Expert opinion

6 Ways to Create More Value in your Business Before You Exit

Rob Starr, Head of M&A at Shaw & Co, shares his advice on how to create more value in your business before you exit.

5 minutes
May 10, 2022
Rob Starr
Tim Gander Photography & Anne Nygard on Unsplash

Once you have decided to exit your business, the time spent between making that decision and the exit itself should focus on value creation. Optimising elements of your business can contribute towards more net wealth once the deal is done. Here are six areas that you can focus on:

1 - Data

Doing more with your data can uncover actionable insights and unlock value. Understanding your data allows you to see the trends in your business and use this to support better forecasts. There are two imperatives here. Firstly, by making better use of data you can control and grow your business more effectively, making it worth more to a buyer. Secondly, when your potential buyer does engage, you will be able to answer all their questions with hard data, rather than the gut feeling by which so many small businesses run.

It is much better to be looking at your data as early in your exit strategy as possible, so that any opportunities uncovered can be acted upon and realised in the time leading up to exit. Failure to do this can result in embarrassing conversations during the sale process when the buyer and their due diligence team come to understand the data driving your business better than you do. Worse still, when this data contradicts assertions you have previously made.

2 - Technology

Your ability to adopt, implement and profit from new technologies will be greatly valued by potential buyers. It’s probable that your business will be taken over by a bigger company and they will most likely be looking to ‘plug in’ your capabilities to their organisation. Outdated technology and systems will prove a barrier to realising the synergies they’re looking for and could prevent or devalue a sale. The ability to adopt and successfully implement technology to drive profitability and efficiency will be a key area of interest for investors.

Having a clear strategy and roadmap in place to take advantage of digital technologies, protect against cyber threats and help increase the value of key technology assets such as ERP systems will provide them with reassurance. It’s also important to understand and exploit the role technology can play in hitting your own growth targets as you head towards exit.

3 - Profit improvement

By taking a close look at all your costs and revenues you can put together a clear plan to increase profitability and therefore sale value. Start identifying where you make profits and where you don’t. This will help you pinpoint transactions that are eroding value. They may be caused by factors including: individual products, customers or sectors; costly routes to market; poor pricing and project management controls; supply chain routes and manufacturing inefficiency/location.

By identifying these underlying reasons, you can identify and implement actions such as cost reduction, process improvement, control enhancement and, in some cases, product or customer rationalisation. The critical factor will be to ensure that each area of opportunity clearly links to a set of defined actions and a clear and measurable bottom line benefit.

Given the short window to improve profit prior to a sale, companies will need to employ a structured programme management approach. Clear identification of prioritised opportunities, action plans, resource allocation, tracking and control are absolutely key to making sure benefits hit bottom line in full and on time. By accelerating their implementation, the profit improvements can hit bottom line run rate prior to a transaction and have greatest impact on value.

Rob Starr, Head of M&A at Shaw & Co

4 - Working capital improvement

The equity value of your company is normally calculated by taking both cash and working capital into account. Reducing working capital cycles can generate cash to help enhance cash reserves, pay down debt and improve shareholder value at exit. Yet a surprising number of companies have excess cash tied up in working capital cycles that are not operating efficiently. Additionally, staff operating or controlling these cycles may not fully understand the importance of cash to the company or the impact of their day-to- day decisions on cash and working capital.

By identifying inefficiencies and introducing process improvements and controls, working capital cycles can be shortened and additional cash can be generated. There are many ways to improve cash generation. These may vary from boosting invoicing efficiency and dispute resolution procedures to streamlining goods receipt and payment controls, or from enhancing sales and operational planning processes to amending VAT processes.

As you prepare for a sale process, a programme focused on delivering permanent cash flow benefits will not only build greater exit value for you but will also demonstrate to buyers the efficiency of your balance sheet and underlying business model. However, so that this is not lost again through the normalisation of working capital, these improvements have to be in place for 12 months or more pre-sale. And if you have enough time before your planned exit, you may even want to consider redesigning your entire operational model to take advantage of credit and pre-payment opportunities (while being aware of the impact of any reduced margins on enterprise value).

5 - Overseas growth

In the run up to a sale, overseas activity or expansion needs to be approached thoughtfully and strategically. The risk can be high due to the significant amount of management time and resources that overseas activity can absorb and the subsequent impact on EBITDA margins.

Poorly thought out international activity can also leave a trail of complex issues that detract from value and make a risk-averse buyer back away. These include international tax complexities, compliance and regulatory issues, complicated joint ventures (especially when attempting to trade in regions where foreign inward investment rules apply). So, for many owner managers the right approach is to keep it simple and keep it UK – after all, there is a significant economy to go for on our shores.

For others, however, proving that a product or service can be sold in a country outside the UK demonstrates to the potential buyer that there is an opportunity to scale globally. Here, it is significantly better to prove a concept in two or three countries outside of the UK with a meaningful market share in each rather than having small footprints in lots of markets. A buyer with international aspirations will value meaningful proof of concept much more highly than a widespread international presence.

Accessing a market through a distribution agreement can accelerate expansion but you need to be mindful of the impact they can have on your eventual buyer who may already operate in that territory and therefore risk limiting their trading in that region and ability to access synergies.

6 - Growing by acquisition

Acquisitions can take up a lot of time and funds so think long and hard about the benefits and risks of any transaction. If you do go ahead, bear in mind that any acquisition will need to be integrated as quickly and effectively as possible to ensure that the benefits are enjoyed by the shareholders. Any failure to achieve cost synergies will present the buyer with an added problem. They will expect any acquisition to immediately or very quickly add value.

However, good acquisition opportunities are rare and getting it right can pay huge dividends, so going ahead could be a major boost to sale price and prospects. It really comes down to experience. If your business regularly makes acquisitions and can prove that it is capable of good integration management to deliver the desired results, then continuing this activity in the run up to sale is likely to be positive. But if you have no such track record, acquiring a short time in advance of the sale could be unwise as a buyer will be nervous about the hidden costs and the consequences of an acquisition that is not fully bedded down.

We work with UK SMEs and small-cap PLCs that are ready to sell or dispose of a business through a trade sale or owner-managers that are looking to exit the business they’ve grown. Our value lies in helping clients assess their readiness to exit, finding the right buyers willing to pay the right price and managing the trade sale process whilst minimising associated risks. For a confidential, independent, no obligation discussion on how to sell a business, click the 'Let's chat' button.
Rob Starr
Rob Starr
's bio

When a specialist recruitment business grew to £103m turnover, its owners asked us to sell the business to a new owner.

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