How to unlock business value before you sell
Too many sellers leave money on the table. Here’s how to avoid that.
With the world inching ever closer to a post-pandemic phase, many business owners and operators are thinking about selling, especially given how robust the mergers and acquisitions (M&A) markets have been over the last several months. In the first quarter of 2021, Canada recorded 1,168 M&A deals totalling US$115 billion; that’s an all-time high, according to data from Bloomberg.
Before putting up the for-sale sign, however, you’ll want to make sure your business is properly positioned to extract the most value from the transaction. How can you do this? “One way is by creating a value creation plan that quantifies the upside potential of your business, improves the cash performance of your operation, and articulates the true value of your company to prospective buyers,” says Jon Bowes, National Lead Partner M&A Value Creation Services at Deloitte. “Fortunately, the value creation process doesn’t have to take years. You can make your company more attractive to buyers right away”, he adds.
Develop a plan
A value creation plan captures the commercial, operational, and financial changes that a business can make that will yield benefits. Typically, these are documented at an initiative level with a robust rationale and phased benefits calculations, and includes detail on the steps and investments required to implement the plan. A good value creation plan also outlines how the company intends to execute the proposed changes, including what governance structure is necessary and what mechanisms will be required to monitor and track improvements.
A detailed value creation program can help craft a positive narrative that will give a potential buyer confidence in the future of the business. Buyers often pay a premium for this and it helps inform the seller’s negotiations of price. Yet, we still only see these kinds of detailed plans in less than a third of the buy-side deals we support.“Many people think that value creation plans must start years before a sale. While it’s ideal to have demonstrated progress on those plans, our experience working with clients has been that creating a plan even three to six months before a sale can boost the price of the deal,” Jon adds. “Future-looking value creation plans (including those that have already implemented some quick wins, but where significant benefits remain) enable a negotiation on the accretive value of the business to buyers”.For instance, in a Deloitte Canada study of 50 recent deals, we found that 15 had developed value-creation plans and of those, one-third (five) had started implementation when they were marketing their business for sale. While that allows buyers to validate benefits before the sale and provides evidence of the seller’s execution capabilities, it doesn’t mean the businesses that hadn’t started carrying out their plans are out of luck. In many cases, the plans were proposed as actions to be instituted by the purchaser.
Of the 15 that had developed pre-exit value-creation plans, a majority projected they would realize their full EBITDA improvements within three to five years following the start of the program through a combination of revenue growth and cost optimization initiatives. Our data suggests a majority of those value-creation plans outline potential EBITDA improvements in the range of 10% to 60%.
As our research shows, what’s most important is not when you start implementing a plan, it’s what’s in it. What can the acquirer follow post-purchase to get the most value out of the business, and how much risk is associated in doing so? We’ve identified four value-creation levers–and business-boosting measures within each lever–that companies should consider when creating a detailed value-creation plan.
1. Increase revenue
One of the key aspects of a value-creation plan is revenue growth: companies must show they can increase their top line. Here are some strategies to consider:
- Increase sales volume by selling more
- Retain and grow current customer base through cross-selling.
- Acquire new customers by entering new channels and new markets.
- Create new revenue streams from existing assets.
- Improve quality of revenue
- Focus on developing long-term contracts (and after-sale services) with customers rather than on generating short-term or one-time revenues.
- Enhance pricing efficiency
- Consider optimizing your pricing structure, professionalizing discounting practices, and accurately understanding the profitability of each customer, product, and service.
2. Improve margins
Companies must also look at ways to improve their margins, through efficiency gains, cost-cutting, and more.
- Reduce costs to produce (COGS)
- Increase efficiencies by cutting production-related costs, strengthening sourcing and procurement, and sourcing less expensive and/or higher-value materials or services.
- Optimize logistics, merchandising, and service delivery for greater efficiency and appropriate match to customer expectations.
- Develop strategic partnerships with suppliers to generate win-win outcomes.
- Reduce costs to run (SG&A)
- Be deliberate in, and ensure good value from, costs related to customer interactions, such as marketing, advertising, sales, customer service and support, order fulfillment, and billing.
- Examine back-office efficiencies, such as IT, real estate, HR, and finance.
3. Improve capital efficiency
There are also ways to get more out of the assets you currently have, including materials, property, and contracts.
- Drive ROI from investments in property and equipment
- Assess opportunities to reduce costs or boost revenues from real estate, infrastructure, equipment, and systems.
- Optimize the inventory you carry
- Examine raw materials, work in progress, and finished goods.
- Collect cash sooner and pay to terms
- Talk to customers about paying their invoices more quickly, while improving your own payment terms with suppliers; monitor compliance with both receivables and payables.
4. Create the right expectations
Finally, you want to show a potential buyer that your company can deliver value in the years ahead. Do what you can to raise the buyer’s confidence in its ability to realize the benefits outlined in the value creation plan.
- Showcase company strengths
- Improve managerial and governance effectiveness, including in areas of business planning, program delivery, and business performance management
The execution checklist
When you’re done examining these four levers, you’ll need to start putting your plan into action, or at least showing potential buyers how they can work with what you have. The degree to which your plan will translate into increased price depends on the credibility of the analysis and perceived achievability of the plan. Here’s what sellers want to see:
Well-defined initiatives with reasonable benefits estimates
- The initiatives are grounded in sound analysis and assumptions that quantify the financial impact and timing of each opportunity
- They are largely based on factors within the company’s control to change
- There is documented evidence of any progress already made
- Implementation costs and effort estimates have been thoroughly quantified
A clear transition plan ready to implement
- Future initiatives have been mapped out and thoughtfully sequenced, considering other business projects or seasonality
- Each initiative has defined sub-activities, with clear responsibilities assigned to staff
- There is evidence of a structure that holds accountability over the program
- Supporting documentation that highlights how any required operational controls will be implemented to ensure the savings stick and costs do not creep back into the business
- Management should have incentives tied to program delivery and savings achievement
- The company has the right experience and track record in delivering comparable initiatives
While several factors drive deal valuation—growth prospects, competitive landscape, economic conditions, deal structure, and tax considerations, among others–well-prepared sellers who optimize the company’s financial and operational performance in the preceding fiscal years and document further future upside for the next owner are better positioned to capture additional value. Ultimately, if you think a potential sale or divestiture could be in your business’s future, pre-exit value-creation planning should be on your management team’s agenda today.