Rob Starr, Head of M&A at Shaw & Co, discusses some key essentials to include in your business exit plan.
Knowing it’s the right time to exit a business is one thing, getting there is another. Having a robust exit plan is a critical and here I share some key essentials:
You need to have a clear plan of what your business needs to achieve in terms of turnover, market share, profit, IP development, people, infrastructure and positioning to deliver the desired sale value at the required time.
This requires developing an understanding of business valuation and the key metrics used by buyers in your sector. Applying these metrics to your business today will give you a good idea of the gap between the value of your shareholding and your magic number - see this blog for further information. Be warned though, actually selling your business requires a lot more than just the application of metrics. A buyer will be looking for other key attributes before they are willing to make a move.
More on those later.
When valuing a business for a trade sale, its trade price is typically calculated on a multiple of earnings that is based on comparable transactions. These are, in theory, valued using the ‘capital asset pricing model’, although adjustments need to be made for scale, liquidity and general market conditions. Such comparable transactions provide comfort to buyer and seller that an asset with similar characteristics was sold on a similar metric.
This market analysis seeks to offer a range of multiples that can be applied to the Ebit (Earnings Before Interest and Tax) or Ebitda (Earnings Before Interest, Tax, Depreciation and Amortisation) of your business. The correct earnings number to choose depends on whichever is the closest approximation to cash. In addition, adjustments are made to account for excess cash balances (add to value) or debt (deduct from value) and normalised working capital. These are areas you should not overlook as they can contribute, or detract, materially from the net amount you receive when selling your business.
Valuing your business is an area in which taking expert advice is essential. In particular, understanding what impacts the possible range of multiples for your business and what would constitute a sensible planning multiple and an aspirational multiple for your exit.
You will need to calculate the distribution of today’s value through your shareholder register. Looking at your holding alone, how does this compare to your magic number, net of tax? You will also need to consider any dilution of your shareholding that might result from taking on new capital to achieve your growth ambitions, or equity that is placed in the hands of your management team to incentivise and reward them.
Whether you have some way to go to your magic number or it is met or exceeded by current earnings, the journey from here to realisation has many similarities. Whilst a journey to realise an investment exceeding your target may be shorter than one that requires several years of further growth, there is still plenty to do to ensure that your business is saleable. A commonly stated ‘statistic’ is that seven out of ten businesses brought to market do not sell. These are not attractive to buyers, regardless of theoretical valuation and therefore the business asset is illiquid, or as good as worthless. A very sad place to end up after years of hard work.
Understanding which characteristics will drive buyers to pay higher valuations is key to unlocking value from your business. Simply put, no doubt you would rather be rewarded 8x for every pound of profit than 5x? This sort of range is not uncommon within a sector, yet it means that one business can be sold for 60% more than another despite the same earnings.
Areas to investigate include: competitive positioning; product/service comparisons; pricing strategy; business processes including IT, HR and operations; and financial performance.
Understanding what the normal ratios and best practices look like for your market can enable you and your management team to consider new and better ways to do business. When a buyer looks at your business to decide if it is a worthwhile investment and what to pay, they are going to do this in the context of this information. It’s better to know in advance what you are being measured against!
You can find a lot of information online in industry forums and by asking peers. However, a great way to gain an insight is to engage a consultant experienced in the industry who will be able to tell you, on an anonymised basis, what they have seen from the inside of similar businesses.
You’ve spent your business life understanding your customers’ needs and designing the products and services they want, but the challenge now is to shape your business so that it meets a potential buyer’s requirements. What are your key features and benefits? What will your buyer value most about your business? To answer this question, you need to identify your likely buyers. Never forget, buyers are taking a risk. Organic growth is often a safer and more reliable option compared to buying. So, the more value they see and the more comfortable they feel, the more likely they are to make a deal happen. In fact, that’s why you probably already know your eventual buyer and they are aware of you.
But you’ll still need to make an effort. Growing your business will add value, while getting every detail of your accounts in order will provide greater comfort. And raising your profile through industry awards and PR will help reinforce the message that you are worth the investment. There’s also the chance that it will attract more competition, which is always good.
Nanopharm is the world’s leading provider of orally inhaled and nasal drug product design and development services. They approached us to help look for a new owner.
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