Preparedness is key to driving exit value. When planning to sell, it is critical for businesses to clearly and tangibly demonstrate the ability to drive EBITDA growth in order to maximize transaction value. As your business stakeholders evaluate exit timing and organizational readiness, you should identify priority areas that may require attention and develop a “go-to-market roadmap” to ensure that growth opportunities are fully transparent to prospective buyers.
There’s a lot at stake when planning an exit. To increase the certainty of close, reduce the risk of deals falling apart, and get the most out of your exit, here are 5 best practices for a successful transaction.
#1 – Ensure the management team is aligned on growth strategy and roadmap
The communication you deliver to the market needs to be unified and based on the strategic growth goals and plans the company has set. Before any messaging leaves the four walls of your business, ensure all key players are on the same page, aligned on strategic goals and the roadmap to achieve these objectives. While investment banks are responsible for preparing marketing materials such as the Confidential Information Memorandum, management must articulate their journey to drive growth to date as well as future value creation opportunities over the next five years. By providing a clear picture of historical margin improvement substantiated with supporting data, buyers will have stronger conviction related to future growth plans, estimated financial impact and the improvement roadmap defined by the seller.
#2 – Early exit planning is key
As much as buyers have value creation plans to implement post-acquisition, sellers should have a clear exit plan at least 12-18 months in advance of a transaction. The company should be able to demonstrate a clear sales and pricing strategy supporting its value proposition and history of driving margin growth through pricing, mix optimization, and sale productivity. Companies that can show through data and financial results that they have executed price increases, improved product/service mix, and expanded customer spend, garner higher multiples and get more credit for proforma plans. As such, if a business has not captured value through pricing, the management team should evaluate a pre-exit pricing initiative to drive impact in their financial statements and show buyers they have the capability and customer value proposition to drive margin growth. If there is concern that a pricing initiative may affect other areas of the business, such as volume loss, strategic pricing can be implemented in a risk-adjusted fashion to align to business goals while also demonstrating value and capability.
By planning early, companies allow time to execute these value creation initiatives that will provide high ROI in terms of enterprise value.
Further, future opportunities for revenue and margin growth that are part of the growth strategy, and are cited in the CIM, should include a detailed roadmap for how changes will be implemented and when financial impact will be realized. Buyer confidence in these future value creation initiatives increases significantly if there is: 1) demonstrated financial impact of prior initiatives or the organization can show that current initiatives have early stage financial impact; 2) clear definition of commercial improvement initiatives and a roadmap describing remaining opportunities, order of operations, and timing of identified impact; and 3) underlying data to support and quantify the value creation opportunities and historical commercial metrics (e.g., margin growth, cross-selling, customer retention).
#3 – Don’t under-index on data quality
Data is the window into your business for buyers. We know that data drives multiples, and so investing in the quality of your data is a foundational play that enables you to showcase your business and your growth opportunities tenfold. Getting a head start on improving your transactional data earlier rather than later allows you to focus more on strategic and game-time decisions during the exit process and worry less about the data experience and unwanted messages your data may unintentionally convey. Quality transactional data means:
- Line Level, not Summary Level: Sales and cost data available by customer, product/service, and date of sale
- Recognizable Fields, not Ambiguous Terms: Fields within data are easily understood with clear definitions and consistent entries
- Structured, not Scattered: Customer and product categories have a clear purpose in business segmentation
- Market Relevant, not Static: Financial methodology reflects actual sales and costs at time of sale
When your data quality is high, this demonstrates that your company has a strong internal understanding of your business, clear customer and product segmentation, and the ability to scale. High data quality also allows you to build robust and granular data analytics that inform and align buyers to what has occurred in the past and what opportunities lie ahead—quantitatively and qualitatively. It changes the script from ‘how much growth opportunity exists’ to ‘how much is it worth to you, as a buyer’.
Benefits of enhanced data quality and analytics:
- Your team has the capacity to focus on other value creation workstreams rather than wrangling data
- Increased transparency provides supporting evidence to prove out your company’s current value and identify growth opportunities
- Prepares the management team for prospective buyer questions and to get ahead of data room requests while controlling the dialogue
- Builds buyer conviction related to speed to drive impact and that the company is ready to implement initiatives
- Demonstrates commercial sophistication to increase confidence in ability to achieve value creation plan
- Proves that platform investments are ready to scale with add-ons
#4 – Demonstrate results relative to key commercial metrics
In addition to strong financial statements showing progressive revenue and margin growth, companies need to show the underlining key performance indicators (KPIs) and metrics that support the growth narrative such as revenue per order, net customer retention, number of SKUs per customer, promotional effectiveness, net price improvement, and product and customer mix improvement. Having these KPIs over multiple years will provide a trend and reinforce that management understands the key drivers to financial performance and makes decisions based on data analytics. Further, sellers can show the ROI on improving specific metrics (e.g., cross-selling) and provide specific examples for in-process improvements and financial impact that has already been realized.
#5 – Showcase organizational preparedness to execute growth strategy
The key to a successful transaction is that the seller gets credit for company financial performance, investments made to develop a foundation to scale, and the readiness of the organization to “go get” the future opportunities that have been defined and quantified. The key factors that buyers evaluate to determine a company’s ability to deliver on the pricing and margin improvement roadmap are: 1) leadership commitment to drive change and use price as a strategic lever; 2) systems and tools to enable the sales team and provide decision-support data analytics; 3) defined processes to control sales and pricing to provide sale discretion within established parameters; and 4) clear go-to-market strategy related to customer and product/service segmentation, channels, value proposition, and market positioning.
Maximize Your Exit Value with INSIGHT2PROFIT
INSIGHT2PROFIT’s Quality of Pricing® (QoP®) serves as an invaluable tool in the exit planning process, regardless of whether a company is in the early stages of discussions with investment bankers or farther down the process of attracting potential buyers. While buyers are sitting on significant dry powder and are seeking high-quality targets at lower valuations, QoP optimizes transaction value by:
- Quantifying historical EBITDA growth due to pricing and commercial improvement
- Identifying, measuring, and prioritizing near-term opportunities to be realized pre-transaction
- Isolating COVID impacts to business and demonstrating the extent and pace of recovery
- Laying out an EBITDA improvement roadmap to inform buyer value creation plans
- Lending credibility and tangibility to proforma EBITDA adjustments in a CIM
- Providing data engineering to develop a commercial Profit Cube for the virtual data room to provide visibility to buyer audiences
- Collaborating with investment banks to market business and address questions from buy-side advisors