Exiting a business is a daunting experience. Whether you are in control or not, you will reach a stage when you are preparing to exit your business. it is best to prepare for it now than later. It will help you command a better valuation.
Imagine you are selling a house and it looks very attractive from the outside. However, as soon as the buyer enters the home for inspection, the valuation of the home drops considerably because of various issues uncovered during the visit.
Similarly, business owners might have certain expectations of what their business is worth only to realize none of the offers they receive are anywhere close to it. As the M&A process goes through the Due Diligence process, the business owners are in for a shock at how prospective buyers value their business.
From my past experience, I have seen many owners who do not go through the pre-marketing phase of the exit planning process. They wait until the exit is imminent or there is an inbound interest to purchase the business. This pre-marketing phase helps the management team of a company to ensure they are ready to sell their business at the maximum potential value.
1. KPI and Reporting
Every buyer looks for stability and predictability when evaluating a target acquisition. While every company’s KPIs are uniquely aligned, the metrics and processes that buyers most want to see include standard KPIs and financial reporting for the last 2 to 3 years, pipeline metrics and analytics, forecasting cadence and accuracy and a long-range financial plan.
2. Technology Prowess
Since I have led the exit strategy of more than 10 technology (SaaS) companies, I can confidently say that as part of the tech due-diligence, your software product will go through stress tests, vulnerability scans and penetration testing and evaluate the quality of the platform. If the product is unable to withstand the test, the company’s valuation could have a severe impact or the company has to bear a huge cost in order to fix it in a short time. Therefore, it is imperative that your company has spent sufficient time well before it is planning an exit to ensure robust processes are in place to deal with critical and high risk issues.
3. Data Room
Preparing and collating all the materials required in a transaction is very time-consuming. The management team can pull it all together to minimize the time and efforts when they are ready to exit. This helps the deal to go through quickly and the buyer’s perspective of the management also improves. Arranging all the documents in a Data Room may not increase the company’s valuation but it definitely minimizes the pain during a high-intensity exit activity. The process will be more efficient and easier to manage.
4. Contract Review
Buyers typically look to eliminate unnecessary expenditures post acquisition. If the target company has any long-term contracts with a vendor that prevents the buyer to terminate the contract after the purchase, it will have an unfavorable impact to the company’s valuation. Buyers are always exploring synergies and the flexibility in contracts with vendors will deliver value to the buyers.
Similarly, contracts with clients/customers need to be scrutinized for any liability provisions and termination rights.
Conclusion
Surprises during the exit process is not uncommon. The management team needs to adequately prepare themselves for an exit well in advance. Getting a legal counsel on board is also a good idea prior to initiating the sale process. Valuing the business, identifying and closing gaps, and preparing for an exit are the best ways to maximize value of your business at the time of an exit while ensuring the most favorable terms possible.
About the Author
This section of the website sets out a variety of materials relating to the investment banking and private equity to be used for educational and non-commercial purposes only; the author(s) of the blog do not intend the blog to be a source of legal advice. Please retain and seek the advice of a professional and use your own good judgement before choosing to act on any information included in the blog. If you choose to rely on the materials, you do so entirely at your own risk. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any division of Columbia Pacific Capital Partners Inc. (CPCP)
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