Ensuring a successful liquidity

Preparing for a liquidity event

Ensuring a successful liquidity

Preparing for a liquidity event

A successful liquidity event involving a privately held business requires considerable preparation.

Even in circumstances where a sale is not imminent, much can be done to ensure the owners can capitalize on favourable market conditions or be prepared when they unexpectedly find an offer on the table.

Even if a liquidity event is not expected to occur for many years, the business owners will benefit from owning a company with reduced risk and better operating and financial performance.

The following outlines the main areas of focus for business owners contemplating a future liquidity event.

Understand your objectives

Undertake some honest introspection to understand your rationale for sale, desire to be involved in the business post‑transaction and the size of the nest egg you will need to finance your lifestyle post‑sale. These motivations and preferences can impact the type of transaction you may wish to pursue, the timing of sale and the type of buyers that you may approach.

Know the value of your business

Even if there are no plans for an imminent sale, it is important business owners have a reasonable estimate of their company’s value.

Armed with this knowledge, owners will be better positioned to evaluate unsolicited offers by potential investors. Additionally, regularly obtaining a realistic estimate of value serves as a tool to examine changes in value over time and is a means to target and track growth objectives.

Relying on a value based on pricing metrics (i.e. multiples) realized in transactions involving similar companies may lead to value expectations that are unrealistic in an open market transaction. It is worth retaining an experienced Certified Business Valuator to get an accurate and unbiased valuation based on the operational, financial and tangible and intangible assets specific to your business and industry.

Understand the value drivers

Along with a realistic estimate of value, it is important to understand the factors driving this value.

Value drivers consist of financial and non‑financial metrics and intangible attributes that are of importance to prospective purchasers. They are also the catalysts to increase the future value of a business prior to any liquidity event. Identifying value drivers will allow owners to focus on enhancing areas that are deficient, resulting in better financial performance, lower risk and, ultimately, a higher value.

Prepare the business for a liquidity event

Optimizing a liquidity event involves timing the transaction to coincide with favourable company and market conditions.

Much preparation can be done in the months and years leading up to a transaction to ensure owners are ready to capitalize on attractive market conditions, including the following:

  • Reducing key man risk through the development of a strong senior and mid‑level management team.
  • Reducing customer and supplier concentration.
  • Investing in maintenance and capital expenditures to ensure productive capital assets.
  • Improving financial systems and reporting capabilities.
  • Documenting business relationships with customers, suppliers, employees and related parties, as well as internal operating controls and governance protocols.
  • Obtaining resolution and greater clarity relating to contingent liabilities, and outstanding tax and litigation matters.
  • Cleansing the balance sheet of redundant assets.
  • Developing a growth plan based on sound business strategy and detailed financial assumptions.

Successfully implementing the above initiatives will increase profitability while reducing risk and costs to potential buyers, thereby increasing the attractiveness, marketability and ultimately the value of the company.

Consult with a transaction advisor

Liquidity events are unusual in the business lifecycle and therefore an area where management typically has limited experience. Given the significance of the process to the business owner, it is prudent to hire an advisor to ensure the outcome is maximized. Two of the areas in which advisors can provide value if consulted significantly in advance of a planned transaction include:

  • Advising on the purification of the balance sheet to ensure overall after‑tax proceeds are maximized for the business owner.
  • Advising on the optimal transaction structure (full sale, partial sale, management buy‑out, sale to family members, etc.) and a process that will yield the best outcomes in light of the business owner’s objectives.

However, even business owners with transaction experience can benefit from engaging a transaction advisor during/at the outset of the transaction process. These benefits include:

  • Signaling that the process will be professional, pragmatic and unemotional.
  • Allowing the transaction advisor to have the “difficult conversations” with potential acquirers, leaving existing owners who will often remain involved in the business and/or have a certain portion of their consideration deferred to a future date, out of the fray.
  • Outsourcing the responsibility for overseeing and managing the transaction process maximizes the efficient use of management’s time and enables them to focus on the day‑to‑day operations and growth of the business.

Secure a successful outcome

For more information:

Nathan Treitel
Managing Director – Valuation and Transaction Advisory


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