How can I maximise value on exit? – part one

19 October 2016

We’re often asked this by business owners who are contemplating an exit and, more often than not, it’s a very difficult question to answer because there are quite a few variables that are outside of an owner’s sphere of influence. Take the most recent economic history, for example – the prices being paid for businesses between 2005 & 2007, where purchaser appetite was being fuelled by cheap and easily available debt facilities, were considerably higher (as a rule) than those being paid after the collapse of Lehmann Brothers. It is doubtful that the peak reached back then will be seen again, however, that said, there’s plenty within a business owner’s sphere of influence, and, as with so much else in life, it’s all in the planning.

A well executed exit plan will, ideally, contemplate a period of four to five years leading up to an exit. Clearly, that time frame won’t always be realistic as the timing may be influenced by the position of the business owner (– ill-health or a decision simply to stop for example) or by rapidly changing industry conditions that an owner may be concerned by. Let’s assume though relative stability in the economy and the industry sector, and a sensible time frame to exit.

What can a business owner in these circumstances do to maximise the value they receive on an exit?

Firstly, put yourself in the position of a potential purchaser – what would you want to examine if you were to take a detailed look at a potential target? You might call this phase “vendor due diligence”, and in the first part of this blog, we recommend evaluating the following seven points:

  • Management team – one of the biggest drivers in value will be the second tier of management that’s left behind when the owner exits the business. You need the normal bases covered here; finance, HR, IT, sales & marketing, etc. If you, as a business owner, haven’t empowered the people in these positions yet, ask yourself why and develop a plan to do so. For top quality people, also consider an incentive plan that will retain them through to, and beyond, your exit.
  • Strategy – what is the current strategic plan for the business? We’re talking SWOT (strength, weaknesses,opportunities and threats) analysis and competitor analysis here. This is a great opportunity to set out exactly why there is a strategic rationale for buying your business. There needs to be some honesty though, as you must be prepared to be challenged on the assertions made. The work done in this area may also be extremely useful when it comes to arriving at a list of potential purchasers.
  • Where is the value? – depending on your activities there may be divisions or sites that are significantly outperforming other parts of the business. Could spinning those high performing parts out into a separate vehicle (or vehicles) help create additional value?
  • Budgets and cash flow forecasts – these should take a lead from your strategic document and should make it clear to any potential buyer how the successful execution of your strategy will manifest itself in earnings and cash flow. It will add credibility to these forecasts if the main assumptions are robust and some sensitivity analysis is capable of being performed within the financial model.
  • Revenue – the method with which companies recognise revenue may look uncontroversial on the face of it, but several high profile deals have gone sour because of a failure to understand differences in methods between the buyer company and the target company. Whilst accounting rules provide some guidance in this area, there can be a number of different interpretations between companies who, ostensibly, are making the same sorts of sales. The key thing here is to ensure that your policy is one that is common in the industry, and that your auditor/accountant is confident that it is well within the bounds of normality.
  • Intellectual Property (IP) – if your revenue and profitability is driven by a strong brand image or perhaps a unique product or process, you might consider whether you should protect the IP by applying to register a trade mark or patent. You should also ensure that your company has good title to any IP generated by its employees – this can normally be covered by well drafted contracts of employment.
  • Contracts – purchasers are most interested in high quality (that is to say enduring and profitable) revenue streams, so if there is any scope for establishing contractual relationships with customers or perhaps framework agreements, then you should really push to get those tied up as it will give purchasers far more confidence over the company’s future earnings.

Clearly, the above isn’t an exhaustive list but it’s a useful starting point in helping you achieve the value that you probably attach to your business; whilst also helping you stay in control of the business sale process.

For further information on this blog, please contact your local UHY corporate finance specialist.

Like what you read? Click here to read the second part of this blog post.