The days of waiting for the perfect time to sell a private equity-owned company are over. Limited partners' patience for returns is waning, sponsors' coffers are full of cash, and a time of record low deal activity is quickly turning into a buyer's market with assets piled high, even if the terms are not ideal.
What does this mean for CFOs of private equity-backed companies and others? They will be tasked with the monumental task of preparing their companies for sale on an accelerated timeline (or sometimes at their request) when they aren't ready for primetime. To do this, CFOs will need to go through a nontraditional sell-side preparation process. Here's a five-step cheat sheet for that process:
It does two things at once.
In a traditional strategy, the CFO would first drive value-creating activities, then realize profits, and (only then) think about selling. But with a much shorter runway, CFOs need to prepare for the sale side and value creation in parallel. (To be clear, because entry multiples were higher than in years past, the path to exiting profitably now leads directly to value creation.)
First, review your value creation plan (a company-wide look at how to improve your target business) and identify what you did and didn't do. Have you implemented all the cost savings? Have you cleaned up your data? Have you automated your processes? If not, it's time to get to work.
Value creation alone does not make an organization sales ready; you must execute on your value creation plan. meanwhile Consider and discuss with your banker the QoE (Quality of Earnings). (QoE is a periodic due diligence report that evaluates how a company accumulates earnings – whether it is cash or non-cash, recurring or non-recurring etc.)
As part of this acceleration process, CFOs and their teams need to lead the way in due diligence – that is, they need to be ahead of the curve in preparing for second and third stage due diligence questions. By tracking both value creation and sell-side readiness, organizations build valuable assets that are attractive to investors and when they are ready to invest.
Focus on “deferred” integration.
The list of value-creation activities that can be undertaken during a sell-side readiness initiative is long. If you're looking for a way to prioritize, it's best to start with recently completed (or, frankly, not-so-recently completed) acquisitions. Your previous focus on revenue growth may have meant that much of the hard work of integrating an acquisition was put on the back burner in order to pursue your next acquisition. There is hidden value in postponed or incomplete integrations that should (and must!) be found before you exit.
Revisiting the original synergy hypothesis is a great starting point. Quantify the synergies (both revenue and cost) that have yet to be realized and map out a comprehensive path to realization through process harmonization/standardization, back-office integration, supply chain or network integration, headcount reduction and automation, SKU rationalization, or commercial excellence. Levers can be prioritized based on expected impact, time to value realization and exit, and one-time costs required. That way, a clear plan to unlock the remaining integration value is in place, ensuring buyer confidence.
Rationalizing your business applications, especially ERP systems, is also an area to consider. If you've made successive acquisitions, you may be operating with multiple ERPs, which could prevent proper integration. But if you're planning on exiting in the near future, ERP consolidation may not be on the agenda. Instead, there are a number of (relatively) cheap and easy ways you can make the most of what you have, including optimizing your disparate data environment to avoid getting in the way of a divestiture. This includes leveraging agile business analytics solutions, streamlining data sharing between different systems, and investing in platforms that automate data flows quickly and cost-effectively.
Build a roadmap for future value.
In a crowded market where companies are racing to exit, you need to stand out to investors. But even if you continue to execute on your VCP, accelerated timelines mean that your assets may not be fully prime-time ready upon sale. That's why you need to design a deal that a) enables a seamless transition from seller to buyer and b) shows a roadmap for the future value of your business.
What does this mean for CFOs? Deal discussions should be about the last mile under the current owner and the first mile under the new owner. In other words, what is the roadmap for creating future value with initiatives being executed or levers that have yet to be executed? What is the expected impact of each, what investments will be required, and what is the timeline for delivery? By being specific about future value, sellers not only make it easier (and therefore much more attractive) for buyers to invest, but they also limit surprises and mitigate risk by showing buyers exactly how they will get value for their investment.
Expand your horizons beyond finance.
When a potential buyer is asking for due diligence analysis (such as revenue and profitability analysis by customer cohort), the first step is to effectively clean, validate, and integrate the data to gain meaningful business insights. But now it's not just that.
As the CFO's role evolves to that of business performance manager for the entire enterprise, the CFO must also have a detailed understanding of all aspects of enterprise performance, which means being familiar with relevant operational KPIs, including value drivers such as product development, employee productivity and efficiency, supply chain optimization, and customer service. Retirement-ready CFOs must have systems and processes in place that harmonize financial and operational metrics and be able to clearly articulate how the two impact the company's short- and long-term prospects. This understanding ensures a favorable valuation, informed negotiations, and ultimately the most compelling equity story.
Delegate business operation activities.
CFOs are expected to be available for exits on demand and must be ready to do it all at once. But CFOs can't do it alone. If you have a quality second, you may want to delegate business operations activities to a controller so you can focus on multiple external exit parties, including potential buyers, banks, and QoE providers.
CFOs will also need help preparing for these stakeholders. Bring in external partners who can help identify value creation levers and help the organization execute on them quickly. Don't just work with consultants who will deliver a plan, bring in partners who can act as an extension of your team to get the nuanced work done.
Accelerated exit readiness is the new paradigm. Gone are the days of linear value creation and preparing for an exit only when the market is ideal. New CFOs understand that their assets are “always saleable” and must prepare their companies to be exit-ready upon demand.
Shahryar Ahmed and George Theocharopoulos accordionA financial consulting firm specializing in private equity.
