A friend in a large PE house recently told me they listed one of their portfolio companies, “in just six weeks”. Such boasts are frequent in the private equity world when stock markets are buoyant. But the claim hides the huge amount of hard work needed to get a business ready for a flotation.
The decision to list is not the start of the exit process, but marks a point in time when the company has probably already completed more than 80% of the necessary preparation. As an investor in high growth businesses, our role is to help our portfolio companies and their management teams to prepare for an exit. The process starts soon after we invest and we exit readiness should be maintained throughout the life of the investment. But this is easier said than done when combined with the day-to-day challenges of scaling up the operation or launching the business in new markets. Without applied effort, there is a tendency for exit readiness to sit firmly in the ‘important but not urgent’ category.
Yet well-prepared management teams are obviously better placed to take advantage when the IPO window opens. The opportunity to float a business often only exists for a short time. Companies that hit the market early will typically raise more money than those which are slower off the mark, floating at the end of the cycle when weary institutional investors that have already filled their boots with new stocks.
Exit-ready businesses can also command a higher value in an M&A negotiation. When a potential acquirer makes an approach, it is important for a company to have a due diligence data room set up, roles allocated, contingency plans in place and adviser relationships established. This allows senior management to spend their time evaluating the strategic value of the business to the acquirer and securing the best possible price and terms for the deal.
Companies preparing for an exit need to ask themselves some important questions. Are the board and management team aligned around the exit strategy? Does the management team have experience of exiting a business, or would they benefit from training? Who are the top ten most likely acquirers – not just the firms but the individuals whose role it would be to evaluate the opportunity and to recommend an acquisition? Are advisers in place – lawyers, accountants, corporate financiers? Is the company’s house in order, including systems and controls, revenue recognition policy, employment contracts, property leases, etc?
You get the point. Exit readiness involves a mind-set that combines operations, strategic planning, business development and finance. These are all activities that should be bread and butter for most senior management teams. They just need to take the extra step to make exit readiness part of their working culture. The fitter a company is for the race, the better its chance of winning. Our job as an investor is to be the company’s personal trainer.