There can be any number of factors that trigger a TMT company’s successful sale. Industry consolidation, exhausted owners or even a speculative buyer’s approach can be enough to spark off the process that culminates in the sale of the business.
However, whatever these triggers might be, the process can only be successfully concluded once a buyer is introduced to the seller at the right time and under the appropriate conditions. Is it possible to create the perfect storm in which the successful sale of the business can be guaranteed?
Probably not and despite an owner’s most fervent wish to sell, a transaction is not inevitable. However, conditions engendering a favourable disposal and maximising an owner’s value can be enhanced by thorough planning and assiduous preparation. The undeniable fact is there will be multiple challenges that need to be met before the business can be deemed to be saleable but by formulating the plan as soon as is practical, the chances of success can be greatly enhanced.
According to Duncan Gregory, Evolution Capital’s Transaction Services Director, it is never too early to start preparing and whatever happens in the long run owners should ideally run their businesses as if they are selling them imminently.
He says: “Evolution Capital has been helping owners maximise the value of their businesses since 2003 and we cannot over-emphasise the importance of getting your house in order early on in the process. Preparing your business for sale takes time and effort and by making an initial start, challenges can be met and overcome in good order. An important part of our strategy is to highlight where the value resides and to encourage lean running. Tracking and removing wasted and inefficient one-off costs are a central plank of our methodology and one which needs to be deployed in an opportune manner.”
Despite a few exceptions, most deals in the TMT space still rely on profit and applied multiples to determine an acceptable and realistic valuation. Evolution Capital focuses on both to get the best conclusion.
Gregory continues: “We tend to attack both sides of the equation by concentrating on increasing profit and focussing on improving the multiple by refining the quality of earnings. For example, increasing recurring revenues generally improves the quality of earnings although it can mean a short-term dip as you swap higher one-off, current profits for smaller immediate gains but higher profit and stickier customers in the longer term.”
“Providing multiple services has an additional positive effect on the earnings. We are also keen on improving the efficacy of management accounting and on the transparency of a business’ cash flow. If the facts are not available and the business intelligence is poor how can an owner make proper business decisions? Whether you end up selling or not there are multiple benefits delivered through good management information.”
Evolution Capital’s approach generally starts with a strategic review of the business and this in-depth examination will always highlight the areas that need addressing. Once these have been established, the work of finessing the business model, refining the supporting infrastructure and delivering better management information can be decided.
Gregory continues: “Ultimately it’s all about creating realistic KPIs and working to them. Our clients tend to have similar challenges which might include, for example, an inability to verify accurate ‘cost of sales’ figures, a lack of resilience in the customer base or a dearth of recurring revenues. Once we determine what these challenges are, we work in close partnership with the client to address the issues and increase the earnings, which ultimately enhances the value. When the time comes to introduce buyers to our seller, presentation is key but cannot be effectively achieved without a significant amount of preparation.”
John Donoghue, MD of ICOM, was advised by Evolution Capital during the successful sale of part of his business. The business was financially secure with a growing list of well-known customers but its market was changing and it needed to adjust the company’s management skills and product portfolio.
He said: “Prior to Evolution’s strategic review we had some very general ideas about a way forward but the study really focussed us on what sort of buyer we needed, and what we had to do to attract one. The company needed a partner with the right culture and ethos to make it a win/win for both of us. The review highlighted the areas where obvious changes were necessary and once made, we immediately started to get positive results. It was a great piece of work.”
The amount of effort in preparing your business for sale should not be underestimated and it is critical to appoint your advisors in a timely manner. The TMT market is not short of advisers but it is vital to appoint a firm that has the requisite industry knowledge, the expertise of the sector and the right network to find you a buyer.
Every effective disposal process unfolds differently and there is no standard template to follow, but there are certain common traits. While preparation and presentation are key factors, there are no guarantees for a successful sale in a complicated transaction but a good partnership with your adviser will boost the chances of getting your sale home.
Invariably there will always be a few rocks in the road as the transaction completes and a good adviser will always be there to clear the way of any remaining show-stoppers.
ACS Group’s co-founder Mike McEwen, who sold his IT services provider business in May 2019, added: “We were absolutely thrilled with the sale of the business and for the advice and guidance of Evolution Capital, which brought us to that point. They proved their comprehensive knowledge of our marketplace. Their professionalism and expertise, demonstrated in guiding us toward our goals, was exemplary. The team’s proposals and advice was exactly what was required and I have no doubt we could not have done it without them.”
The final piece in the chain is obviously the transaction itself, without which any amount of preparation to sell is rendered redundant. Your adviser should be able to provide you with a choice of buyers who meet your valuation, cultural fit and aspirations. They should be able to maximise your business’ value by making timely adjustments to increase its appeal and will subsequently enable you to present it in its best light. However, they will not only need to present you with a selection of buyers at the opportune moment but will need to see you safely through to the other side of the transaction.
Tom Carroll, who sold his IT services business Our IT in May 2018, said: “The sale of your business is not preordained just because you believe the time has come to sell it. It will only happen once the right counter-party is in the same room as you at the right time and until that happens everything else is academic. Evolution Capital not only found a buyer for my business at the right time but also helped me present it in a way that appealed to that buyer. They enabled me to maximise the value and saw the transaction through to its logical conclusion and beyond.”
Click here for our interview with Tom Carroll