We’ve explained the concept of value creation previously, but in this post we’ll focus specifically at the other end of the private equity cycle. A successful exit is what every private equity investor and management team is looking to achieve, but it requires significant preparation well in advance of the actual sale. In our experience, Marketing & Sales leaders have a critical role to play in supporting an exit.
Getting your house in order
Preparing for a successful exit begins at the start of the investment journey, as has been covered previously. There is never a bad time to ensure your house is in order, but Marketing & Sales leaders should begin to focus on what’s required for exit 12-18 months out from a potential transaction. This will include both hygiene factors, such as reporting, as well as the proof points that support the investment case to be presented to prospective buyers. As a private equity investor I used to work with called it - the ‘sausage and the sizzle’
The hygiene factors (the sausage) form the basis of what future investors will use to value the business on exit. From a Go-To-Market perspective, this could include:
Weekly/monthly KPI reports and with associated commentary
Strategy documents outlining the Ideal Client Profile (ICP), target markets, channel and partnership strategies, etc.
Process documentation covering company approaches to Sales and Marketing
Think about these from an investors’ perspective – what would they want to see to build confidence that the business will continue to grow profitably? For a B2B business this might be your pipeline value over time, lead conversion rate, and individual salesperson metrics. For a B2C business this may be your LTV:CAC ratio. While score keeping is important, try to make these forward looking where possible, tying them to actions and initiatives. Work closely with your Finance team to ensure weekly/monthly reports tie back to management accounts and Board packs - this will save you potential headaches further down the line during the due diligence process.
It’s also important to mitigate any major risks that may go to value. This could include ensuring material customer and/or supplier contracts are renewed, giving prospective buyers comfort that there will be no impact to the underlying business.
Lastly, identify any gaps in capabilities, systems or processes that may be highlighted as part of the due diligence process, and create a plan to fix them. This may be through recruitment into the team, or investment in a new marketing automation platform. In an ideal world this will be fixed by the time a sales process kicks into gear, but just having a plan is a step in the right direction and will help answer challenging questions later – the primary purpose here is to present a picture of understanding, control and predictability of your Go-To-Market efforts.
Enterprise Value in the context of private equity is typically a function of EBITDA and multiple. We’ve covered how to grow EBITDA through Go-To-Market improvements in many of our previous posts, but multiple expansion can more challenging, as this reflects the perceived quality of the business and the opportunities for growth.
An upside story (the sizzle) will help you maximise value on exit through multiple expansion. Every business typically has a portfolio of products/services/customers at different stages of the BCG matrix. The challenge for a successful exit is realising value for the ‘Question Marks’. Sales & Marketing leaders play an important role in this, building proof points of the green shoots that are growing in these Question Mark areas, before they become ‘Stars’ and then ‘Cash Cows’. Examples of this might be website user growth in a recently launched geography, and how that compares to the historical growth in more mature geos. Or from a B2B perspective this may be the increase in the pipeline volume and value for a recently launched product or service, and how that compares to more mature offerings.
Being able to add quantitative evidence to the potential value that these upside initiatives may generate, will go some way to these being included as part of the valuation.
The private equity exit process
By the time the sales process kicks off and sell-side advisors are selected, your house should be in order, with plenty of evidence of green shoots. Focus will now turn to preparing the sales materials – another area that Sales & Marketing leaders can play a crucial role.
In the first instance, a Teaser will be created – typically a combined effort between the management team, current investors (if applicable), and the corporate finance advisors. This is a short document (2-3 pages) designed to highlight the most attractive aspects of the company. This tends to be light on financial information but includes data points that will help to entice prospective buyers. Sales & Marketing leaders can contribute to this in several ways:
Creating an overview of the market and competitive context – showing the growth of the market and the business’s highly defensible position
Highlighting key customers success stories – showing the business’s ability to win and retain valuable customers
Providing KPIs/metrics that highlight the quality of the business - examples include user growth rates, customer acquisition, LTV/CAC, revenue retention, etc.
Once the Teaser has been shared with a longlist of prospective buyers, a shortlist will be selected based on level of interest, who will be given access to the Information Memorandum (‘IM’). The IM is a longer form version of the Teaser and will include more extensive financial and trading information. This is where details of the Sales & Marketing strategy, KPIs and greenshoots can be presented to paint the business in the best light.
Alongside the IM, the advisors will work with Management to build a Financial Model, Vendor Due Diligence (VDD) reports and a Virtual Data Room (VDR):
The financial model typically consists of a forecast P&L, cashflow statement and balance sheet, that will be used by prospective buyers to value the business. Sales & Marketing leaders will need to provide KPI forecasts into this, as they will form a key part of the revenue growth assumptions
The VDD reports are provided by separate advisors to give an independent view on the historical trading and achievability of the business plan
The VDR is where key documents are shared with prospective buyers. The KPI reports, strategy, and process documents previously compiled can be shared here, to answer buyers’ questions about the overall Sales & Marketing strategy and performance
As well as the review of the IM, Financial Model, VDD reports, and VDR, Management Presentations will often be held. This gives buyers an opportunity to meet Management teams and ask questions face-to-face. These will sometimes include just the most senior executives, or other times the wider senior team. The presentation itself is often a shortened version of the IM, but any soundbites that Sales & Marketing leaders can add around recent successes or progress against key initiatives will help to add flavour to the investment highlights.
Prospective buyers will look to carry out Due Diligence (DD) on the business, to validate the information received as part of the IM, Financial Model, VDD reports and Management Presentations. DD typically covers a range of aspects, including Financial, Commercial, Legal, Technology and Tax issues. Sales & Marketing leaders can play an important role as part of the Commercial Due Diligence (CDD) workstream by providing evidence that supports the business’s growth plans in the context of the market, competition, existing customer base and growth strategy.
We are also seeing an increasing trend of more thoughtful investors carrying out Go-To-Market DD – where they are looking to identify the potential for value creation through improving GTM strategy and operations.
The buyer will use all this information to inform their valuation and negotiation strategy, while the seller will be looking to have as many interested parties participating in order to maximise competitive tension and drive a higher multiple & better terms.
Trading momentum – keep going!
It may feel like there is a lot to process and documentation as part of an exit - that’s because there is! The most important thing, however, is that trading momentum is continued. This will ensure you create competitive tension among prospective buyers (which is important for healthy valuations) and avoid any negative surprises during or after the sale process.
In summary, there are plenty of ways that Sales & Marketing leaders can play a key role before and during a business exit. Just make sure you have the sausage and the sizzle.
If you’d like to discuss how you can better prepare for an exit through value creation planning and due diligence, please Contact Us.
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