Businesses rarely prepare for the exit process appropriately, leading to loss of value in a deal. We outline nine areas you need to look out for, as well as tips for protecting your deal value.
Value erosion can (and does) occur at various stages of an exit cycle. Our experience is that businesses are rarely prepared for exit processes, by which time it is difficult to change trajectory. Here are nine areas to watch out for that can lead to value loss in a deal:
1. Vendors do not pursue multiple divestment options
Exploring the options and potential buyers helps maintain competitive tension in the bid process, and enables seller to explore the best solution for them in the next phase of ownership.
2. Vendors fail to customise the business case for each potential buyer
Buyers want to understand the business from their own perspective to get comfort with their investment thesis, customising the message helps deliver an efficient process and facilitates the best price.
3. Value is lost between signing and completion
Loss of value occurs in the final stages if there is a lack of clarity or material, outstanding issues which still remain when the competitive tension of the process is less apparent.
4. The equity story is not clearly articulated and/or supported by robust plans and forecasts
Granularity in the information helps reduce misunderstandings and ambiguity if the analysis is appropriate and robust in supporting the exit. Clarity on forecasts and historics helps bidders deliver confident and potentially higher bid prices.
5. Vendors fail to engage with bidders early or tailor communications to the audience
Confidence is built up if management teams are able to engage with and build relationships with bidders, as this builds trust and belief in the ability of management teams to deliver on their equity story.
6. Poor business and technology enablement of the business plan and its operational needs
The failure to address barriers to the execution of the plan, creates nervousness amongst bidders who will want to see and trust in the executability of the plans, and the returns they are investing in. Both the technology and operations may take time to change, which may in turn impact the timing of the growth
7. Vendors fail to work on the trade-off between time and deal value
Deals are highly time consuming and balancing the detail and priorities in the negotiation of the sale and the complexity of the various issues significantly influences management's ability to realise the best deal and also the level of distraction the deal process is to business as usual.
8. Preferred bidders require vendor support, especially for financing
Close working with preferred bidders deepens understanding and builds confidence with investors who are delivering financing
9. Preparation fails to meet today's more fluid sales processes and limitations in the operational hand over plan
The diversity of bidders, the differing investment thesis and ability to deliver on the early demands of the business plan, requires early focus on operational matters to overcome deal fatigue and re-energise the business for its next phase of business growth
How to protect deal value
Fundamental to protecting value is:
- early preparation and identification of risks
- planning and alternative exit strategies
- strong leadership of exit process, and well supported robust business execution and forecasts.
Value leakage in the process can be mitigated by early exit readiness programmes which stress test weaknesses in the exit thesis.
Consequently we recommend an Exit Readiness exercise, ideally 12-18 months beforehand, focused on credibility of growth story post-exit, quality or suitability of management information and key performance indicators to support the exit story and any potential carve-out considerations, amongst others.
What is exit readiness and what are the benefits?
- early review/diagnostic by senior Grant Thornton specialists to work alongside management (and sponsors) to assess the business from a new investor's perspective
- addresses the key commercial, operational, financial, and tax issues that will effect deal structure, process and value
- early, independent view of potential purchaser issues – helps identify key value drivers and risk areas
- performed well in advance of a sales process (minimum 12 months) to create lead time for management actions
- practical outputs focused on key issues and actions to be addressed in advance of a sales process
- develops thinking on exit options and tactics. Promotes a smoother and faster disposal process. Comfort to Board/CEO/CFO that the business is ready for sale and the financials support the disposal strategy.
Find out more
If you are looking to prepare your business for exit, please get in touch with me or with your usual Grant Thornton.