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Your next deal; five ways to prepare from Day 1

19 June 2019

Why would you and your team go through the emotional rollercoaster and scrutiny of a completing a deal with a PE investor, if not to realise life-changing wealth? Once you have completed the deal, you may be tempted to go back to business as usual and meeting the day-to-day challenges of running your business. That would be a mistake. You need to start planning and working towards a successful and profitable exit from the moment you have signed your deal.

So if I may, I will give you a few tips to ensure that you don’t reach the end of the rainbow only to find the pot of gold is half empty!

Exit must stay on the agenda

A PE-backed business is always potentially for sale so an exit is always on the cards. That is not to say that exit should be an obsession and dominate every board meeting and conversation. But it is good practice for your board to regularly have an “exit” discussion. What do I mean by “exit” discussion”?  Well, the board should cover issues such as timing, who the potential buyers might be, what level of profits need to be achieved and which members of the management team will to be involved post the sale?

Thinking about the answers to those questions about every six months will underpin your business’s strategy.

Management Succession

As mentioned in my last point, you and the rest of the management team must be clear amongst yourselves and with the PE investor on who is in and who is out at the next deal.

A strong, experienced and established management team is critical to the value of your business whether the buyer is trade or another PE investor. If certain members of your management team are intending to leave, you must plan for that well ahead of the sale. Replacements need to be in situ and operating in the role for a minimum of 12 months before the deal.

Strategy must stay fresh

You started your PE journey with an exciting 3/4 year strategy. This strategy was the basis for securing the original investment. You cannot afford to allow your strategy to run down or become stale. Your next buyer, PE or trade, will need to see a compelling medium term strategy for growth. You need a robust, up to date strategy that will deliver ongoing success to secure you a good price when the next deal happens.

Well invested platform!

You should think carefully about how investment in your business supports your preparations for your next sale.

There will be a temptation to starve the business of investment in an effort to maximise profit and cash pre-sale. This approach will come back to bite you and shareholders. Buyers will pay a high profit multiple when they believe the business is capable of continuing on a growth trajectory. This will not be credible if you have not invested in areas such as headcount or systems.

A word of warning, investment in your business will need to show a return or yield in time for the next sale. No buyer will be prepared to factor these long term and as yet unquantifiable benefits into the price.

Data is King!

In a previous blog I make the case for the importance of collating and storing data covering all aspects of the business such as financial, sales, operations and legal. The rationale for this is to be ready for the intense scrutiny to come from a PE investor.

Why should this mind-set of collecting and updating data cease once the PE investor comes on board?  My advice is to continue with the practice of maintaining a data room. This will make the sales process more efficient when the time comes. More importantly, it will also help you make high quality decisions as you will have accurate data at your fingertips.

By following these 5 pieces of advice, I am confident that you and your shareholders will be in a strong position when it comes to getting that knockout price from the next buyer. I think it is helpful to think about your first PE investment as a transformation of how you run your business rather than an event or process that begins or ends.