Waiting for the perfect time to sell a private equity-owned company is over. Limited partners’ patience for returns is wearing thin, and sponsor’s coffers are full of dry powder. We will soon emerge from this period of record-low deal activity into a buyer’s market with a logjam of assets in play—even if conditions aren’t ideal.
What does it mean for CFOs of private equity-backed and other companies? They’ll be tasked with the yeoman’s work of getting their not-so-primetime-ready company prepped for sale on an accelerated schedule (perhaps even on demand). Doing this will require CFOs to undertake an unconventional sell-side readiness process. Here’s a 5-step cheat sheet for that process.
Do two things at once.
The traditional playbook has CFOs driving value creation activities first, then realizing returns and then (and only then) thinking about a sale. With a much shorter runway, CFOs must undertake sell-side readiness and value creation in tandem. (Make no mistake: With high entry multiples of prior years, the path to a profitable exit now runs directly through value creation.)
It starts by revisiting your value creation plan (an enterprise-wide look at how the target business can be improved) and identifying your “did” and “did not’s.” Did you execute all your cost takeouts? Clean up your data? Automate your processes? If not, it’s time to get to work.
Value creation alone won’t make the organization sale-ready. You must execute the value creation plan while working through your QoE (quality of earnings) and talking to bankers. (QoE is a routine due diligence report that assesses how a company accumulates its revenues—such as cash or non-cash, recurring or nonrecurring.)
As part of this accelerated process, the CFO and his or her team should also front-run diligence—get ahead of the game by preparing for second and third-tier diligence questions. By dual-tracking value creation and sell-side readiness, the organization is building a high-value asset that’s attractive to investors—and attractive to them when they’re ready to invest.
Focus on “postponed” integrations.
The list of possible value-creation activities to conduct with sell-side readiness initiatives is long. If you’re looking for a way to prioritize, there’s no better starting place than with your recently completed (or, frankly, not-so-recently completed) acquisitions. The previous focus on revenue growth may have meant that much of the hard work of integrating acquisitions had fallen by the wayside in pursuit of the next buy. There’s hidden value in those postponed or incomplete integrations that you should (must!) find before exiting.
Reviewing the original synergy hypothesis is an excellent place to begin. Quantify any yet-to-be-realized synergies (both revenue and cost-related) and lay a comprehensive path to realization through process uniformity/standardization, back-office integration, supply chain or network consolidation, labor redundancies and automation, SKU rationalization or commercial excellence. Levers can be prioritized based on expected impact, time-to-value vs. time-to-exit and required one-time costs. Doing so will ensure buyer credit, as they’ll be fully equipped with a clear plan to squeeze out any remaining integration value.
Rationalizing business applications—particularly ERP systems—is another area to consider. If you’ve been a serial acquirer, you’re likely operating under multiple ERPs, which might hinder proper integration. But integrating them might not make the agenda if you’re on a near-term path toward exit. Instead, there are several (relatively) cheap and cheerful ways you can make the most of what you have, like optimizing a disparate data environment so that it’s not a deterrent to sale—including leveraging nimble business analytics solutions, streamlining data-sharing between different systems or investing in platforms that automate data flows quickly and cost-effectively.
Build the roadmap of future value.
In a congested market of companies racing to exit, the business needs to stand out to investors. But even as you continue to execute against your VCP, an accelerated timeline means the asset might not be in perfect condition for a sale. As such, you must design a deal that a) makes for a seamless transition from seller to buyer and b) outlines a roadmap for your business’s future value.
What does this mean for a CFO? Transaction conversations must be about the last mile under current ownership and the first mile under new ownership. In other words, what is the roadmap for creating future value with in-play initiatives or not-yet-executed levers? What is the anticipated impact for each, what are the required investments and what is the realization timeline? By being specific about future value, the seller is not only making it easier (and thus, much more compelling) for a buyer to invest, but also mitigating risk by limiting surprises and showing the buyer exactly how it will get its money’s worth.
Extend your purview beyond finance.
With potential buyers looking for diligence analysis (for example, an analysis of revenue and profitability by customer cohort), the first step is effectively cleaning, validating, and consolidating the data to drive meaningful business insight. But now, it’s more than that.
As the role of the CFO has evolved to include enterprise-wide performance manager, finance chiefs must also have a granular understanding of every dimension of corporate performance. This means being well-versed in a host of relevant operational KPIs (including value drivers like product development, employee productivity and efficiency, supply chain optimization and customer service). An exit-ready CFO should have systems and processes in place to harmonize finance and operational metrics and be able to articulate how the two inform the company’s near-term and long-term outlooks. This understanding ensures desirable valuations, informed negotiations and, ultimately, the most compelling equity story.
Delegate run-the-business activities.
Expected to be exit-ready on demand, CFOs must be ready to do it all—and all at once. But they can’t do any of it alone. If you have a quality number two, delegate the run-the-business activity to your controller so that you can focus on your multiple external exit stakeholders, such as potential buyers, bankers and QoE report providers.
The CFO will also likely need support to prepare for those stakeholders. Bring in outside partners who identify the value creation levers and help the organization execute against them quickly. Be careful that you’re not just working with the consultants who provide a plan—bring in partners who can serve as an extension of your team to get the nuanced work done.
Getting exit-ready in an accelerated fashion is a new paradigm. Gone are the days of linear value creation followed by exit preparedness when and only when the market is ideal. The new CFO understands that their asset is “always for sale,” so they must prepare their company to be exit-ready on demand.
Shaharyar Ahmed and George Theocharopoulos are managing directors of Accordion, a financial consulting firm focused on private equity.
