Pre-transaction planning. It is a rather uninspiring phrase that does not necessarily evoke a real visceral reaction to hit up the white board for some strategic planning. Who gets very excited about advanced planning when you have a business to run, goals to meet, and profit to earn? Well, I must admit, we do and we hope you will too as you read on. Let’s start with a little foundation building. Pre-transaction planning is the process of preparing your company, both operationally and financially, for the rigors of an eventual sale. In the M&A world, you can breakdown the sale process into the three broad categories of Planning, Execution, and Closing. It is our experience that most business owners and management teams focus intently on the latter two stages and do not always prioritize the investment of time and resources to plan for a successful transition well before the desired time to hit the market. It is this observed dynamic that has made Mr. Lincoln’s line “If I had eight hours to chop down a tree, I’d spend six sharpening my axe” apropos.
While splashy acquisitions make the headlines, we are often unaware of the large number of deals that never get to the finish line. No one wants to beat the drum when a deal falls apart post Letter of Intent (“LOI”). The reality is buyers are increasingly more sophisticated and due diligence has become more and more robust and onerous. If you have seen a private equity or strategic buyer due diligence request list lately, you will know what I mean. They want detail on organizational matters, legal liabilities, IP rights, regulation and permitting, HR policies, environmental studies, and on and on. We are not trying to be an alarmist, and we certainly ‘get’ not everyone has the predilection to sell to a private equity group, but the point simply is there are a lot of opportunities to lose well-earned value as a sale moves through the various phases of the process (value is never as good as the time you sign the LOI).
If your long-term business objective is to achieve a liquidity event through the sale of your business, taking some time upfront to sharpen your axe is critically important. To get granular, let’s take a look at some core elements of pre-sale planning:
- Evaluate your objectives: It all starts with what you and your team want and when. This is where you try to align mental and emotional goals with financial objectives. Establish consensus goals, model out your capital needs to execute your plan and what type of value you can create on a standalone basis. Since this step sets a lot of wheels in motion, you may want to go further to understand your cost of capital, assess the market dynamics, benchmark your performance against peers and the industry, all with the collective goal of clearly defining performance targets and other key requirements that imply success as you measure it.
- Assemble the team (early): You want rock solid bench strength here, which means having the right mix of internal and external advisors. Most importantly, you want advisors who have been to this rodeo many times before, because you can expect the buyer on the other side of the table has these experts.
- Create a project plan: Essentially, how do you want to manage the process, and, perhaps most importantly, how do you want to coordinate communication and confidentiality.
- Preliminary due diligence audit: This sounds formal and daunting, but it is about getting your house in order, be it getting audited financials in place or tidying up corporate governance loose ends. The more you can say “see the data room” for answers to diligence questions, the better.
- The model & beyond the model: It makes sense to have a thoughtful financial model in place so you can get an early sense of value drivers and sensitivities that impact your enterprise value. When we say “beyond the model,” we are referring to non-financial value drivers and identifying potential obstacles before they come up mid-transaction. Early detection of possible buyer hang-ups (i.e. who owns the IP, does one customer account for an outsized portion of your sales, etc.) allows you to better defend and articulate the nuances of your business more effectively.
There are other preparation steps, such as defining the buyer universe, anticipating potential synergies, establishing your preferred execution strategy (i.e. auction, targeted solicitation, etc.), but blogs are supposed to be concise and digestible, and we are running long. So, to wrap it up, let’s attempt to lay down the rationale for why we, as an organization, place so much emphasis on doing your homework upfront.
Failing to successfully sell your company, most likely your biggest asset and labor of love, is emotionally and financially trying. Deals often fail, not at the expression of interest, but during the execution and closing phases where avoidable issues arise. In a sale process, time is not your friend, but rather your enemy, so creating an environment where you make the navigation of the three sale phases as painless, transparent, and quick as possible will most certainly help you both preserve and optimize the value for your business.
Chief Operating Officer