Due diligence specialist Sophie Colloby explains why unprepared vendors can lose out in the sale process – and how to anticipate and overcome the challenges
Owners and management teams who are selling a business will understandably want to achieve the best possible price. Yet too often they suffer last minute price chips or even jeopardise the sale altogether because they fail to convince buyers of the true opportunity it offers, anticipate the difficult questions they will be asked or manage the due diligence process properly.
It is critical from the start to understand what will be important to potential purchasers – and it will not necessarily be what is most important to you, or what you already have. Working with advisers to focus on purchasers’ needs will drive value.
You will also need to reflect on what is important to you – is it the headline price, the equity cheque you will receive, the timing of the sale or other elements? A clear understanding of what is the right trade-off between time and value will help frame a successful sales process.
Once the value story for your business is clear, you can start to gather the evidence and work through the process. Here is some advice to help you on the way:
- Start early
Preparation is less intrusive if it is spread over time, as anyone who has crammed for an exam will know! While it is possible to do it all in a few months, that can be too intensive. There is nothing worse than getting so distracted from your day job that trading dips or operational problems occur in the middle of negotiations.
Consider what level of disruption is acceptable to you and your team. I have seen businesses successfully work through a detailed exit plan over a two-year period without putting undue pressure on key staff.
- Build evidence
Often the level of detailed information necessary to sell a business is greater than that needed to run it, especially if you are considering private equity buyers. It can also be surprisingly difficult to describe to people who do not yet understand your business how and where you make money.
The financial information you present to buyers needs to evidence the historical track record in sufficient detail, typically over three years, and be credible, consistent and reconcilable throughout. Think carefully about the availability and rigour of information that enables price, mix and volume effects on sales and profitability to be analysed. Presenting alternative KPIs, cashflow details or proforma EBITDA can help potential purchasers understand the value story that is so obvious to you! Don’t forget to consider income or costs that may not be relevant after a sale, if you are just selling part of a business for example.
- Consider an audit
The thresholds for firms requiring an audit increased from 1 January 2016. However even if you do not need to have an audit, the comfort for potential purchasers could be well worth the investment.
- Spot the weaknesses
Don’t panic if you find unexpected issues, such as soft areas in the business plan or the odd inconsistent application of an accounting policy. It is better for you and your advisors to uncover potential problems now so you can keep control, fix them or proactively share them with potential purchasers, along with your proposed solutions. Issues that come to light at the end of the process can give buyers last-minute nerves.
- Extract value pre-sale
While preparing the financial information, you may spot opportunities to extract value before the sale – for example by disposing of unused property or other assets, tidying up group structures or improving working capital management. Changes implemented shortly before a sale are likely to be ignored or questioned by a potential purchaser – but if they have been in place for a year or more and been through an audit or two, it is harder for them to argue that the changes are not sustainable.
- Prepare robust forecasts
High-quality historical financial information will form the basis of your forecasts. To withstand the due diligence process, forecasts should be sufficiently detailed and robust. In many cases vendors underestimate the level of detail and support purchasers require. The more financial forecasts are supported by operational or commercial plans, the more credible they will appear.
- Look for the downside
In the current economic climate of change, investors need to understand the risks and deal with uncertainty. Help them to understand the downside by presenting different scenarios and the mitigating actions you could take in those circumstances. Having a forecast model that enables different scenarios to be illustrated will be of great benefit.
- Balance the picture with upsides
At the same time, to present a balanced picture, highlight the potential upsides or areas where investment could accelerate growth. You do not need to be over-ambitious and build all the upsides into your forecast, but by taking the time to qualify and highlight them, they will provide broader comfort and can be used to offset other smaller issues that may arise.
- Agree roles and responsibilities
Decide who does what and when, ensure gaps or overlaps are avoided and expectations are clarified. If you don’t have the time or resources you think you will need, a wide range of vendor assistance services exist which allows you to outsource certain aspects of the preparation and accelerate the process.
- Learn from others
Entrepreneurs and managers who have been through a sale process are a great source of good hints and tips, so talk to people and network.
Ultimately, the key to a successful sale lies in planning and managing the process properly – and it is probably never too early to start!