“Preparing for an exit”
Advice for SMEs thinking about selling their business
Step n°1 |
Background to an exit
A well designed and well executed exit strategy can create as much value as
all the other work building shareholder value over the years.
Preparing in advance for an exit and managing the sales process
professionally will almost certainly result in a higher price being achieved.
Companies should be ‘sold’, not just ‘bought’. Resist the temptation to accept
the first unsolicited offer that comes along.
A professional sales process run by an experienced advisor will also increase
the chances of success, not least by introducing more than one bidder.
Start planning for an exit early… because ‘stuff happens’ and you may lose
several months trying to resolve a problem.
Step n°2 |
Advance preparation (12-24 months before exit)
Identify your Unique Selling Proposition (USP) - the principle feature of your
business that differentiates you from your competitors. This is likely to be the
key element that will create strategic value for a buyer. Focus on this feature
and strengthen it. Don’t be distracted by non-core activities – they are
unlikely to add value to your business.
Prove the business model. This means to prove that the sales life cycle from
customer acquisition to final fulfilment and after-sales service is profitable, on
a customer by customer basis.
Build your sales pipeline and prospect list. Invest in your sales and marketing
resource. Growing sales is one of the key value drivers for your business.
Try and build recurring revenues into your business model if possible (eg
subscription renewals, maintenance contracts, etc). These are valuable to an
acquirer and improve the predictability of future revenue projections.
Identify opportunities for your business in other countries and other sectors.
Try and develop at least one of these to demonstrate that your business has
growth potential beyond its core market (scalability).
Reduce reliance on the founder/CEO. Ensure other managers are capable of
running the business and taking it forward without you being around longer
term. Incentivise them with share options to ensure they are focussed on
increasing the value of the business. Make sure their employment contracts
are consistent with best practice.
Check Investor or Shareholder agreements for any drag-along or tag-along
clauses, liquidity preferences for certain shareholders or liquidity clauses
obliging you to seek an exit within a certain timeframe.
Discuss the possible sale of the business with your major shareholders to
understand their aspirations and any timing constraints for their funds. Many
institutional funds are obliged to sell their investments within a fixed
timeframe. Make sure all the shareholders are aware of your plans and agree
with the process.
Start to document the processes that drive your business (technical manuals,
training manuals, employment contracts, IT systems, etc).
Reduce the risk in the business. Try and achieve a spread of different
customers and a range of products.
Check key contracts for onerous ‘change of control’ provisions. Make sure
these are renegotiated if they would block an exit or reduce the value of the
Ensure patents, trademarks and brand names are properly registered and up to
Make sure your accounting policies are appropriate and ideally consistent
with international accounting principles. Ensure that any capitalised
development costs are still relevant to the business. If not, write them off.
Ensure your budgeting and financial reporting is of a high standard, ideally
with monthly management accounts showing the full P&L account with
variances against budget. Also historic and forecast cash flow reports.
Start keeping proper minutes of board meetings and shareholder meetings so
you can demonstrate that your business is run professionally.
Step n°3 |
Identify potential acquirers (12-18 months before exit)
Consider potential acquirers from all aspects of your business:
iv. Partners (eg joint bidders for complex RFPs)
v. Big corporates operating in your sector
Consider the synergies that could exist between your business and a potential
acquirer. The more added value that could be created by a merger, the more
the buyer will be prepared to pay.
Consider their ability to complete an acquisition (are they profitable, cash
rich, acquisitive, etc)
If you can identify two or three logical buyers for your business, try and
strengthen your relationships with them, eg cooperate on RFPs or share views
on industry issues. Try and make the highest level contacts you can, eg CEO
or board directors.
Look outside your own country and marketplace – acquiring companies are
often looking for access to new markets.
If your business is growing and profitable with good long-term potential,
potential ‘exits’ could include other financial structures:
- Secondary financing by private equity firm (development
- IPO on an unregulated market (Alternext, AIM).
- LBO/MBO – company acquired by founders/management
using leveraged financing.
The best choice of exit will depend on your motivation, eg access to new
capital; creating a market for employee shares; enabling financial investors to
exit; credibility with customers, etc.
Step n°4 |
Select an advisor (6-12 months before exit)
Ask all your contacts for recommendations – a personal reference is valuable.
Choose a firm who has knowledge of your sector and who has successfully
completed sale transactions before. A credible track record is essential – there
are a lot of sharks out there!
Choose a firm that is reasonably local to your business and where you have a
good compatibility with their team. Make sure you know who will be working
on your transaction – often this is not the smooth sales guy who convinced
you to choose their firm!
The exit process can be time-consuming and stressful. It is very important that you get on well with your advisors and enjoy working with them. You’re
going to spend a lot of time together!
You also need adequate financial resources to pay advisors, lawyers,
accountants, etc for exit work. Any sign of cash constraints during the exit
process will be perceived very negatively.
Some boutique corporate finance houses follow a routine process for all
transactions, mainly driven by email circulars. This may not be the best
approach for your business. Interview them carefully to understand how well
they understand your sector and how they propose to manage the sale process.
Define their mandate precisely and ensure the engagement contract includes
the specific tasks you expect them to carry out.
Consider a two-stage approach for their mandate (particularly in France):
i. Review strategic options for the business (funded by the company,
normally by a monthly fee or retainer). If/when a sale is confirmed as
the best option, then;
ii. A full sale mandate (normally success-fee based and funded by the
shareholders from the sale proceeds)
Fees are variable but typically include a modest retainer for the preparation
period, often paid monthly, followed by a success fee for a completed sale.
The success fee will normally be a percentage of the sale proceeds but subject
to a minimum fee.
For an SME, the retainer or fixed fee is typically € 50-75k or €10-15kper month. The success fees can vary from 2-3% for sales value > €50m, 4-6%
for sales value of €10 – 50m; and 7-10% for sales < €5m.
Make sure that the success fee is the most important element of the total fee
proposal for the advisor. You want him to be highly motivated to achieve a
Consider negotiating a lower fee for acquirers introduced by the company
rather than the advisor – you don’t want to pay them for your own contacts!
Also try and ensure that the fixed fee or retainer is deducted from the eventual
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