Navigating the Sale of your Business
In this article we set out the key challenges together with steps to maximise value when selling your business.
I. Challenges
Based on current market conditions and trends, businesses considering a full or part equity sale face several challenges which require consideration in anticipation of any transaction.
In order to provide a comprehensive backdrop, we have identified seven specific items which should be considered when divesting.
Relevant considerations
1. Economic Uncertainty Impacting Valuation and Demand:
While markets have stabilised and inflation has abated across much of the global economy, economic uncertainty remains with concerns relating to valuation bubbles (e.g. technology) and geopolitics remaining front of mind. Despite improved stability, investor confidence remains cautious, and this overhangs buyer valuation multiples and the speed and depth of deployable capital.
Specific issues that underpin current conditions:
A. Inflation concerns:
Despite improvements over the last 18mths, many countries still face above average inflation rates.
Uncertainty related to the long-term impact of recent prolonged high inflation and its impact on the current pace of economic growth globally.
B. Interest rate environment:
Current interest rates are high, and this continues to impact economic activity and business financing costs.
Initial steps beginning the process of global interest rate easing have appeared in the EU and UK but this has been slower than anticipated. Uncertainty remains regarding the pace and extent of future cuts as well as the intermediate stance taken by the Federal Reserve in the US.
C. Geopolitical tensions:
Ongoing, and in some cases escalating, global conflicts weigh on market confidence with the potential for trade disputes, supply chain disruptions and otherwise affect global markets most notably in Ukraine, Israel and the Middle East.
D. Labor market dynamics:
High wage inflation over the last 3 years has impacted efficiency and wage inflation pressure remains stubbornly prevalent in many sectors. This is a particularly acute factor for high growth sectors that have required additional resources to support their trajectory.
Remote working has driven business operational changes which, in some cases, has weakened efficiency or driven consequential second order demand changes e.g. commercial real estate development and demand.
E. Technological disruption:
Rapid adoption and advancements in AI based applications and process automation are changing business activities and the pace of change is expected to materially increase.
Cybersecurity concerns are now a universal issue, and the costs associated with breach prevention are elevated. Emergent corporate regulation in this area also requires further attention and consequential cost.
F. Consumer behaviour shifts:
Post the pandemic and in an environment of significant change, consumer behaviours and demand has altered for a variety of factors e.g. inflation and cost of living, increased focus on sustainability, ethical consumption and a shift towards digital consumption in many sectors.
2. Post-Pandemic Recovery:
Some sectors are still carrying over residual effects from COVID-19 impacts, affecting their financial performance and attractiveness to buyers, e.g. employees working from home remain a prevalent characteristic in many businesses and this may skew fully realised operational efficiency. It remains at query on a case-by-case basis whether this is a positive or negative impact on performance, however any inability to validate either hypothesis may discount suitor valuation analysis.
3. Buyer Demand, Valuation and Behaviour:
The market is currently characterised by a significant extent of so-called VC / PE dry powder capital available for deployment – indeed 2023 and 2024 have seen significantly higher rates of capital raised than recent years (much of which was in anticipation of a future wave of improving economic outlook). Despite this many potential investors remain actively cautious and the depth of applied scrutiny to target companies is high with no sign of change in the immediate term. The extent of diligence applied is in part a result of continued economic uncertainty (see above) and concerns relating to over inflated market valuations particularly relating to publicly traded peer comparison valuations. Other emerging variables such as uncertain impact relating to the deployment of AI solutions in targets entities or indeed in competitors from a competitive financial projection perspective weigh the extent of applied caution and review.
4. Technology and Digital Transformation:
2024, and potentially beyond, represents an inflection point where global markets have turned acute focus on the deployment of AI related systems. Businesses siding to aggressive moves towards automation or holding a more conversative ‘wait and see’ approach are being actively challenged in the reasoning and verifiable commercial impact of such choices by potential suitors. As a result, a clear and, insofar as possible, data driven AI deployment commercial thesis and resulting evidence of financial outcomes is being sought through diligence. This may increase the applied preparation time and cost required of business contemplating a market sale. Absent such preparation, business owners’ risk potential buyers discounting bids where supporting data is light or related strategies are unclear.
5. Competitive Market:
Through H2 2022 and into 2023 many European business sales processes were prepared but ultimately failed to come to market. This was driven by several factors such as materially weakened market demand because of economic uncertainty, high interest rates closing off debt supported investor funding and high prevailing inflation which weighed on business operating performance. As some of these negative factors have eased, many companies have now looked to renew their sales initiatives and, to an extent, this has resulted in a glut of opportunities coming (or actively considering coming) to market at the same time. Considering this, business owners should be especially mindful and observant of near competitor / comparable firms looking to transact at the same time. The best defence versus any investor benchmarking is the application of high standards of business data and offering material preparation through internal diligence premarketing, especially regarding commercial internal data, FP&A and supporting business financial projections.
6. Financing Challenges:
Q3 2023 represented a recent high with respect to prevailing interest rates. ECB rates have since(slowly) begun to reduce and recently the Bank of England has followed suit. This elevated interest rate period through the last 18-24 months resulted in a significant decrease in the availability of debt supported transaction financing. It is a positive that this situation is improving, however, given a general expectation of further global interest rate easing, a balanced analysis of the depth of buyer demand now versus early/mid 2025 should be applied. In the context of a decision to delay any market outreach, the intervening time could be positively utilised through improved business data preparation and soft initial marketing interaction with prospective suitors in anticipation of a transaction.
7. Preparation Time and Resources:
It remains a fact that for any business partial or full sale requires extensive preparation time and application of effort to ensure the best possible investor demand, highest valuation and the highest probability of transaction conclusion.. This can be highly distracting for boards and senior management teams and indeed the required applied bandwidth can go so far as impacting underlying business performance with no ultimate certainty of outcome. Given the current state of institutional investor appetite, market volatility and restricted prevalence of financing solutions, the need for business owners to carefully prepare for any sales process properly is indeed more elevated now than at any time in recent years.
Key Steps for Best Valuation Realisation in 2024
II. Key Steps for Best Valuation Realisation
Given current market dynamics, appropriately supported planning and internal diligence is paramount. Specific steps to consider and apply in anticipation of a business sale:
Focus on demonstrating resilience and adaptability. Demonstrate how the business has performed through recent market challenges and reasonably project future commercial opportunities. Prepare a commercial due diligence pack for potential buyers detailing the market and competitive dynamics the business operates. How is that environment expected to evolve in the future and what is the strategy of the business to drive growth in such.
Ensure robust historic financials data and projections. Expect very strong challenge to be applied to all projections and as such, support all with explicit and reasonable assumptions. The more verifiable data available such assumptions the better. Ambiguity is a common pitfall which often leads to investor valuation discounting.
Demonstrate current and future planning relating to technology and digital transformation. Where such transformation is projected to impact future financial performance, take the time to demonstrate this through explicit data driven case studies.
Carefully articulate the robustness of the business’ current cybersecurity environment and the historic performance of the same.
Have a clearly articulated position with respect to the businesses strategy and position relating to ESG.
Consider engaging with advisors to time the market approach effectively and to prepare the best possible information to ultimately be made available to prospective buyers. Ultimately buyer uncertainty relating to target business strategy / future performance hypothesis as a result of a lack of supporting data available will impact their demand.
Have a solid succession and transition plan in place and recognise likely buyer demands that will be applied post transaction e.g. senior management retention, founder transition, etc..
Be prepared to articulate the unique value proposition of the business in the context of current market trends. Have the data that supports this position carefully prepared before it is sought in buyer diligence.
Expect that any suitor will extensively diligence all available data sources relating to specific market conditions and competitor positioning and performance. Prepare clear and supportive argumentation relating to this before any arising observations are posed in negotiations.
Approach contract negotiation with extreme care. Strong legal and commercial support with extensive transaction experience is critical. A hands-on (and supported) approach to every element of negotiation is the only way to guarantee no surprises in what can be a highly complex and involved process.
Contact us
Please contact us should you or your client wish to navigate the sale of a business in the near future, or be prepared for an exit strategy on any existing or planned investment.
