5 Key Steps in Planning a Private Equity Exit Strategy
Posted by Molly Boyce, Industry Marketing Lead
To sell or not to sell – it’s a decision that many companies may find themselves facing, or at least contemplating, when considering the future. Considering the strong volume of deals in the Mergers and Acquisitions (M&A) space over the past couple of years, to sell may be the best answer.
It’s “a good time to be selling your business,” Sam Barthelme, Managing Director of JEGI, an independent investment bank for the global media, information, marketing, software and tech-enabled services sectors, said on a recent Oracle NetSuite webinar.
Why now? Today’s economy is seemingly overflowing with capital. Private Equity (PE) firms have a lot of spending potential due to unallocated funds in their portfolios, known in the industry as “dry powder.” In fact, across the PE and Venture Capital (VC) market, there’s currently over $1.1 trillion in dry powder on the sidelines for fund managers to invest. While strategic firms are scooping up companies to aid in organic growth, PE firms are now often outbidding them as they see investment opportunities.
In a recent webinar, NetSuite’s Ahmad Rana, Oracle NetSuite PE Practice Lead, sat down with Barthelme to discuss some of the trends across the M&A space and how companies can best prepare themselves for sale.
There have been several unique themes that have emerged amongst M&A activities over the past year with a shift in some buyer’s key drivers:
- Crossing of Industry Lines – Large strategic organizations have started acquiring companies that play in areas where they have historically not operated. For example, Barthelme said he’s seen large consulting organizations, like Deloitte and Accenture, acquiring outside agencies to help build out the capabilities of what they can offer to their clients. Deloitte Digital acquired Acne – a creative agency based in Europe – in August 2017 to build out its agency services; The addition served to improve their strategic, digital and film services for clients in the lifestyle and luxury retail sectors – an area they did not play well in previously.
- Relaxed Anti-Trust Environment – Disney acquired 21st Century Fox. Comcast acquired Time Warner Cable. These precedent setting billion-dollar deals are passing through the Department of Justice and have implications for down-market and middle-market deals going forward.
- Trimming the Fat – Many companies that have been built by disparate M&A activities over the years are now shedding pieces of their business to become more focused and nimble in an ever-changing market. For example, General Electric (GE) saw a significant increase in its share price after selling the non-strategic healthcare and oil services parts of its business.
How to Prep for Sale
First and foremost, competition is the largest driver in achieving the most successful outcome in the selling process, according to Barthelme. Many businesses are achieving this through an auction process. There are two kinds of auctions – a target auction (with 10-15 specific buyers) or a broad auction (open to all). To foster the best competition, there are some key steps the company can take in preparing itself, Barthelme said. These include:
- Bring in an Advisor: These can be investment banks (like JEGI) or other industry specialists. However, it’s key to build these relationships early as it can save a lot of headaches and pitfalls along the journey. Barthelme often works with companies 2-3 years before the sale.
- Tidy Up Your Financials: Buyers will want to do a deep-dive through their financials to see how the books look and often request an audit. Investment banks will often conduct a sell side quality of earnings review, bringing in a financial advisory group to do the exact work that a buyer would be doing later in the process. The process usually uncovers any earnings issues that could sink a deal.
- Evaluate Your Systems: Barthelme often suggests that his clients upgrade to a full financial management system like NetSuite, especially if they’re using a more basic system like QuickBooks. A system that can scale with the business quickly is more appealing to buyers.
- Build Your Team: Invest in a dedicated finance staff. Barthelme recommends bringing in a CFO who thinks a little bit more strategically about the financial side of business rather than strictly closing the books each month.
- Start Measuring Business by Metrics that Matter: Use the same metrics that buyers – PE groups and strategic investors alike – will be reviewing when you’re ready to sell. By working closely with an advisor, businesses can better understand which metrics to track and emphasize. Potential buyers will appreciate the historical data, and companies may be able to avoid a lot of questions.
Beware of Sinkholes
Nobody wants to get halfway through a sale process and have a misstep sink the deal. The largest culprit: being over ambitious with financial forecasts. When you’re creating a budget, Barthelme recommends checking your forecast to make sure it’s both aggressive and achievable – the two shouldn’t be mutually exclusive. He’s seen companies lose buyers because they lost momentum with unattainable targets. The key is consistency to keep the buyers in play.
Ultimately, every investment bank and every deal will be different. There will be unexpected sinkholes, difficult buyers and unforeseen shifts in the market. However, there is a wealth of opportunity for companies to explore what’s best for their company and culture.
Watch our latest webinar for more on PE market trends on how to prepare your company for sale with JEGI’s Managing Director, Sam Barthelme & NetSuite’s PE Practice Lead, Ahmad Rana.