Exit focus: get ready to create value

Nigel Owens, Mercia Portfolio Director; Sarah Williams, Mercia General Counsel and Company Secretary; and serial non-executive Frank Collins, sat down to discuss exits to trade or secondary buyouts. With a combined 59 years of exit expertise, our panel advised our guests at our Chair Summit 2022 on how businesses can best prepare for exit.

Prepare for an exit, but do not presume when or how it will happen. This was the pivotal comment of the day, drawing consensus from our panel that exits rarely arrive in an anticipated form; buyers often emerge from left field and timings take you by surprise.

Drawing further inspiration from this fireside chat we share these insights for you.

Run it like you will never sell

This is a bold statement, but one intended to narrow the focus of business leaders on creating value. The strategic plan for growth should run parallel to the exit strategy.

Our panellists’ advice to management teams was to run their business like they will never sell it and as though they will have an interesting approach tomorrow. Negotiating the tension between these two opposing imperatives is tricky but necessary as the buyer might not want to buy when management want to sell. However, business leaders should be adaptive and ready to sell if an offer is made that meets the objectives of everyone involved.

Consider your exit from day dot

Business leaders should start to consider the exit the day their first investment completes. Because good exits come from businesses that are run as though they will never be sold, understanding the value drivers for the business from the outset will help to refine the business plan.

Leaders must rise to the challenge and knuckle down during the period of frenzied activity that the first investment heralds and gain a clear understanding of what those value drivers are. They could be revenue, revenue growth, profitability, profitability growth, the technology, the people, or a combination of all and more. Understanding those value drivers and how they develop over time is key to all leaders.

Retain a focus on performance

Know what good performance looks like in your business and meet it. Hitting your numbers is important because regular underperformance knocks confidence in buyers. Those numbers do not have to be profitable numbers, but your business plan must be a meaningful document that has reachable targets. Buyers will look at it.

Maintaining accurate records is critical. You should maintain your data room following completion of your first investment. The unexpected is what derails most deals, but accurate record keeping saves you from trying to plug unexpected gaps during the due diligence process. Identify and highlight potential issues as they occur so you are not struggling to amend the unfixable when it is too late. A lack of preparation, poor record keeping, weak governance and data gaps are the chief factors that repel buyers.

There is no such thing as the right buyer

The perfect buyer is rarely the purchaser. The best most businesses can hope for is the best buyer at the right time.

Buyers often come from an unexpected direction at an inopportune time. Your potential buyer may perceive your business’ value in an area that you did not anticipate at the outset. To anticipate this, business leaders should retain an open mind about what are the value drivers of their business are. Buyers might see your business as an add-on to one in their portfolio, a means of accessing a new market or a method to acquire some new IP. Once you refine your buyer pool, you may need to tweak the message about what the respective value drivers are in your business to suit the interest of potential buyers.

What makes a bad deal?

Bad deals were those which lack honest conversations. Adversarial deals rarely lead to successful exits. Corporate transactions should have both sides of the table working in tandem toward the same objective. Everyone naturally wants their unique objectives to be met and their position protected, but open dialogues are necessary for deals to make it over the line.

Have clear expectations

Many deals fall away because stakeholders lack clear expectations of price on exit. Management teams could initially be excited by a headline number, but once tax bills are calculated and everyone realises how much they will take home, sometimes that number no longer works. To avoid this, management teams should know what numbers will cover the related tax costs and be remunerative enough for everyone involved to accept before sitting down at the table.

Be conscious of personality fit

Personality fit is integral to constructing successful management teams and is an equally important aspect of choosing the partners that the business works with during the exit process. Not everyone has the right skills to maximise shareholder value on exit.

Non-executive directors need to have the tough conversations about whether the management team has the right skills, capability and desire to deliver what will be expected of them when exit comes.

Good Chairs can provide appropriate, respectful feedback to the team about which personalities will best lead a business to a remunerative exit and beyond. A strong Chair can build teams that not only deliver exits but propel growth in the business’ next chapter.

As an exit approaches businesses will work very closely with and depend on their advisors. Choosing the right advisor can make all the difference toward as whether there is smooth exit process and outcome, or not. All advisors should be cautious, but uncommercial advisors can jeopardise transactions. Successful advisors are those who are neither excessively cautious or heedless but can draw on their expertise and resilience to negotiate for the best possible exits.

Loyalty matters less than suitability in the run up to exit. You may trust your long-standing legal adviser, but management teams should elect advisors best suited to the task at hand, even if that means introducing new personalities to the business. This is especially beneficial for cross-border transactions, when someone who can negotiate different territories,’ cultural differences can smooth the process.

In conclusion

A successful chair or non-executive director can provide the appropriate insight and feedback to propel growth. They can draw on their expertise to support in team construction, by focusing on personality fit; establish good data collection and record keeping; and by creating a business plan which clearly details value drivers. Great chairs and non-executives not only are instrumental in driving the kind of value which delivers exits but are the architects of the growth that comes next.