparing for an exit well in advance. Everything required to prepare for an exit is also required to run an efficient and profitable business. Time and money spent preparing for exit is not wasted but rather an investment in your future even if that future does not equal an imminent exit.