3 minute read 26 Feb 2021
Exit strategy: marketing your business for sale

Exit strategy: marketing your business for sale

By Christophe Vandendorpe

Leader, Strategy and Transactions, EY Luxembourg

Trusted transaction advisor for M&A, due diligence, valuations, legal entity rationalization. Team player. Results-oriented.

3 minute read 26 Feb 2021

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n this interview, Christophe Vandendorpe and Pierre Kuntzelmann from EY Luxembourg's Strategy and Transactions team, discuss prepping your business for a successful sale.

Are present circumstances right for a sale?

The market is always welcoming positively a well-prepared investment opportunity. The most important is determining the right moment from your own perspective. Selling too early often means leaving value on the table and holding too long onto your business may at best, imply sub-optimal pricing power and at worst, jeopardize the long-term development of your company.

Present market conditions appear favorable. After substantial slow-down during the first semester of 2020, we see strong recovery in mergers and acquisitions (M&A) activity as from the second half of the year, which is expected to continue in 2021.

Once the sale decision has been made, what's next?

Preparation is key and often underestimated by corporations not familiar with the process. M&A transactions can be time-consuming for key management. This process usually starts at least six to twelve months before soliciting potential buyers.

Conceptually speaking, selling a business is about telling a compelling story to attract potential buyers. The latter will want to ensure that the story is backed-up by solid financials and conduct due diligence with the support of professional advisors.

The preparation process should include the following steps:

1)    Defining the objectives of the sale and identifying the ideal buyers (or buyer qualities)

2)    Making sure the business is in good order and ready to be scrutinized by an external party and their external advisor.

It is common to prepare reports and documents specifically for the purpose of the transaction. Indeed, potential buyers want to go beyond annual accounts, they want to understand how sustainable the company’s earnings and deep-dive into client portfolios to understand sales, operating costs, contingent liabilities, etc.

As seller you may want to ensure that such scrutiny and opening of your records does not diminish your negotiating position.

Such transparency is nevertheless required to gain the trust of acquirors, fundamental to an optimal sale. Entrepreneurs who have exited their business understand well that you need experienced advisors supporting you during this phase.

3)    Creating a compelling story about the company and compile the marketing and pitching material to be presented to potential buyers. There are various materials that are generally prepared:

-       A Teaser, which is a short high-level document, often anonymous, to allow potential buyers to decide whether they want to learn more about the investment opportunity.

-       An Information Memorandum (IM), no longer anonymous, to pitch the compelling story and whet the appetite of potential acquirors. The IM usually includes information about the company’s financials, strategy, market position, products and services. This document can be supplemented by a detailed and realistic 5-year Business Plan, i.e. in line with the company’s historical performance and strategy, as well as market trends.

-       A Vendor Due Diligence (VDD), which is an in-depth report on the Company’s financials, aiming to provide an independent view on the business and address issues relevant to an acquiror. In combination with the IM; a VDD tends to strengthen significantly the seller’s negotiation position.

 Based on your experience, what are the key mistakes made during this preparation phase?

Valuations are complex and includes technical jargon such as “debt-free, cash-free valuations”, “adjusted” EBITDA, debt-like items, etc. Not having a detailed understanding of such terms, may lead to ultimately end up with much less money in the pocket, despite having “negotiated” a high price multiple.

Additionally, often sellers tell buyers “I have nothing to hide, please ask me what you want”, which may indicate a lack of seller preparation. In such situations, either the seller gives valuable negotiation power to the potential buyer or else the potential buyers will run away as the “numbers” tend to not reconcile to the compelling story.

Our clients’ feedback recognizes the tangible benefits of involving a firm like EY as their financial advisor. In a nutshell, working with a professional advisor to sell your company is an investment that pays off.

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About this article

By Christophe Vandendorpe

Leader, Strategy and Transactions, EY Luxembourg

Trusted transaction advisor for M&A, due diligence, valuations, legal entity rationalization. Team player. Results-oriented.