Getting ready to Exit

How can a company best prepare for a transaction? How can shareholders put themselves in the best possible position to maximize value, and when should they start to plan for an exit? What if “now” is not the right time to exit or sell part of your company? What happens if you miss the boat and a Trade War-related storm (or other economic event) hits you?

Some of these topics will be showcased along with recent success stories at the Arctic15 Exits track powered by KPMG on 6th June at the Cable Factory, Helsinki. At KPMG, we continue to see companies who under-prepare in advance of a transaction, leaving value on the table or opening themselves up to price chips during the due diligence process.

Many lead advisors will show you a timetable to exit 12 months before the desired event, with specific timings for a valuation, information memorandum preparation, marketing and due diligence. However, it can be difficult to enhance value in those last 12 months, in order to generate an optimal offer for the business.

Even if M&A conditions remain good, unpredictable events can occur out of nowhere – with the last credit crunch being a stark reminder that liquidity can sometimes be in short supply and that capital markets can shut down. Therefore, for any shareholders considering an exit, keeping the various exit option ‘plates’ spinning for as long as possible is both the most proactive and the most defensive tactic to maximize value.

Here are some topics for startups to consider in their exit paths

  1. Getting the right strategy in place and highlighting the future strategic directions for acquirers to develop is key to achieving the highest possible value on exit. Under all the different exit scenarios, be it private equity, IPO or trade sale, the buyer or investor will want to see some evidence of value creation and a clear strategy for growth beyond the immediate exit.
  2. Ensure your business model comprises reliable and accurate data and has enough flexibility to cope with the demanding due diligence process. If a business cannot articulate some of its own KPIs such as customer churn, MRR/ARR, customer acquisition costs, profitability by client, capital expenditure requirements for growth, the obvious perception will be that they are not ready.
  3. Identify the key risks of the business and consider how to articulate their mitigation. Failure to do so can have a real impact on value achieved on exit, or can even result in the collapse of potential transactions.
  4. Make sure you have a strong understanding of your basic legal documentation: IPRs, statutory books, employment contracts, and customer/ supplier contracts. There are no excuses for not getting the basics right. Obtaining legal advice prior to an exit is critical to achieving the best balance around risk limitation post-deal.
  5. Make sure your audit is robust, and that any issues identified are addressed prior to commencing the exit process. Ensuring the accounting policies and controls are robust will give comfort during the due diligence process around quality of earnings and presentation of financial results in relation to the underlying earnings position.
  6. A clean tax history will reduce the potential for a price chip and limit retention of proceeds in escrow. It also underlines the professionalism and governance within the company, adding to its positioning as a quality company during the transaction process. By managing tax risks it is possible to reduce the amount of disclosure required against warranties and limit potential claims against tax indemnities.
  7. Ensure debt facilities are appropriate for growth and do not mature in the immediate period leading up to exit. For those companies with existing debt arrangements, ensuring that facilities are in place during the whole sale process is critical. The complexities of negotiating new facility agreements while also discussing a transaction with potential acquirers can be a real drain on management time and resources at a moment when these are in short supply.
  8. Prioritize how best to support the CFO/COO in continuing the day-to-day running of the business while also driving forward the transaction. Buyers are interested in management that has the capacity to effectively manage and ensures visibility during the process – not having this may put buyers off.

To sum up. Prepare early, as it will allow any issues that may impact deal value to be remedied, and will help management to retain control. Afterwards, take some time to enjoy your exit and consider your next move.