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Business owners must avoid losing value when the time comes to sell, says GRAHAM CUNNING
Winning orders, tackling costs, planning expansion and hiring talented staff will help keep a business owner’s growth plans on track. But one other issue has to be factored into the forward plan – when and how to exit, and at what price. It’s a key issue that many busy executives overlook and they can find themselves losing out, particularly if the potential for a sale drops without warning.
Unsolicited approaches – when a buyer such as a large corporate, private equity house or competitor makes a direct approach to buy a company – have become increasingly common since the Covid pandemic. It has been fed by the cash reserves built up by corporate buyers.
About half of business exits are a result of such ‘tap on the shoulder’ approaches, but many business owners are ill-prepared, so fail to maximise shareholder value.
Private equity investors have raised billions in funding and are highly focussed on deploying it for acquisitions, driving sector consolidation, as part of their “buy & build” strategies.
The SME sector, particularly in Scotland, is rife with innovative, ambitious and entrepreneurial companies, so successful businesses can easily land on the radar of acquisitive corporates, whether they are based here in the UK, in continental Europe, or further afield, without knowing.
This is both an opportunity and a risk – an opportunity to realise great value for the shareholders, but only if their business is prepared and presentable. It’s a risk if an approach catches the business owners and management unaware, and results in value well below the business’ full potential.
Unfortunately, nine times out of ten a company is simply not prepared for sale, is immediately on the backfoot and hence finds it difficult to gain the upper hand in negotiations.
Azets encourages business owners to plan for an exit many years in advance, regardless of whether that is via a trade sale, management buyout, or a sale into employee ownership.
If business owners assume that their business is always for sale, they are more likely to prepare accordingly and will be better equipped to manage the unexpected call.
There are four key benefits from taking a strategic approach to exit planning:
- Shareholder value is maximised
- Business continuity is more likely
- Due diligence risk is reduced
- Business performance more likely to improve
Making time to plan for a sale, regardless of whether one is intended in the short or medium term, is probably one of the most profitable management decisions shareholders and their boards can make.
Our research indicates that the majority of successful businesses leave exit planning to the last moment. We encourage business owners to add ‘exit value’ to board agendas to focus minds on getting exit ready, even if a planned sale is not imminent.
Graham Cunning is head of corporate finance at Azets in Scotland
Azets reviewed corporate finance transactions advised by the firm over the last three years
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