2023 is a good year to begin preparing your business for sale
After a record M&A year in 2021, we have seen the market slow down with a relatively soft second half in 2022.
There are ongoing concerns of a global recession and the challenges that presents to businesses. However, the looming downturn does not appear to dampen the market’s appetite for acquisitions. While dealmakers acknowledge it is more challenging, they still see tremendous opportunities to explore in the current environment. Some sectors will be in higher demand, and we may experience pent-up demand in several “out-of-favour” sectors, such as travel, leisure, transport, healthcare, and insurance resulting in some interesting transactions in the year ahead.
Businesses that are in a healthy and stable financial position will remain of interest as an acquisition target. This may be because they are in areas where there will be opportunities to counteract the overall economic trends or have stable and forecastable future cashflows.
Macquarie specifically highlights several areas of structural opportunity as prime targets for acquisition: “electrification, digitisation, ESG and public-private partnerships with government in policy priority areas such as energy, defence, education health and security.” These areas will be in demand as bringing those capabilities into an organisation will help it capitalise on elevated, targeted consumer spending during the ongoing post-pandemic recovery.
Also, because businesses will be looking to ready themselves for a fast “rebound” in the market after an anticipated disruption, acquisitions may be seen as an opportunity to quickly scale operations, enter new market categories, and consolidate market positioning. With there being a skills shortage across the country, buying a business to bring talent into the company could also become a driver to acquire.
To take advantage of the potential wave of M&A activity and have a business ready for sale at the right time and for the right price, it is critical to understand the qualities of your business that will be appealing to a potential buyer and get the business game ready.
How to build an understanding of your business’ worth to acquirers
In our structured approach to preparing a client to be game ready before embarking on selling their business, one of the first stages we walk clients through is Evaluating The Gap, with the “gap” being the difference between what the business is worth today, and what the owner wants or needs from the sale of the business.
To subsequently close the gap, you will need to evaluate the entire business and look at it through the eyes of a potential acquirer to identify its strengths and what areas of the business will create the most additional value. This will include looking at the quantitative points like the capacity for the business to increase revenue, and lower cost to improve profitability. It will also require looking at various qualitative points such as the client mix, succession planning, governance, divestment as well as diversification.
Each sector behaves differently. However, some of the common issues and opportunities that we typically identify with clients – the qualities within the business that can impact on its value to a buyer – include:
Financial strength/Quality of earnings
Market attractiveness
Company attractiveness
Competitive advantage
Revenue profile
Client profile
Business Development
Business processes
IP
Marketing
People & Employee Risk
Business maturity
What you should assume (and be ready for) is that an experienced buyer will do their due diligence. They will want to understand the market conditions, the overall health of the sector, the profile of your business, what unique qualities is has to offer, and what it can add to their own interests in the sector.
For example, as Macquarie noted in its forecasting note, companies that can bring ESG capabilities into the new parent organisation are going to be in demand, and so buyers may value a company that excels in those capabilities, giving the seller a negotiating point beyond the mathematical value of the company. Another buyer might need IT capabilities but is struggling to hire top-quality talent. A skilled and loyal tech team may become a major differentiation point worth well beyond the productivity gains of each individual within the team to that buyer.
Being able to evaluate the gap and ultimately bridge the gap, maximises the business’ value to the informed buyer.
The Morgan Shaw Advisory approach
The most effective way to ensure you will get the value for the business you are looking for is to develop a plan that will, over time, build its value in the areas that matter to a buyer. Partnering with Morgan Shaw Advisory will identify where the best opportunities sit and help you achieve the most lucrative exit, whether you want to sell your business in full, or in part while continuing to work in the business.
To prepare your business exit strategy and leverage the opportunities in the coming years, you should get in touch with us today to discuss how to get your business game ready.