February 2012

If that future is a partial or whole sale of your business, then planning well ahead to maximise value is essential. In an ideal world, any corporate deal is best struck in a rising economic environment so as to obtain the best price. But to be able to achieve a premium, a company also needs to be prepared and ready well in advance – and that includes keeping a careful eye on strategic decisions at least 12 months in advance of preparations.

When preparing for a deal, it’s important to bear in mind that buyers require two main criteria. First that the business or division you wish to sell is indeed ready for sale and, secondly, that the price they are paying is justifiable to their board or investment backers.

So in terms of maximising corporate value, sellers need to work on highlighting profitability and potential in order to justify the price being asked. Demonstrating potential is necessary because a purchaser wants the reassurance that after they have acquired the business they can take it to a further level. “Successful businesses are generally valued on multiples of the profits generated. In order to get the best return a seller needs to be producing strong, steady profits with potential for future growth to make the purchasing environment more attractive,” explains Mark Standish, Corporate Finance Partner at Mazars and winner of Dealmaker of the Year trophy at the recent Central and East of England Dealmakers awards.

While many owners understand this point, they often overlook the importance of ensuring the company is fit and ready for sale. “A business not only needs to be financially attractive to a purchaser, but any problems within the business need to be identified and ironed out before a deal is struck.” Typical problems would be to do with suppliers, quality of stock and holdings, as well as credit, debt or staff issues.

Neither should owners contemplate what Standish describes as “an emergency stop” as this could jeopardise any deal prospects. “If you have a business that needs continued investment, then you should not stop replacing machinery or investing in plant prior to a sale. It is naive to think that a well-informed purchaser will not identify a business that has been starved of investment prior to or during the sale process. The investment needed to put the company back on track will simply be factored into the offer price,” says Standish.

The difficulty then is you have a purchaser factoring in their figures in a completely different way to the figures you have presented in the first place. “So you may find a reduction in value that is over and above the investment you would have made had you kept up necessary spending in the first place,” he adds.

At the other end of the spectrum, Standish advises against wasting capital by opening up a strategic new directional investment. “Don’t open a new sales operation in France, for example. You may not have the chance to get a return from that investment and the potential purchaser may already have an operation in France, in which case it would be a wasted investment. Strategic decisions should be considered very carefully at this time. You should not be planning beyond the 12-month time frame when looking through a sale window. You should maintain business as usual as much as possible and, while not neglecting lead generation, you should focus sales efforts on lead conversion primarily.”

It is possible to reduce costs and get the company in a ‘lean’ condition for sale, while still maintaining 'business as usual' expenditure and investment. This would include reviewing stock holdings and asset utilisation as well as scrutinising variable costs such as utilities and stationery to see whether any savings can be made.

Yet, even with all the main criteria boxes well and truly ticked, a deal can still be threatened during the negotiation phase.

“It might be that a purchaser finds a weak link in the business. If there is the chance to fix the problem, then it is possible to re-instigate negotiations. But sometimes it’s right to abort the process at that point,” says Standish.

At such times, it’s important not to let emotions get in the way as the ability to recognise when it’s appropriate to continue with the deal or walk away from it completely could potentially be the difference between a successful deal and a costly mistake.