Preparing for a Liquidity Event

MS-Canadian-Overview-Logo-2.jpgThis article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.
 

The success of a liquidity event involving a privately-held business requires considerable preparation.
 
Even in circumstances where a sale is not imminent, much can be done to improve the operational and financial performance of a business in order to ensure owners can capitalize on favourable market conditions and execute their liquidity option when the timing is optimal.
 
Even if a liquidity event not be expected to occur for many years into the future, business owners will end up benefitting 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:
 
Know the Value of the Business
Even if there are no plans for an imminent sale, it is important that business owners have a reasonable estimate of their company's value.
 
When armed with this knowledge, owners will be better positioned to evaluate unsolicited offers by potential investors. Additionally, obtaining a periodic, 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 obtained 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 financial and non-financial, tangible and intangible factors specific to your business.
 
Understand the Value Drivers
Along with an estimate of a realistic value range, 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 increasing 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, higher value.
 
Prepare 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 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 undocumented 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, 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 outcome are maximized.

However, even business owners experienced with the transaction process, can benefit from engaging a transaction advisor prior to initiating a liquidity event. These benefits include:
  • Signaling that the process will be professional, pragmatic and unemotional;
  • Advising on purification of the balance sheet prior to the transaction to ensure overall value is maximized for the business owner;
  • Advising on the optimal transaction structure (full sale, partial sale, management buy-out, sale to family members, etc.) and process that will yield the best outcomes for the business owner; and
  • 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.
This is the first in a series of articles by Nathan Treitel from Segal LLP on transactions and valuation issues relating to small and mid-size privately held companies. The next article will focus on liquidity and financing alternatives for privately held businesses. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.