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The way you position your business in advance of a sale can make a world of difference to the valuation and deal terms you secure. But the process can seem daunting if you’re not sure what questions to ask. In the analysis below, Andrew Boyle, CEO of LGB&Co., a London-based corporate finance and investment firm, examines some of the most important factors any growth business should consider to attract the right buyer, close the best possible deal and avoid any unwelcome surprises.

Andrew Boyle
Andrew Boyle

Strengthened financial controls for due diligence

Growth businesses’ focus on their expansion often comes at the expense of an underdeveloped finance function; many may not yet have a full-time financial director in place. But a lack of emphasis in this area can be a serious impediment in the sale process.

Any potential seller should be aware that the reliability of a business’s management information system – and in particular its financial reporting – will come under close scrutiny. This is required by buyers not only to calculate the value of the business, but also to validate its business model and market positioning.

Failing to have strong financial controls in place could have serious ramifications during the due diligence process, even terminating the transaction altogether. It is therefore a good idea to build a robust finance and reporting system with high quality management information well in advance of thinking about selling. A buyer will typically require at least three years of historical financials to undertake its due diligence exercise.

One of the first questions a potential buyer will ask is how transferable the value of a business asset is. This is key to the transaction rationale. For example, how dependent is the asset on its founders or key executives, and can it be scaled to leverage the buyer’s financial or operational resources? Is it overly reliant on a few main clients? Are margins being eroded by supplier pricing? By having high quality financial information readily available, as well as contractual documentation and operating materials, a seller should be in a strong position when the time comes to respond to due diligence.

Select the right exit route: private equity or trade?

Valuation is in the eye of the beholder, and it is an art as well a science. There is a distinction between trade buyers on the one hand and financial buyers – such as private equity funds – on the other.

Trade buyers typically prioritise acquisitions which offer products or services they can integrate within their own businesses. Financial buyers, meanwhile, tend to focus on earning a good return on their investment. This means that the way in which the two types of buyers undertake due diligence and structure deals differs.

It is important not to restrict your options; achieving competitive tension can help you get the best possible deal. Conversely, be wary of buyers that demand excessively long exclusivity periods or which do not demonstrate commitment to a deal process.

Another pitfall is when the sale process is so time-consuming that it distracts management from the running of the business. This can result in slow growth or poor results and leaves the seller open to price re-negotiation late in the deal process.

By appointing the right corporate finance adviser and ensuring that a transaction team is organised within the business, these risks can be mitigated and valuations optimised.

Time your exit by monitoring valuation bubbles – and ensure you’re positioned in the right sector

A business’s valuation can fluctuate markedly depending on the timing of a sale. Resources available to financial and trade buyers move in cycles, with one sector often moving ahead or lagging behind. In the current climate, for example, PE firms are sometimes outbidding trade buyers because they are under pressure to deploy large funds and have available substantial amounts of cheap debt, which they can use to increase returns using financial engineering.

Businesses need to be nimble and aware of their surroundings. If your sector is performing well and transactions are numerous, ensuring that you’re exit-ready if the opportunity arises could pay handsomely. Be aware that what constitutes optimal timing might vary by sector. For instance, valuations in the technology sector might be highest during the ascent phase of the technology life cycle, rather than when products or services gain market penetration. It is quite common for entrepreneurs to miss the peak valuation point for their business in the expectation that growth will continue (missing the wood for the trees). Having some objective external input can mitigate this.

It is also important to ensure that any business is positioned correctly for sale. It’s often a good idea not simply to define a business by its current market and services, but to emphasise the underlying nature of the business, and the possibilities that follow. For example, an online retail business could have logistics or data management at its core, above and beyond merely selling products. By defining the business’s potential more broadly, owners can often draw attention to its greater value and growth potential.

Demonstrate that the business is able to continue to grow in its own right

Demonstrating historical growth is not enough; prospective buyers want to know whether a business has peaked or has potential for further expansion. The upshot is that your business needs to present compelling evidence that it can introduce new products or services and create new revenue lines, whether by broadening its client base or expanding into new markets.

A convincing growth strategy is an obvious prerequisite for this. But, beyond this strategy, businesses preparing for sale should also be able to show that they have the funds and cash flow to support this growth or that plans are in place to raise the necessary finance. Another avenue to demonstrate growth potential is to bolster the skills contained within the business. In the time leading up to a sale, investing in employee training and development can be just as wise as maximising sales.