Exit Readiness – The importance of preparation for an M&A process

For most owner-managers, selling their business is the most important financial event of their working life, and it usually only happens once. Yet many businesses come to market before they are ready, and value lost through a rushed or poorly prepared process is rarely recovered at the negotiating table.

Exit Readiness is the work done before a transaction to prepare the business, and you as shareholders, for a sale. Done well, it increases the value buyers are willing to pay, reduces the risk of a deal falling over in due diligence, and gives you far more control over the timing and terms of your exit.

Why preparation matters

Buyers, whether trade acquirers or Private Equity, are buying future earnings and paying for certainty. Every question they cannot get a clear answer to during due diligence becomes a risk, and risk is priced in, through a lower headline value, more of the consideration being deferred or linked to an earn-out, tougher warranties and indemnities in the Sale and Purchase Agreement (SPA), or in the worst case, a buyer walking away.

Preparation also protects the business while the sale is under way. A process can take six to twelve months from start to finish, and running it alongside the day job is demanding. The better prepared the business is, the less management time is pulled away from trading, and the less likely performance is to dip at the moment buyers are watching most closely.

The key areas buyers will look at

Every business is different, but the same themes come up time and again in due diligence. These are the areas we focus on with clients first:

• Financial reporting. Timely, accurate monthly management accounts that reconcile to the statutory accounts, a clear view of underlying (normalised) EBITDA, and a credible forecast the business is trading in line with. Buyers will test the quality of earnings, so one-off costs, owner-related expenses and accounting policies need to be clearly explained.
• Margins and growth. Buyers will compare your gross and EBITDA margins with others in your industry, so understanding where you sit against your peers, and why, strengthens your equity story. Sustained growth in revenue or EBITDA of 15% or above per annum, backed by a credible plan for how that growth will continue, is one of the strongest drivers of both value and buyer interest.
• Working capital and cash. Most deals are priced on a cash-free, debt-free basis with a normal level of working capital. Understanding your working capital cycle, and what will be treated as cash or debt, well ahead of time avoids surprises in the completion mechanism, as we saw first-hand on Project Columbus.
• Legal housekeeping. Up-to-date statutory books and shareholder records, signed customer and supplier contracts (including any change of control clauses), employment contracts, property leases, and clear ownership of intellectual property and domain names.
• Tax compliance. A clean record with HMRC across corporation tax, VAT and PAYE, properly documented relief claims such as R&D, and any historic share issues or option schemes correctly valued and reported. Tax issues found in due diligence commonly lead to specific indemnities or a reduction in price.
• Customer concentration. If a large share of revenue comes from one or two customers, buyers will see risk. Broadening the customer base, securing longer-term contracts and evidencing the strength of key relationships all help.
• Supplier and owner dependency. Reliance on a single supplier, or on you as the owner, can weigh on value. Building a management team that can run the business without you, and incentivising them to stay through and beyond a transaction, for example through an EMI scheme, is often one of the most valuable things you can do.
• Quality of revenue. Contracted, repeat or subscription revenue is valued more highly than one-off project income, so understanding and presenting the predictability of your revenue matters.

Preparing you as a shareholder

Exit Readiness is not only about the business. Shareholders need to be aligned on their objectives, timing and what a good outcome looks like, whether that is a full sale, a partial sale to Private Equity, a Management Buy-Out or an Employee Ownership Trust. Taking personal tax and wealth planning advice early, including on the availability of reliefs such as Business Asset Disposal Relief, makes sure the structure of a deal works for you as well as for the buyer.

Our step-by-step approach

At Leyland Capital we take clients through a structured, step-by-step Exit Readiness process, tailored to the business and the timeline the shareholders have in mind:

1. Understand your objectives. What you want from an exit, your preferred timing and the type of buyer that would be the best fit for the business.
2. Indicative valuation. An Indicative Valuation Report to understand a realistic range for the value of your shareholdings today, and the drivers that would move it.
3. Readiness review. A review of the business through a buyer’s eyes, covering financial reporting, legal, tax, commercial and people risks, to identify anything that could affect value or derail a deal.
4. Action plan. A prioritised plan to address those issues, supported by financial modelling and reporting from our team, with clear owners and timescales.
5. Process preparation. Building the equity story, forecasts and an organised data room, so that when the time is right you go to market with confidence and stay in control from Heads of Terms through to completion.

How we are different

Many advisers are introduced shortly before a business goes to market. We typically engage with companies much earlier, often one to five years before a transaction, and work alongside the management team as the business grows, in some cases sitting on board meetings, as we do as a long-term engaged M&A advisor to Face The Future.

As owner-managers ourselves, we understand the pressures of running a business while planning for its future, and every engagement is Director led. Being sector agnostic, we bring ideas and experience from across technology, e-commerce, sport, manufacturing, hospitality and financial services, and from the problems we have helped a wide variety of clients to solve.