Maximising Value! Steps To Prepare Your Business for Sale or Investment

Executive Summary

Selling your business or raising capital and allowing investors to invest in your business (especially for the first time) is one of the most significant decisions an owner will make.

By preparing thoroughly and addressing key potential acquirer / investor issues, you can ensure you achieve the best possible outcome and secure the legacy of your hard work.

In the diagram below, we summarise how preparation can be segmented into Process Strategy, Maximising Business Value and Getting the House in Order.

Conquest Capital has more than a combined 100 years’ experience across more than $50 billion in M&A transactions and $10 billion in equity and debt capital raisings across multiple sectors.

If you would like a sounding board to discuss a potential business sale or capital raising, I would be delighted to share more insights and discuss how you can best prepare your business for a successful outcome.

Please feel free to contact me at [email protected] or give me a call at 0420 989 706.

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1.??? PROCESS STRATEGY

1.1? Owner Objectives

The first key step is for the owner(s) to define the objectives of any Sale or Capital Raising Process, including:

????? i.???????? what % to sell - minority, 50%, 50%+ or up to 100%;

???? ii.???????? control – is it important that the owner retains more than 50%?;

??? iii.???????? consideration mix - cash, acquirer shares, earn-out etc;

?? iv.???????? growth capital – does the business need to raise growth capital and, if so, how much?;

???? v.???????? how long the owner intends to work in the business post-sale and, if not long-term, the transition period.

All these matters will impact the types of parties approached, transaction structure and valuation, to varying degrees. Clarifying these objectives is particularly important in ensuring there is no disagreement or contradictions where there is more than one owner.

1.2? Timing

The owner should then consider the suitability of current market and business conditions and whether the business will receive an appropriate earnings multiple.

The timing of a capital raise is often slightly less flexible than timing for a sale if there is a need to raise capital to fund growth and operations. It is also usually for a far smaller % of the business.

With a business sale, if market conditions are deteriorating or likely acquirers are strategically not ready to undertake an acquisition, then it may not be the optimal time to sell. In contrast, there are some times when markets become "hot" and acquirers may "pay up" to avoid missing out. At such times it may be sensible to opportunistically cash out to receive a higher multiple even if the business is not at peak earnings.

Of course, it is important to be prepared to take advantage of such an opportunity.

1.3? Identifying Acquirers or Investors

Owners should prepare for a sale early by identifying the most likely potential acquirers who have the strategic rationale, capability and desire to pay the highest value.

Similarly, for a capital raise, investors should be identified whose investment criteria best suits the owner objectives, raise amount and transaction structure.

Such parties should then ideally be introduced to the business opportunity at least 6 - 12 months prior to the sale or capital raising process to “warm them up” so that they are ready strategically and resource-wise. Private Equity firms typically identify exit options prior to investment and then keep parties abreast of likely exit 1 - 2 years ahead of sale.

An introduction to potential acquirers or investors will also provide valuable feedback to help shape the strategy, such as setting value expectations, who will bid, or not, strategic desire, synergies and how to structure a process.

If there are multiple businesses in a group, acquirer feedback may assist whether to sell business units separately or the group in one line. If there are only a few strategic acquirers with strong synergies, it may make more sense to run a select process rather than a broad international search, which can be the cookie cutter process recommended by an adviser who doesn't have a clear view on likely potential acquirer interest.

Further, by understanding a potential acquirer’s attitude towards key value drivers, sellers can better understand how to position their business to maximise value. For example, are they strategic acquirers seeking significant revenue and cost synergies or are they financial buyers focused on quality management and a strong growth story from organic expansion and bolt-on acquisitions?

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2.??? MAXIMISING BUSINESS VALUE

2.1 Operations

From an operational standpoint, owners should consider winding back capital expenditure and discretionary spending in the 6-18 months prior to sale to avoid investing money where the return is too low and the payback period too long. This is particularly important as Private Equity firms are notoriously reluctant to invest in acquisitions or medium-term capex towards the end of their investment cycle.

2.2 Commercial

Secondly, owners must ensure key contracts are renewed and / or extended, to the extent possible, particularly with key customers that represent a significant proportion of revenue or are business critical expenses, such as key suppliers, software licences and government permits.

However, where potential acquirers might derive significant synergies from merging key functions or cherry-picking the best supply terms, it may make sense not to extend so that the buyer can maximise potential synergies. For example, if there is an opportunity to co-locate, renewing a new long-term property lease might be value destructive. A case-by-case approach needs to be considered depending on the needs of the business and the likely value to potential acquirers.

2.3 Management and Employees

A strategy to manage people-related considerations is important to maximise business value as key management are usually critical in the sales process.

Initially management may "fear" a new owner and the risk to their ongoing roles and so undersell the business. After a time, as momentum in the sale process changes, they may feel their alignment changing to a new employer and potentially even favour a select acquirer.

As such, it may be useful to pay a "sale bonus" which vests on sale to ensure management are continually focused on maximising the value of the business for the current owner.

Separately, the owner may wish to understand the incumbent management team's compatibility with the acquirer's plans, the proposed compensation and benefit packages and negotiate with the new owner on future roles to provide ongoing job certainty to employees.

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3.??? GETTING THE HOUSE IN ORDER

3.1 Financials

Firstly, historical financials need to be reviewed to strip out one-off items (e.g. JobKeeper subsidies, owner drawings / lifestyle expenses) that may impact a normalised view of financial performance.

The owner should also prepare forecast financials (P & L, cashflows) for at least 2 financial years, which tie into a medium-term strategic plan. These should include reasonable, justifiable assumptions (preferably in an Assumptions Book) and not generate "hockey-stick" forecasts, which could undermine the seller's credibility and business value. For financial acquirers and investors, focus on building a robust forecast model which will portray the business as an attractive investment opportunity.

Further, owners should enter the process with an understanding of the tax implications of any structure (eg share vs assets sale; scrip for scrip rollover relief for share-based consideration, Capital Gains Tax and whether full marginal tax rate or discount etc).

3.2 Due Diligence

Due Diligence must be provided to factually confirm that the statements made by the seller are true and to maximise sale value. This is further confirmed by representations and warranties in final legal sale documentation.

Given the volume of information that is required by acquirers to conduct due diligence on an acquisition target, it is worthwhile for the seller to collate all the regulatory, corporate governance, financial, operational and HR information required well in advance of launching a process. A full proforma Due Diligence information list is available on request.

3.3 Build a Team of Advisers

Finally, as transactions are becoming increasingly complex, it is strongly advised for owners to build a team of financial advisers, accountants and lawyers with corporate experience.

Engaging these advisers to be part of the planning process is encouraged so that they can participate in important decision making and guide your business to a successful outcome. It also signals a readiness and seriousness to acquirers and investors that you are serious about the process. Owners should also not underestimate the level of distraction that impacts them and management in selling a business or raising capital, which is particularly vital as maintaining business performance during any process is critical to maximising value.

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4.??? APPOINTING AN ADVISOR

It is important to have an experienced adviser by your side if you are selling your business or raising capital to assist in the preparation, position the business in the best way to be attractive to acquirers / investors, to manage the process (which can be extremely time consuming), to access their network of acquirers / investors and to negotiate the best possible terms.

Conquest Capital Group has more than 100 years’ combined experience across more than $50 billion in M&A transactions and $10 billion in equity and debt capital raisings across multiple sectors.

If you would like a sounding board to discuss issues and potential solutions, please contact:

John Perry (Managing Director) on 0420 989 706 or?[email protected]