In creating the finnCap Group, finnCap adds sell-side advisory to our comprehensive suite of client services (find out more about our sell-side services). This expertise comes in the form of Cavendish Corporate Finance’s 30-year track record managing the entire sales process for vendors of businesses across multiple sectors. As such, we decided to explore the ins and outs of exit planning, and why timing it right is so important for ambitious entrepreneurs.
Here we speak to Partner at Cavendish, Derek Zissman, exceptionally experienced in exit planning, about how he helps a founder create the best possible exit strategy for their business.
“When a founder arrives at our door, intent on planning an exit, there are two questions I always ask,” says Derek. “Firstly – ‘why are you selling?’ and secondly – ‘what will you do afterwards?’”
Such preparation is key as it addresses the critical and fundamental issues before an exit process gets underway. The point is to fully understand the founder’s ambition in terms of value, the timing of the deal, the exit options, the strength of management, as well as reviewing financial results and forecasts.
How is your timing?
The issue of timing for an exit strategy will always surface early in the discussion. For example, the current state of the M&A market or the incumbent tax regime are both major considerations.
One must also account for the potential impact of any possible external changes, such as whether entrepreneurial relief will be scrapped, perhaps a change of government is mooted, or indeed the uncertainty of Brexit.
The exit options
Exit options generally boil down to either selling to a trade buyer or to a private equity firm, or an IPO.
Some entrepreneurs shy away from a public listing. In these cases, appointing an experienced, public company non-executive chairman can help to protect a founder, but then again going public isn’t for everyone.
Meanwhile, founders that are thinking of selling to another entrepreneur should be aware that this can create difficult negotiations. Having your most trusted adviser beside you in the process pays in the long run.
The management team
Buyers take a hard look at the company’s management below the founders. Specifically, they tend to be interested in how dependent the company is on its founders. They also want to know whether the company has a strong Finance Director, who will play a crucial role in answering questions about the financial affairs of the business.
Founders will have to expect that the due diligence process undertaken by the buyer – that critical review of results and forecasts on which the buyer determines the value of the business – will be searching, disruptive and time consuming. There will be a lot of questions whose answers have to be detailed and supportable.
“Most importantly we don’t want any negative issues identified, particularly those we weren’t told about previously,” says Derek. “Failure to satisfy due diligence gives a buyer the ammunition to chip away at the price. It is also a major cause of a deal falling over.”
Finally, an experienced corporate lawyer is crucial. Where the buyer will doubtless use a serial M&A lawyer, the founder must be able to call upon a lawyer who is used to dealing with those kinds of issues which tend to raise their heads on almost every deal.
This might be obvious to some, but as Derek points out, one mustn’t forget to keep the business running. He explains that many entrepreneurs are shocked to realise how all-consuming – in terms of time, energy and focus – the exit process often is. And this can have its own repercussions.
“Taking management’s eye off the ball can result in all sorts of problems,” he explains. “The last thing you want at this stage is for the business to face a deterioration in its results.”
What to do after
A vital consideration for is what happens afterwards, and it’s one that founders seldom fully appreciate.
Years of hard graft, early mornings and late nights have defined the typical entrepreneur’s existence; when that is suddenly taken away it can feel like a mental cliff edge.
“The founder carries an emotional attachment to the business; the buyer doesn’t,” says Derek.
Should the founder stay in the business after exit? Sometimes there is little choice; if they’ve left some equity on the table, they need to work hard to ensure their expectation of deferred consideration is realised.
“Otherwise, it may be difficult for the founder to live with the inevitable changes the buyer will make to the business,” explains Derek. “And it will probably won’t be as much fun.”
There is always the alternative option to start afresh, but one must remember that there’s never a guarantee of getting the same result twice with a new business.
“I’ve seen founders fail to repeat their success in a second, similar business,” says Derek. “It’s difficult to recreate that hunger and motivation you had the first time round.”