Getting in shape for a sale

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Now 2023 is well and truly under way, this is a key time to reflect on the state of the M&A landscape and what this means for businesses that are looking to sell in the not-too-distant future. Dealmaking in general has seen some interesting twists and turns recently, with an incredible post-lockdown surge of pent-up demand since slowing and meeting the realities of 2022’s economic turbulence. Ryan Shields, Director at Grant Thornton UK LLP across Northamptonshire and Milton Keynes, explores what businesses need to consider when preparing for a sale and how to become ‘investor ready’.

2023 is likely to see the M&A environment evolve further, with the slowing economy and the combination of inflationary, cost of living, energy price and skill gap pressures putting an additional squeeze on firms. Continuing supply chain disruptions and the possibility of Capital Gains Tax changes in future Budgets are also adding further uncertainty into the mix. This combination of factors will likely result in transactions becoming a bit tougher and slower to get over the line.

Despite all this, there are still opportunities to be seized and there remains a significant amount of capital in the market with which to do deals. Businesses in attractive sectors, such as technology, business services and healthcare, will enjoy a lot of attention, as will firms that can prove they are high-quality assets that are strategically important for acquirers. The lower mid-market is also always fertile ground for deals, with owner-managed and investor M&A appetites underpinning activity.

All of this means that it is more important than ever for business leaders to carefully consider how they present themselves during the sales process and that they understand the market context and what’s important to
potential acquirers.

Understanding the new normal

Right now, acquirers will be paying attention to factors that could impact the defensibility of previously recorded profits. This means vendors must not only look at their past performance but at future profitability too. They should also carefully consider the perspective of possible acquirers and positioning themselves appropriately from the start is critical to delivering the best value.

At Grant Thornton, we are seeing that those making acquisitions are taking a real-time view of value, with factors impacting key business inputs and outputs (be they wider economic or sector specific) emerging and manifesting more quickly than before. It is our role as lead advisors to work through these aspects with the stakeholders to bring about a favorable outcome for all parties involved.

To ensure that a business is ‘investor ready’, it is therefore crucial that the acquirer/vendor relationship is properly understood and that owners can articulate their audience, their view of the market, and how they can align with an acquirer’s strategic criteria, which can vary markedly between organisations and will evolve over time. Getting this right requires a team that is well informed, and which has the right conversations with the right people at the right times.

Another current trend that we’re seeing is an additional emphasis on the resilience and adaptability of supply chains, including a preference towards onshoring parts of the supply chain. Previously, this was all covered by a relatively small section of business marketing materials, though now there is clear merit in providing interested parties with more depth and this can prove to be a real differentiator if done properly.

Getting the basics right

While emerging dynamics across the M&A landscape need to be taken into consideration, it’s vital that business leaders don’t lose sight of the basics when going through the sale process. For example, integrity of financial and business data in relation to earnings, adjustments to profit (or add backs), net debt, normalised working capital and forecast assumptions all remain necessary to ensuring that a deal stands up to the numerous due diligence demands.

For Private Equity (PE) deals in particular, the quality of the management team remains crucial. This is seldom better showcased than by how management teams have delivered during periods of uncertainty. The hard numbers are obviously important and interpersonal fit and strategic alignment are also vital. PE deals are at their best when there is a shared vision for the business post transaction and how the key aspects of value creation should unfold.

It is always useful for vendors to view the business through a PE lens. For example, management teams often focus on top line, profit, and cash generation, though they sometimes overlook how these aspects are combining with other business features to contribute to the company’s indicative value.

Businesses embarking on the deals journey need to bear in mind these considerations as well as the importance of understanding market changes when it comes to delivering maximum value. Those businesses that remain resilient and agile in how they respond to unpredictable conditions, characteristics which many have worked hard to embed into their organisations over recent years, will do well when they go to market.

Whatever the prevailing economic situation, it’s important to bear in mind that the M&A conditions will rarely align perfectly with a company’s position when seeking an exit. This is because there’s so many factors to account for, ranging from the firm’s market traction, customer adoption rates, management team commitment and opportunities pipeline, that it’s unlikely they’ll all be firing at 100% at exactly the right time. This underlines why preparation is paramount to driving not only valuation and structure but also the deliverability and ultimate success of a transaction.