Preparing for sale

For anyone who is considering selling their business this year there are many things to take into consideration. Most important to the business owner is getting the best possible price for the business they have built. Here are experts’ tips on how to prepare for a sale and maximise valuations.

Dillon Eustace

Philip Lea, partner, corporate and M&A (mergers and acquisitions), says it is important to conduct your own due diligence: collate your customer and supplier contracts, title documents, licences, insurance details, employment contracts, loan and any other documentation which is key to the business. “Ideally ensure these are scanned and easily accessible. If any gaps are identified at this point, address these as soon as possible.”

Adrian Benson, partner and head of corporate and M&A says to check that your financial records and accounts are in order and financial controls stand up to independent scrutiny. Objectively assess your customer base and recurring revenue to determine if these will be attractive to a buyer and withstand a business transition. Consider taking advice from a corporate finance practitioner to identify the valuation mechanism likely to be applied to your business, so that you can focus on the relevant elements of the business which impact the valuation and appeal to buyers.

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Take any necessary steps to ensure there is a good management team in place, says Catherine Hicks, senior associate, corporate and M&A. “Even if you are willing to stay on for a number of years, which may be required if there is not a stand-alone management team in place, you will want to ensure that you are free to focus on the transition of the business and the maximisation of any potential earn-out consideration. Consider offering employee incentives such as employee share plans to drive productivity.”

A&L Goodbody

The secret to a successful sale and maximising valuations lies in preparation, says Laura Kennedy, corporate partner at A&L Goodbody. “Leaving aside macroeconomic forces, we still see a robust M&A market for 2023. There is no doubt that a rebalancing exercise is taking place as the market shifts to a more buyer-friendly environment with sellers having to lay greater groundwork to achieve a successful deal and maximise price. Seller preparation is all about eliminating as many unknowns and areas of speculation as possible to help bidders understand your business.

“Understand what you want to achieve from a sales process. On what terms and at what valuation do you want to do a deal? Is it a full-scale auction process or a more truncated bilateral deal? Do you sell to private equity for a stake, or would you prefer to integrate with a ‘strategic’ buyer? Good advisers will help you answer these questions so that you can remain focused on your deal goals.”

Invest time honing and refining a robust business plan. In an uncertain market, cautious bidders will place greater scrutiny on its underlying assumptions. Avoid overly ambitious projections as they can lead to performance-related earn-outs or worse still, turn buyers off entirely.

Kennedy says to engage on warranty and indemnity (W&I) insurance early. “Increasingly popular W&I insurance is taken out by buyers as a means of recourse against an insurer, rather than the sellers, for warranty claims. Sellers can initiate this process to get early indications on likely policy terms and potential areas of exclusion, handing over their broker engagement to the eventual buyer.”

Maples

Jordan O’Brien, corporate partner, the Maples Group says there is a distinction between preparing for the execution of the deal and preparing to maximise value. “The latter is the main focus in building a business but having built that value there are transaction-specific considerations to consider. Do I have the right team to execute? The right financial, legal and tax advisers are key. A strong finance function that can deliver on the requirements of the sophisticated buyer and retain sufficient bandwidth to support a diligence and disclosure process is also a must.

“From a legal perspective, understanding where the liabilities might arise in the business will mean you are prepared for the painful examination that can arise when an army of buyer’s advisers pore over your contracts, your policies and your practices.

“Looking at the key areas of risk in the business and pre-empting the findings of a buyer’s diligence so you can mitigate and prepare will save you both on price adjustments and re-trades, the direct or indirect cost of warranty and indemnity insurance and the “tail” liability your shareholders might have to carry. The key areas we see as problematic and garnering attention from the diligent buyer include ownership of IP, data and privacy compliance, cyber, use of contractors, tax risk around historic reorganisations, messy cap tables and employee share and option issues.”

Deloitte

Anya Cummins, partner, M&A and head of Deloitte Private, says knowing who the likely buyers are – strategic and/or financial investors – and building relationships (commercial or otherwise) well in advance of a sale is a key step. “If a potential acquisition target is on the radar of a prospective buyer, particularly if it’s an international buyer, building trust and making sure the acquisition is seen as a strategic priority can be really impactful when it comes to a process. If you know who your likely buyers are you can also tailor the process and the marketing materials to appeal to the unique selling points of the business that are likely to appeal to that buyer pool; and can tailor your process to maximise competition across that group of buyers.”

Cummins says one of the key factors to maximising value is maintaining competitive tension throughout a process. “This is typically achieved by running multiple parties/buyers alongside one another, but can also be achieved through the threat of opening the process up to a wider buyer pool if only dealing with one party. Maintaining pace, tight deadlines for bids and due diligence and driving the process is also important, as well as negotiating key commercial issues up front – rather than during an elongated exclusivity period – all help to maximise the negotiating position of the seller and ultimately the optimal outcome for the shareholders.”

Davy

Peter Bennett, head of technology investment banking at Davy, says failing to plan in a corporate sale scenario can cost the seller across a variety of aspects, not just on the ultimate purchase price – an extended timeline, higher risk of not executing the sale, lack of competitive tension and attracting the right buyer, less favourable transaction terms, increased complexity leading to elevated transaction costs and potentially a lower valuation overall. Time spent preparing for a sale process is time that can pay dividends later on down the line.

“In the planning processkey areas to focus on include determining the reason why someone should buy your company, recognising there may be a different rationale for some over others – what is the investment thesis?

“Figuring out what your company is worth and comparing it to how much someone would be willing to pay you for it – there may be a difference. Who are the best buyers for your business, and can they execute an acquisition? What terms and conditions are you willing to sell your company at versus what is realistically achievable in the market? Do you have the right team – internal and external – set up to handle an M&A process without your business suffering along the process? Do you have contingency plans in place in case it does not work out?”

Goodbody

Finbarr Griffin, head of corporate advisory at Goodbody, says that while business exits rarely come as a complete surprise to their owners, not everybody is fully prepared when they come along. When conditions are right, opportunities arise and those that are best prepared usually make the most of those opportunities, however.

Overdependence on a business owner looking to exit can raise issues in diligence, he says. “Ensuring there is an experienced and broad management team can mitigate this significantly.”Despite volatility in equity markets, valuations for private Irish businesses remain strong and sales processes are still competitive. The past 10 years have seen a notable increase in private equity activity in the Irish market, which has been supportive of valuations.

“Key shareholder objectives such as their level of involvement in the business post-transaction should be addressed early in discussions with buyers and could have an influence on transaction structure/terms. Key to maximising value in a transaction is to clearly articulate the value drivers of the business to buyers, which is usually done in the form of a short marketing document.”

An efficient and tightly run process will increase competitive tension between bidders and maximise valuation, he says. “Going to as wide a pool of potential buyers as possible in a process will drive competitive tension and should increase valuation. However, vendor concerns around confidentiality may limit the potential pool of buyers.”

Addleshaw Goddard

The most important piece of advice Nicola McGrath, corporate partner at Addleshaw Goddard has to give those considering divesting is not to underestimate the preparation time required. “Start early to position your business for a successful exit. It’s important to know your market and identify where the value lies in your company and focus on how to grow and support that part of the business.” She says to reduce exposure to non-profitable / riskier parts of your business and build relationships with potential buyers in advance.

“A sales process is arduous, so surround yourself with good people, both internal and external. A good CFO will inspire confidence. A good corporate finance advisor will not only support you to negotiate the best price and terms for your exit but, if brought on board early, can work with you to structure your business to in the best way possible before embarking on the sale process.”