Strengthen financial controls
Growth businesses are often focused on expansion and lack a strong finance function or even a full-time FD. Both are essential in a sales process. Now is the time to build up your team so you can present robust and accurate financial statements to any potential buyer. It will also give you a detailed knowledge of the company’s financial model, including the cost base, profitability, cash flow and capital expenditure.
Such an enhanced finance function should allow you to forensically review the business and check on any issues, like the company being over-reliant on a small number of key clients (customer concentration) or whether supplier pricing is eroding margins.
These strengthened financial controls allow you to spot important issues to address, ensuring you secure the best price on sale.
Select the right exit route and time your exit strategically
Typically, selecting the right exit route is a C-suite decision and the FD’s role is often to conduct a review of available options and advise senior management on which route to take. Decide whether a trade or a private equity (PE) exit is your preferred option, as this will determine your exit strategy and how you position the firm for sale.
If the objective is to release cash from the business and ensure a smooth integration with the buyer, then a trade sale is probably the best route. PE is better if price is the focus and the objective is a partial exit with management keen to remain for a period post-sale.
Once the exit route has been determined, focus on getting the timing right as it is a key valuation driver. Although the company’s performance underpins its fundamental value, a good FD will monitor M&A trends in the company’s sector. If activity is rising and valuation bubbles are emerging, these can be capitalised on to boost the price achieved.
Understand your buyer
As trade and PE buyers have different objectives, it is important to understand these so you can position the business appropriately. A financial buyer will place emphasis on a tried and tested management team that has a proven track record and is incentivised to drive the business to its next growth stage. Financial buyers will typically require more due diligence as they won’t know the business or the market as well as a trade buyer. This means FDs need to be prepared to answer very detailed queries. Show that key employees are aligned with the long-term success of the business by ensuring a structured and incentivised remuneration package is in place, a key area on which FDs typically lead, with benchmarking against peers.
Trade buyers seek acquisitions that enhance their existing offering or product range. They are motivated either by acquiring greater market share or the desire to expand into new industries or markets. Trade buyers are often prepared to pay a premium for the value derived from a niche product or service, as well the potential synergies that can be achieved through critical mass.
Differentiate your offering to help boost sale value
Establishing a clear specialism or strong niche can maximise the sale value and make potential purchasers consider the business as a strategic acquisition. This can be achieved several ways. One method is to reposition some of the products or services and target a more niche, but lucrative market. Another way is to add a tech element to the offering through the development of apps, online tools and systems to help streamline the business and boost sales. Budgeting and analysing at the cost/benefit analysis of such a re-positioning is a critical role for FDs, giving the senior management team the right intelligence on what to base their decisions.
Demonstrate a convincing expansion strategy
While you will need to demonstrate the firm’s ability to hit key revenue and profitability milestones, you will also need to convince any buyer of the growth potential.
This means demonstrating the existence of necessary funds to finance an expansion strategy, such as bank facilities, a cash injection from an investor or other instruments.
Alternatively, prove that the cash flow forecasts are robust enough to support true organic growth through funds generated from the business.
Position your business to maximise the sale multiple
As FD, your objective will be to help management secure the highest possible valuation for the business on sale.
Exit multiples will vary considerably across sectors. Just take two examples, Software as a Service (SaaS) companies will usually command a multiple of 3-5x sales, depending on their growth rate, while digital subscription firms can command higher multiples in the 10–12x sales range.
If your company spans several sectors, reposition your offering and strengthen your revenues within the sector which commands the higher multiple. Ensure you implement a clear growth strategy to maximise the EBITDA in this area in the lead up to the sale.
FDs need to mitigate the impact of any potential problems that might impact the value of a business on sale. Planning well in advance, and having an awareness of the mistakes that can sink a sale will give you the best opportunity to help secure the maximum price on sale.