January 12, 2023

Corporate Finance: Positioning for Value

As a seller/borrower in any corporate finance transaction, some key drivers of value for you that are often not prioritised are: know your buyer/funder, prepare the story, and manage the process.

Too often, the emphasis is solely on the financial performance and positioning the business using a template and then negotiating the best price. While this approach may often work, for something as important and often life-changing as a business sale or capital raise, it is worth giving yourself the greatest chance of a successful transaction and the best value.

This means preparing sooner and working more closely with your advisors to ensure you are presenting the best pitch and process to hit on the key areas that buyer/funder are looking for.

Know your buyer/funder

Knowing more about the organisation and people you are transacting with is essential and gives you a better view on:

  • Value: Why they are interested and how they value/price
  • Timing: The process they need to go through
  • Chance of Success: The likelihood of completion
  • Fit: Whether they are an organisation you want to deal with

You should have a view on the buyer/funder across each of these areas at the very least once they have shown formal interest, usually after seeing the initial ‘Teaser’ document. If possible, an assessment of some or all of the above factors in order to assess who you should be targeting at the outset of the process can be very useful. For example, if your expectation is that the value of your business is based on the recent purchase of a competitor by a large strategic buyer, then it is probably not worth approaching financial investors such as private equity as their approach to valuation will be different and most likely result in a value lower than you require.

Should you be looking for a quick deal, you should be focussed on organisations already in your sector that have completed a transaction like this before and have funds available. Also, you may need to consider smaller organisations whose internal approval processes will be a lot faster.

Prepare the story

The process of raising funds or selling your business is often foreign to business owners and CFOs and what's often forgotten is that, ultimately, it is a ‘sales’ process. Whilst parts have official-sounding names like Information Memorandum, Management Meeting, or Virtual Data Room (further enhanced using acronyms like IM and VDR), they are all part of the sales process and in your control. As such, it is important that you ensure all the information provided to the prospective buyers/funders is accurate, consistent, and presents the full value of your business.

Highlighting the key value drivers, risks and mitigants, and areas of growth potential for your business and ensuring the information and communication provided are aligned to these is very important to a successful process and, ultimately, the best value for you.  

However, it is important to realise that elements of the ‘story’ begin long before any official process is begun or often even contemplated. Some of the areas that the potential buyers may investigate as part of their own early-stage qualification and diligence include:

  • A review of historical financial accounts
  • A review of your companies house submissions
  • Searching any mentions in the media or trade press
  • A review of the website
  • Asking around i.e. speaking to the industry, ex-employees, customers and/or suppliers

As you can see, at the time you begin any corporate finance transaction, most, if not all, of the above information cannot be amended. When you consider that this is what will be forming an initial impression of you and your business in the buyers'/funders' minds, you can see the importance of considering this today and not waiting until it may be too late.

Managing the process

Once your prospective buyers/funders have been through the initial phase(s), it is likely that you will select one party on an exclusive basis or a small number on a competitive basis to go through to the next phase. Usually, this will be based on an indicative offer that, among other things, is subject to due diligence. In short, the idea is that the indicative offer is based on the information you have provided in the Teaser, Information Memorandum (IM), Management Presentation etc, and now the buyer/funder will go through the underlying information and data to both validate that information and ensure nothing has been missed. 

This stage is vital in maintaining (or even increasing) the value that has been attributed to your business, as stated in the indicative offers and managing the process efficiently and effectively is the key.

Any delays in information provision, inaccuracies or gaps can be used by the buyer/funder to chip away at your value. Usually, the buyer/funder will engage one or more professional advisors to undertake the legal, financial, commercial, regulatory diligence etc, and in some respects, the value of these providers can be measured in the 'issues’ they uncover.

The integral issues for many business owners at this stage are:

  • How can I manage all this and keep the business running? The worst possible scenario is for the transaction to fail and for the business to trade poorly throughout the process
  • Who can I bring into the fold from the team, and how do I get all the information required without everyone knowing we’re up for sale? The worst scenario is that people lose focus or even leave upon finding out there is a process underway, and the process leads to nothing

The short answer here is that you need to get assistance from appropriate advisors and bring in the core management team early on. Nothing speaks to value more than a faultless process and a cohesive management team all singing from the same sheet.

Although for most business owners, corporate finance transactions are outside their skillset and not part of normal business operations, this does not mean the transaction cannot be managed. Pushing through the terminology and acronyms and ensuring a process that is underpinned by a good understanding of the potential buyers/funders, a well-prepared story of value, and a streamlined process is something that all business owners need to be focused on when considering a corporate finance transaction.

For more information or to discuss a potential transaction, please contact christian.roelofs@finativ.co.uk

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