Going out with a bang: Developing the right exit strategy
January 30, 2018
By Fiona Webb and Erika Schraner
Private Equity (PE) firms are increasingly turning to buy-and-build deals and market consolidation plays in order to generate returns. Making these types of deals work requires more than traditional financial engineering and cost cutting. And on top of that, current market uncertainty makes it important to keep multiple exit options open.
"40% of European funds gave buy-and-build as a factor influencing investment rationale in 2016, and 49% see add-on acquisitions for existing portfolio companies as a source of new deal opportunities for 2017."
The exact challenges these dynamics create will vary with the individual investment strategy and deal rationale. Consolidation plays create some complex issues to navigate; and of course the more options there are for the eventual exit, the trickier it gets to build a solid integration plan. Different exit strategies raise different key questions, call for different approaches to value delivery, and are not mutually exclusive. To illustrate:
- For a potential IPO: how do you meet value and market requirements?
- For a secondary PE sale: how do you deliver enough, but not ‘too much’, value so there is upside remaining for the next owner?
- For a strategic buyer: how much common enabling infrastructure and capabilities should you implement, without overspending on associated one-off costs?
"Over 60% of total UK IPO proceeds are raised from PE-backed investments."
If an IPO is a primary exit option, the consolidated business will have to be managed and organised with that in mind, which means a credible equity story, the ability to provide historical financials on a consistent basis and clear governance and reporting will all have to be in place.
And not just that, potential stock market investors will require a solid track record on profitability, and they’ll spot an inadequately prepared business a mile off. An integration plan for an IPO exit must focus on the hygiene factors of finance function and robust governance. Meeting listing requirements will mean resources need to be carefully prioritised to avoid disruption to revenues and margins.
Secondary PE sale:
A whole different set of issues arise if the plan is to sell the business to another PE house. Here the challenge (counter-intuitive as it sounds) is not to do too much. In other words, one would want to leave some upside for the next owner to realise – an owner who will need to find future potential in the business. In fact the intense competition now seen in many auctions means PE buyers will rely on synergies that have not yet been fully realised, or remaining operational upsides from value levers such as SKU reduction, the potential to upsell existing clients or implementing a zero based budgeting approach. So whilst presenting a fully integrated and operationally efficient business may increase the proceeds from sale, it may also limit the pool of potential PE bidders.
And finally, trade buyers, and any other potential investor taking a more strategic position. Corporate acquirers will have their own, often quite precise, criteria for acquisitions, and it can be hard to second-guess what these are. There are so many variables, not least their current product and geographical mix, and the potential for very specific synergies. A target that ticks all the boxes may well merit a much higher price than another financial investor would pay. Fully integrated governance and finance processes will probably be of much less interest than innovative product and go-to-market strategies, or proven customer success.
What is clear is that people, capital and time are not infinite resources, and choices will have to be made - often years in advance. There needs to be a focus on the cost and value implications of these decisions. The relative importance of factors including integration, innovation, growth, governance, cost control or IPO preparation will depend on the business, the sector, and potential future buyers.
A clear process for prioritising these factors, for making these choices, initiated in the early stages of ownership and engaging both the investor and management, will increase exit success and value, and allow PE owners to move elegantly and efficiently from ‘in’ to ‘out’.
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