Private equity (PE) and strategic buyers, loaded with capital that largely sat idle over the past several years, are now vigorously pursuing growth opportunities. Consequently, well-positioned companies have greater access to the equity markets than they’ve had for some time. Over the years, a business owner or investors in the company may have contemplated a liquidity event, but the liquidity process may have been confusing to them.
We’ve identified six issues to consider in positioning your company for a liquidity event and maximizing the value of your company.
The decision to either raise capital or sell to a private equity buyer should be a tactical response to a strategic need. A liquidity event is not something that companies fall into—it should be something that the management team has planned and prepared for, taking into consideration the long-term implications of the transaction on the company and its owners, the impact on value, and the ability to keep growing the business.
One of the first things that private equity investors look for in an acquisition target is a business that meets their particular vision. As such, PE firms will closely scrutinize the nature of the business they’re buying, including financial condition, growth opportunities, and strength of the business’ management team. Further, and equally important, PE firms analyze how a company will fit into their overall investment thesis.
It is essential for companies to be in control of their own destiny and have a strategic plan of their own when approaching the market. Their business plan needs to be crystal clear, explaining – and supporting – the long-term value of the company as well as the strategies and opportunities for growth.
Some PE firms will only invest in companies with strong management teams, while others will look to replace management with their own hand-picked team. Firms that require a strong management team from the outset do not want to get involved in the day-to-day operations of the company. They want an established management team they can trust to run the business.
And what do private equity buyers look for in a leadership team? They weigh whether a management team has been able to grow the business, from both a top and bottom line perspective, and attract new customers year after year. From an operational perspective, they also want to see that a team has been able to develop new products and stay responsive to a changing marketplace. Product teams that have succeeded in continually reinventing the business and keeping it relevant in the marketplace are worth their weight in gold. Does your management team have the vision and insight required to make strategic decisions and take the business to the next level? Those are questions any potential acquirer will be asking.
In financial reporting, two concerns are paramount: the quality and reliability of the financial statements and supporting financial data. When potential buyers analyze a target company, they want to know that the right systems, processes, and internal controls are in place to ensure that the numbers they are scrutinizing are accurate.
Some companies may not have a CFO who has the experience required to execute a liquidity event. Accordingly, it is important that a company recognize this limitation in its CFO capabilities and turn to its financial and legal advisors for appropriate advice. For those that do have a CFO with the appropriate liquidity capabilities, it is critical that the CFO identifies the critical indicators that drive the business—such as margin by product and customer—and creates a structure that allows for the measurement and reporting of those success factors.
A private equity firm will also want to have confidence that your company is closing the books on a timely basis, but not at the expense of compromising needed analyses and management reporting packages. Audited financial statements are another must-have. Buyers often want to see at least two or three years of audits before they will even consider pursuing an acquisition. Companies should consider having an audit performed well in advance of a liquidity event.
When a potential acquirer is contemplating an acquisition, it wants to know that the target company is running its operations efficiently – from information technology (IT) and finance to corporate governance and compliance.
With IT, for instance, a private equity firm wants to see that all business systems, including customer support, manufacturing, and HR applications, are modernized, and hopefully well-implemented and integrated. The same goes for technology used for your company’s financial accounting and reporting systems. Do you have executive dashboards that enable your people to best manage the business? Does your company have the ability to automate financial processes and gain a comprehensive picture of available cash flow—anytime, anywhere?
Regulatory compliance is another hot-button issue with PE firms. Before they acquire a company, PE firms want to know that everything is in order from a regulatory standpoint. For example, companies in the retail or restaurant space need to adhere to the Payment Card Industry (PCI) guidelines for protecting credit card information and safeguarding against fraud while healthcare companies must be fully compliant with the Health Insurance Portability and Accountability Act (HIPAA) requirements.
Private equity firms are now conducting a degree of due diligence never seen before. They are demanding—and getting—an enormous amount of detail that extends far beyond financials. The due diligence process is new to most companies that are preparing for a liquidity event—and it usually comes as a shock.
The first step on the path to a successful due diligence effort is to engage a reputable accounting firm to provide sell-side due diligence and/or audit services, which are the backbone of your credibility. From there, the potential acquirer may scrutinize every material contract, every document, every settlement and lawsuit, every vendor agreement, and confidentiality agreement your company has signed in the recent past. Maintaining a document file that provides easy access to documentation is one of the most productive due diligence support measures any company can take.
For any company contemplating liquidity event, now is the time to start preparing for the diligence process. If it is not performed now, it will have to be done later. Analyze all your major agreements. Contemplate going back to investors and banks to renegotiate terms that may become problematic. Consider engaging competent legal expertise to determine whether contracts and agreements should be cleaned up for problem areas.
The right investment banking, accounting, and legal advisors are crucial to the liquidity process. In choosing the right advisor, it is critical to select those who possess specialized expertise so that you can maximize the return on what can be the most important transaction in the life cycle of your organization. Start by finding a banker, financial advisor, and attorney with whom you can establish a rapport. Set up a “dating period” to get to know them. During that period you will need to decide which of them you can work with and whether they share your strategic goals.
It is difficult to contemplate a liquidity event when you are busy building a business. However, the most successful transactions are carefully planned events. It is important to engage advisors earlier than you might think, perhaps even a couple of years ahead of a planned sale. It can take six months to prepare for a liquidity event and another six months to complete it. Companies should get in touch and staying in touch with talented, compatible bankers and accountants at least six months to a year before beginning the prospecting process for a sale.
Jeremy Swan is a principal with CohnReznick and the National Director for the Firm’s Private Equity and Venture Capital Industry practice. His areas of expertise include internal audit, IT audit and security, corporate performance, and business intelligence. With more than 15 years of experience advising both emerging private companies and large corporations, Jeremy has extensive knowledge of investment banking and private equity, providing advisory services in areas that include mergers and acquisitions, IPO readiness, financing transactions, and operational and financial due diligence. Prior to joining CohnReznick, Jeremy was the director of a global business consulting firm with a focus on private equity and due diligence services and, prior, had served as a principal of a boutique investment bank with a focus on technology and information services