Enhancing value
A sale‑ready business plan helps the board communicate a credible equity narrative converting operating performance into valuation. When calculating an offer, buyers are primarily interested in a future return on investment and having a forward-looking plan that details growth projections, expansion opportunities and the tools and investment needed to deliver these is most likely to command a premium when it comes to pricing.
In terms of content, the plan could focus on ways to improve margins to expand maintainable EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), such as standardising pricing, streamlining service offerings and implementing customer service models to reduce churn. If the business is one that benefits from recurring revenues, a review of the terms to expand the duration of the contracts, reduce termination timeframes and causes and include price-indexation clauses will all help give credibility to predicted cash flows. New territories, markets, products or services to be explored within the next three-five years can be detailed with the plan articulating the route to market, the risks and benefits. Factors that could depress valuation should also be addressed such as customer concentration, the need to broaden supplier relationships and the threat from competitors or new entrants.
Regular reporting at Board level helps to show professionalism and gives confidence in the management team. Introducing KPI’s and financial controls and reports suitable to the size of the business provide indicators that the company is ready for acquisition or investment.
Succession planning should be addressed in the plan well before it is needed, with the Board regularly considering the issue of recruitment, training and incentivisation for management and ensuring that any founder led business has the necessary depth to be attractive to a buyer if the founders are seeking to retire on exit.
A strategy to look at the legal and, in particular, intellectual property health of the business can add value. Ensuring all IP is correctly owned by the business rather than the founders, employees or consultants is critical to value, updating employment agreements and consultancy agreements to deal with this as well as non-compete covenants and incentive plans for key employees will be time and cost effective. Reviewing the staff handbook, closing any gaps in data protection and privacy requirements and formulating an ESG framework (where appropriate) can be undertaken over a period of time and pre-empt some buyer concerns that could impact the level of an offer.
Controlling the timing and type of acquirer
The preparation of the business plan can identify the type of buyers that would be attracted to the business. A strong, incentivised management team committed to the business for the next 10 years along with a credible growth story and/or identified bolt-on acquisitions may be attractive to private equity whereas the availability of cross selling synergies or a new territory may be enticing for trade. Identifying the potential type of acquirer will help the Board reverse engineer the data and metrics they need to evidence equity value.
In addition, a plan provides an early warning system for the Board, if milestones are measured quarterly in the plan, any divergence can be flagged quickly and addressed. Timelines can be adjusted where macroeconomics or regulatory changes affect the timing of an exit. Tracking performance means that if the business is behind or ahead of plan, the Board can amend when it goes to market to maximise the equity value.
De-risking the sale process
Pre-sale preparation shortens the deal timeline and helps reduce execution risk. At a time where transactions are routinely taking longer than the perceived average three-month period, buyers recognise the benefit of an asset being diligence-ready and are more willing to maintain their initial offer price where the narrative remains consistent throughout the transaction.
Including corporate housekeeping in the plan at least six months ahead of the transaction should pay dividends. Ensure Companies House filings are up to date, prepare an accurate cap table including all share options and vesting, sort out any anomalies with inter-company balances, directors’ loan accounts and related party transactions. Building in a review with the owners/company’s tax advisers to consider any tax-efficient structuring and pre-sale reorganisation and then presenting those as a condition to any exit will avoid delay at the start of the transaction.
Dealing with any change of control restrictions in key contracts or consents required by landlords or financial providers along with any regulatory approvals should be built into the plan at this stage. Showing that you are engaging with third parties who have the ability to derail or delay the process demonstrates transactional experience and provides further certainty for a Buyer that the project will reach completion.
As the exit grows closer, consider including a section on the quality of earnings, allowing the company to adjust reported net income to remove one-off items and present sustainable EBITDA. At this stage, the introduction of a draft 100 day plan for post-exit value creation can also demonstrate the preparedness of the management team.
A robust business plan can be a critical tool for value creation, good governance and execution fitness. If the Board can introduce reporting relevant to a buyer and address execution issues across a three to five year timeframe it can enter exit discussions with a strong narrative and greater authority over the process. The result could be an enhanced value for the business as well as greater certainty over the timeframe and journey to completion.
Our corporate team is here to guide you through the M&A transaction process.
For any queries or an early discussion, please contact us by email or call +44(0)3333 231 580.
