Evolution Capital raises alert over exit pitfalls

30 January 2019

Evolution Capital raises alert over exit pitfalls

Businesses ill-prepared for sale risk losing 20% or more of their true value, according to mid-market boutique TMT M&A advisory firm Evolution Capital.


Corporate finance whizz Gary Smith, Head of Business Sales and Divestitures at the company, is on a mission to match vendor expectations with deal outcomes and claims Evolution Capital’s sector-specific valuation methodologies, developed over 17 years and built into a bespoke and managed service, provide a business value safety net for vendors based on ‘clear and detailed data and audit trails’.

“If you are looking to sell a business, winning is 0% luck and 100% preparation,” stated Smith. “Our research concludes that business owners who manage deals themselves or engage broking-style services achieve offers at lower levels than their counterparts who are advised by knowledgable advisory firms. Even worse, the prices achieved and agreed at heads of terms are frequently reduced by over 20% by completion.”

According to Smith these alarming stats are reflective of exit processes that do not leverage the forensic or strategic analysis offered by specialist corporate finance advisors who, for example, would as standard deploy robust methodologies that take into account not just current but intrinsic value, which is the potential value of future cashflows.

“Preparing a business to withstand the challenges of a well organised buyer investigation is similar to preparing a car to resist the brutal demands of a 24-hour race,” added Smith. “The grid position may reflect the price the business has achieved but maintaining position or moving up requires investment in preparation. The key to winning is to start in the strongest possible position.”

Smith took up his own strong position at Evolution Capital in October 2018, moving from the MD role of an online UK technology company with group revenues exceeding £100m. He is credited for turning around the business, growing profitability by 750%; and he led the three year value building programme and preparation for disposal, completing the transaction in 2016.

Prior to his career as an advisor Smith held a number of Director roles within multi-nationals in the digital and technology marketplace with responsibilities for P&L. He also brings international experience of both disposals and acquisitions for technology companies in the Asia region where he held the post of Regional Chief Executive with Saongroup, which he grew from two to seven integrated subsidiary companies within five years with revenue growth increasing over 600% during his tenure.

Smith’s M&A and financial experience, his understanding of technology businesses and strength in strategy review add considerable weight to the message Evolution Capital advances to ICT company owners seeking the topmost value when they decide to sell their business.

“Sellers generally have two things in common: They want to achieve maximum value and they have never completed a business sale before,” observed Smith. “On the face of it, a sales agent or broker makes a compelling offer, comprising a low-cost entry process with no in-depth review and rapid acceleration to the thrill of the marketing phase. A quick memorandum and you’re ready to meet multiple buyers and talk up the price. But this dream scenario is likely to be no more than a sleepwalk into diminished value or deal failure.

“History also shows us that shareholders may not fully understand the many obstacles and their significant impact on the realisation of maximum value.”

A crucial stumbling block, reiterated Smith, is that broker propositions may not present a true picture of the likely outcome.

“If performance doesn’t dovetail with financial records, or projections aren’t supported by contractual agreements, you could find your sale lost or the price dropped in the final hours of concluding a deal, right when you are at your most vulnerable,” he warned.

“Smart entrepreneurs look to avoid these setbacks and demand bespoke solutions, forensic analysis and managed services to prepare their business for a buyer’s due diligence – and with the assurance that the price they agree at heads is the price they will realise at completion.”

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