Five ways private business owners can maximise value from the big deal

Start early on value creation

The earlier you start, the more time you have to increase value, address any prospective diligence challenges and position your business as you get ready to do a deal.

With most investors valuing your business on a multiple of sustainable earnings before interest, taxes, depreciation and amortisation (EBITDA), the starting point is looking at how to capture everything and present your earnings in the best light.

Some of the key things that we would think about in this respect are:

• The timing of a process against key contract wins and renewals that may be upcoming;
• The strength and understanding of the pipeline (where relevant) and how it converts to revenue for the business;
• Potential hard and strategic synergies with trade acquirers, which can translate to value for a seller through competitive tension;
• The quality of financial information and forecasting;
• The investments that the business is making today and how these would be presented to an investor / purchaser to maximise value;
• The talent in the organisation - who are the key individuals, how are they incentivised and what could their roles look like post investment / acquisition; and
• Are we sufficiently invested in technology and do we have a view on the impact of future technologies such as Generative AI on our business?

Cost control, cash generation and improvements in workforce efficiency offer some of the fastest and most effective ways to gain an uplift in EBITDA. Useful levers include activity value analysis, which gauges how much value is being generated in return for the money going into a particular operation. The results will help you target spending where it can make the most difference.

Just as important is optimising your earnings potential through steps such as talent acquisition or tech modernisation. Investors will also be looking at long-term plans in areas such as innovation, decarbonisation and opening up of new markets.

Cutting across this EBITDA focus is a value creation mindset within your enterprise. This looks beyond short-term revenues at how to strengthen the viability, resilience and enterprise value of the business.

Explore the options

There are a wealth of options available to business owners to enable them to realise an exit, or partial exit, of the business.

Trade acquirers might be seeking to build up their capabilities or expand their market reach, enabling existing shareholders to typically exit their whole shareholding; a recent example being the sale of IntoZetta to Experian plc. They extended the data governance capabilities of Experian’s business to enable them to better support existing clients and enter new growth markets. Trade exits can enable retirement or time to refocus on other goals or opportunities post a transition period for existing shareholders.

There remains a vast amount of capital within private equity which can facilitate management buy outs (MBOs), as well as opportunities to rebalance existing shareholders and to support growth aspirations. One example of this is where one founder may wish to exit but others may wish to continue to drive the business forward. Foundation SP Limited is a great example of a thriving business which has benefitted from two rounds of private equity and established itself as one of the UK’s leading digital transformation specialists, with expertise in data, cyber security and unlocking the benefits of Microsoft365 and the Power Platform.

There are also other routes which are perhaps less commonly considered but are increasingly relevant, including the rise in Family Office investors who can have longer term horizons, typically, than private equity houses. Also, Employee Ownership Trusts have become increasingly common in recent years and are an option worth considering with some real tangible benefits. However, these benefits will only be appropriate in some circumstances.

Judge what’s right for you

The most viable option might not be the most obvious or well-trodden one. Starting with a clear map of what you want to achieve and when is great, however it’s important to explore all appropriate routes and to consider these against your objectives, the position of the company and the wider market. If you want to de-risk but feel that you want to remain within the business and generate more value, a partial divestment or private equity deal might work better than a full trade sale. For some business owners the prospect of working with an incoming partner is not as attractive and a full exit may be more appropriate.

It’s also important to consider the tax implications. The proceeds from different options attract particular capital gains and inheritance tax liabilities, while others such as an employee ownership trust open up possible beneficial tax treatments, and there are very tax efficient ways in which management teams can be incentivised to drive towards a successful transaction.

Create a convincing investment story

Whether you decide to exit in full or raise external capital, you need to be able to convey a compelling and credible case for either a buyer or new investor. This should not only set out the current performance of your business, but also the equity story. What are your unique selling points (USPs) and opportunities for future growth? How will the business generate value for the new shareholders?

Appealing features for businesses attracting premium valuations would include a leading market position, a strong management team and high level of renewal and repeat business. As businesses look to grow, attractive factors might include margin progression, a large addressable market and/or opportunities to develop additional capabilities to sell to existing customers. Having a well-defined plan provides confidence to the buyer in its delivery and supports value.

A clear and comprehensive ‘data room’ of information and analysis will help to inform potential buyers and build credibility in your financial projections – the more they know and the more confident they are in the potential, the higher the multiple. Being able to present a compelling set of data to support your equity story is becoming increasingly important to delivering a premium multiple and in many sectors, such as direct to consumer and software businesses, or indeed any sector where there is a rich seam of data to explore, we have seen this drive huge value for sellers.

Shape your tactics around the target

A key consideration for professional investors at the time of investment is who they are ultimately going to exit the business to, and why the business will be attractive to that cohort of buyers in the future. This enables them to mould the business over their ownership period so that it’s attractive to a future owner. This mindset and approach should be adopted by private business owners too.

Identifying potential future buyers and understanding their strategic objectives and reasons for buying your business will help you focus on the key issues and formulate your business plan. Some of the interested parties may be known to you, whilst advisors will use their network across the UK and internationally to identify a strong buyer pool and ensure competitive tension in a process.

You can then gear your investment story to particular categories of investor. The priorities of a trade buyer seeking out scale and reach are likely to be very different from private equity investors looking for rapid earnings uplift.