Sunday, August 28, 2011

So you are thinking of selling to Private Equity!

Private Equity
Congratulations. You have built an impressive business and have decided that in order to accelerate growth you would like an investment in capital from a sophisticated investor such as a Private Equity firm. Alternatively you may be looking to sell the whole business to a PE firm.

Below are a number of suggestions that may assist in the execution of your strategy.

Before I go on, a big thanks to the anonymous, but experienced Private Equity blogger of www.carriedinterest.com who put much of the list together.
  1. Work out why you are selling and let that drive the structure. People often sell businesses with a focus only on the money and then later look back with regret after six months playing golf. It may be that a partial exit is better for you than a sale would be.

  2. Hire advisers who buy and sell businesses for a living.  Yes, they'll charge a lot more than Fred who does your tax return, or the neighbourhood lawyer who sold your house, but it will be money well spent.  

  3. Dividend out all excess cash well before the sale process begins. Smart buyers will always go after the cash sitting in your business.

  4. Try to resolve outstanding or pending litigation. It may even be worth taking a financial hit to remove litigation which could scare off potential buyers or result in a tough warranty/indemnity/escrow regime.

  5. Address leadership succession issues well before the sale process begins. No smart investor wants to buy a business from a retiring founder. (See my previous post on this topic).

  6. If your inventory controls are loose, complete a professionally supervised stock take. Your goal is to build buyer confidence, and that means avoiding surprises.

  7. Make an effort to collect overdue debtors. It's unlikely that the buyer will pay for accounts receivable which are dated (depending on your industry, this typically means 90+ days).

  8. Sell obsolete or slow moving inventory, as well as any surplus assets. Again, the buyer probably won't give you value for these, so try and monetise them before you start marketing your business.

  9. Remove those embarrassing “personal" assets from the balance sheet. Come on, you know what I'm talking about. Your daughter's computer, the boat you never used for customer sales events, the car you ex-wife drives . . . time to clean it all up.

  10. Ensure that property leases are arms-length. Buying a company where the seller is also the landlord is an uncomfortable, but common, situation. If your company's buildings are sitting in the family trust, at least put in place a proper lease on typical market terms.

  11. Run a competitive sale process.  Getting an offer from several buyers will not only almost always drive up the sale price, but it may also give you a range of different transaction structures to consider.  

  12. Get your books in order. Ideally you should have three years of audited accounts ready to show the buyers.

  13. Get your premises in order. Sounds very obvious, but do not want to give a terrible firm impression due to dirty workshops, offices with 20 year old lighting and carpets, no signage on buildings, etc. As part of this, consider whether your OH&S practices would stand up to outside scrutiny. 

  14. Assume that potential buyers will want to read your board minutes from the past 12 months . . . write them accordingly.

  15. Make sure that employment contracts are in place for all important members of the management team.

  16. Ensure that the accounts are in order - both statutory and management accounts. It is worth making an investment in a decent accounting firm to ensure that the accounts are in as good condition as they can be before buyers pitch up. If can be very embarrassing for a seller to find that their earnings are much lower than they had thought because there is a stock write-off, an uncollectable debt, or whatever hiding in the books.

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