When an entrepreneur decides to part ways with their business, potential buyers will be identified and approached, a price and terms will be negotiated, and all or part of their stake in the business can be sold.
Leading up to the buyer approach stage, the business must prepare for a change in ownership by ensuring it is in the best possible position when the new owner takes over. This is known as an exit strategy. Any business owner that fails to prepare for exit risks a reduced valuation for their business.
The role of an FD in a company exit strategy
When executed correctly, an exit strategy can secure a higher settlement price and increase the likelihood that the business will continue to flourish after the previous owner has departed.
Readying a business for sale is a complex, challenging process that demands a high level of strategic and financial planning and both financial and legal due diligence, causing headaches for many entrepreneurs who are often already time-poor, busy running their business day to day.
Taking the first steps
Exit strategies should be started long before the business goes to market. Our FD’s first step was to gain an understanding of the business, its historical financial performance, and its future potential. Having completed this outline analysis, the FD sought to understand the client’s expectations around the value of their business.
It is important to have a valuation conversation early in the process with the individual who is going to help the business owner throughout the process, to avoid wasting time and ensure that the client’s expectations can realistically be achieved. Furthermore, the exit strategy can be devised based on the client’s expectations. For instance, if the client’s target price is higher than the business’ current value, a growth or acquisition strategy may be implemented to increase value before going to market.
Driving business value
Once a realistic target price had been agreed, our FD conducted a deep analysis of the financial statements to gain a detailed understanding of the business and identify its key drivers. Working closely with the company’s existing accountants, the FD restated all the historical monthly management accounts, from a cash flow to accruals basis, the latter being recognised as the generally accepted accounting convention in the marketplace.
During the due diligence process, buyers usually wish to see at least two years of monthly management accounts, tying into the statutory accounts, making the availability and accuracy of these accounts an important step in the process.
With the benefit of hands-on, operational and strategic experience across a vast number of businesses and business sectors, our FD carried out detailed sales and margin analysis to identify the most profitable areas of the business and advised the business owner to focus on growing these high margin products and services and cut low margin lines to rapidly improve the company’s performance. Looking at the historical accounts, the FD analysed the cost base to identify methods of reducing costs without detriment to its operations and then helped the business owner to make those changes, driving increases in profitability.
Overseeing the management transition
From an exit point of view, it is important to demonstrate the retention of key personnel to assure buyers that they have the right team in place to help them manage the change in ownership. Our FD helped develop an employee incentive scheme to encourage staff to remain with the business.
Drawing on an expansive network of contacts, our FD also aided the recruitment process by helping fill gaps in the management team with competent employees that bolstered the workforce and made the business more enticing to buyers.
Preparing forecasts for potential buyers
Similar to the historical accounts, financial forecasts setting out how the business should perform in the future are particularly important to potential buyers who need reassurance that they are going to get an acceptable return on their investment. To demonstrate the company’s sustainability, the FD created 4-year integrated forecasts, including profit and loss accounts, balance sheets, and cash flow forecasts. Ensuring the forecasts were underpinned by assumptions based on historical trends, the FD was able to show prospective buyers that the company should continue to grow profitably for the foreseeable future.
Negotiation and due diligence
A hugely time-consuming step, both parties must agree a value for the business and address other aspects of the sales process such as earn-out clauses. The business owner heavily relied on our FD to handle negotiations with potential buyers and ensure the legal and financial due diligence process went smoothly without delaying the completion of the deal. Taking much of the burden off the business owner, our FD managed this process and used their wide network of contacts to help them identify purchasers, introduce legal and tax advisers, and liaise with all parties to negotiate and finalise the deal.
Our highly skilled and experienced FD was instrumental in getting the client a higher price for their business – one that was more than twice their initial expectation.
As a result of their expert guidance, the business was presented as an attractive acquisition opportunity. Our FD helped the client achieve a cash exit whilst still retaining a minority equity stake in the business. Hiring a Dartcell FD ensured that the business owner was supported throughout the complex process and received both a range of exit options and the best available deal for them and their business.
If you need support in preparing your business for sale, or you need advice on exiting a business, please contact us.