7-Step Guide to a Successful Business Exit in 2024-25
In 2023, M&A levels retreated from the heady heights of 2021-22, falling to their lowest level in ten years globally. The good news, however, is that private merger and acquisition (M&A) volumes in the UK mid-market are on the rise again, as stable interest rates and abundant acquisition targets fuel acquirers’ pursuit of new opportunities.
To capitalise on this increasing investor interest, it is important to come to market with the right preparation, the right valuation and the right positioning – along with the helping hand of an experienced adviser.
Step 1: Get your house in order
Exit planning and preparation
This stage, arguably one of the most important, involves structured, sustained exit planning over a 6-24 month period.
Getting your house in order means everything from financial housekeeping and tax hygiene through to commercial due diligence – for example, ensuring any IP claims and supplier/distributor contracts are watertight, and training up staff to replace the expertise of exiting shareholders.
The 24-months prior to exit is also the time to think about tax-efficient exit strategies. This might mean transferring shares to a spouse or civil partner to maximise Business Asset Disposal Relief (BADR), or assessing whether an Employee Ownership Trust might be feasible.
This is also the time for any valuation-maximising action. What does this mean? It means zoning in on the key metrics that will determine your EBITDA multiple, such as growth of earnings and resilience.
Step 2: Set your price tag
Getting an independent valuation
People, even financially-astute traders, tend to overvalue assets that they own. This cognitive bias, called the “endowment effect”, can negatively impact M&A deals by creating an expectation gap between the vendor and the prospective buyer.
And savvy acquirers, such as PE firms and large trade buyers, will be particularly deterred by an overinflated price tag.
An independent valuation professional, however, can provide an objective benchmark that withstands buyers’ scrutiny. And they bring more than just number-crunching to the table – they’ll have the expertise to select the most appropriate valuation methodology for your specific situation, whether that’s an income, market or asset-based approach, or a combination of all three.
They’ll also be able to advise on how cash flow and EBITDA can be normalised by identifying discretionary or non-recurring expenses, helping to find the true picture of your business’ value. They may even recommend making run-rate or pro forma adjustments to better reflect your business’ forward momentum.
Step 3: Define your value proposition
Marketing the business
In the compilation of your Information Memorandum and other marketing collateral, you’ll want to provide a comprehensive overview of your business to ensure you reach the right prospective buyers – from your products and services through to marketing, customers and contracts.
In 2024, foregrounding financial stability will also be key, as acquirers overwhelmingly seek “safer” assets with resilient revenues. Key differentiators to highlight might include:
- A high free cash flow (FCF) conversion ratio – a particularly important in more challenging economic climates.
- Year-over-year revenue and profit growth.
- Scalability with low CapEx.
- A larger-than-average share of the addressable market.
- Strong management team or experienced employees.
- Customer “stickiness” and low customer acquisition costs.
- Contracted/recurring revenues.
- Operating within a market with high barriers to entry.
- Strong and non-reproducible IP.
Note that with rising wages and other inflationary costs, squeezed margins are providing a key strategic rationale for deals, so emphasising your company’s potential to bring cost-saving synergies and economies of scale is advisable.
Showcasing your business will also need to be balanced with the right level of confidentiality and discretion. This means having a well-drafted NDA, and possibly even imposing non-solicitation covenants, prohibiting employee, customer or supplier poaching for a set timeframe if negotiations fall through.
In some cases, financial granularity like in-depth breakdowns of profit margins and pricing structures, IP specifics, and the fine print of important contracts will be withheld until the final stages of the deal.
Step 4: Identify and approach potential investors
Targeting the right acquirers
Different acquirers will have different priorities. Understanding these priorities and understanding where you company fits into them is crucial.
High-growth businesses offering a high return in the short-term and a profitable exit will appeal to private equity (PE) firms, while trade buyers may have more wide-ranging strategies – from a straightforward buy-and-build strategy through to something far more transformational.
One of the most frustrating parts of the selling process will be weeding out “time wasters” from genuinely interested parties.
Request proof of funding near the outset to assess the buyer’s genuine capacity to complete the purchase. For instance, if your business is valued at £2 million and a potential buyer only has £100,000 in readily available funds, needing to raise the remainder, it’s unlikely you’ll achieve a favourable sale price.
Financial due diligence will often betray a prospective buyer’s seriousness. When a private equity firm or financial director presents an Excel spreadsheet with hundreds of probing questions, or combs through your accounts for potential cost savings, it typically signals genuine interest.
Engaging an experienced adviser such as Hilton Smythe, however, can take a lot of the legwork out of the buyer search process: they will identify and vet buyers on your behalf, both through direct outreach and by drawing upon their extensive buyer networks. They’ll also help to foster competitive tension by lining up a number of deals.
Step 5: Create a pain-free due diligence experience
Preparing for scrutiny
Once an initial offer is on the table and the Heads of Terms agreed, due diligence will ensue. While the legal concept of caveat emptor (‘let the buyer beware’) places the burden on buyers to reasonably examine assets before making a purchase, you can help to make the process as pain-free as possible through advanced preparation.
You should ensure all financial records are up-to-date, contracts are properly documented, customer data is well-organised and compliant, IP rights are clearly established, and HR documentation is to hand. Read more about how you can prepare for due diligence here.
At this stage, an adviser like Hilton Smythe can also help to organise dynamic virtual data room for better information exchange. This will house all the documentation a buyer and their advisers will want to see in a full financial, legal and commercial due diligence exercise.
Step 6: Call in the deal structuring experts
Deciding on the form of payment and the form of acquisition
At this stage, your deal adviser will assess the primary goals of both parties involved in the transaction, structures to achieve these goals, and ways to share risks. Major components of the deal structuring process include the:
- Acquisition vehicle and post-closing organisation.
- Form of payment.
- Form of acquisition.
Possible acquisition vehicles include holding companies for deals with earnout clauses, or partnerships or limited liability companies for a more straightforward transaction. Other options may include special purpose vehicles (SPVs) or direct acquisitions by the parent company.
Your deal adviser will also negotiate payment terms. This may involve cash, debt, and other terms such as deferred consideration. Deal structures such as leveraged buyouts (LBOs) may also be on the cards, especially where the acquirer is a private equity firm, institutional investor, or management team, while earnouts or contingent payments may be the most suitable option where the buyer and seller cannot see eye-to-eye on price.
Step 7: Sealing the deal
Purchase, sale contract and financing
At this stage, legal teams step to the forefront, crafting the deal’s cornerstone document: the Share Purchase Agreement (SPA). This comprehensive contract details the terms of the deal, including consideration, acquirer protections, completion mechanisms, vendor protections, and timelines.
