Having weathered running a business, there may come a time when owners wish to exit it and enjoy the fruits of their success. Given that many Irish SMEs are family run, the decision to sell up can involve more than merely financial considerations.
Helpfully, for those wishing to step back from day-to-day management, there is also the option to retain an interest in the enterprise while realising cash by opening up the business to new investors and a management team who can lead the next stage of its journey.
“The most successful transactions occur when the seller can articulate a strong value proposition to the buyer. This includes factors such as the strength of management and customers, operational excellence and an actional growth plan. Sellers need robust preparation to withstand scrutiny on these items through the due diligence process,” notes David O’Kelly, partner and head of mergers and acquisitions at KPMG in Ireland
In any transaction, both buyers and sellers should remain open to alternative transaction structures, such as earn-outs or deferred considerations, particularly where they help to bridge valuation gaps or align buyer and seller expectations. “In today’s market, buyers are placing increased emphasis on diligence and risk management, which can lead to more creative deal structures,” O’Kelly observes.
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“A full sale is no longer the only route for business owners to unlock value. Increasingly, owners are considering partial equity sales including minority investments from private equity. These approaches can allow founders to realise some value, reduce personal risk and access growth capital, while retaining a meaningful stake in the business and participating in future upside.”
Colm Sheehan, partner, corporate finance, at Crowe, says successful transactions are usually planned well in advance of execution. Investing time and resources to get your business ready to go to market is critically important to maximise and protect value through a sale process. Having clear financial information for buyers, robust commercial contracts that are not due to expire and a corporate structure designed to provide for a clean sale of the business and a tax-efficient exit specific to your needs are all vital first steps, he advises
“We are seeing more businesses being brought to market having undergone a vendor due-diligence exercise – where the business is reviewed from a financial, tax, legal and commercial perspective in advance of going to market. The benefit of this is that it can identify potential seller risks that can be rectified in good time – this can be the difference between a smooth due diligence process and a failed business sale,” Sheehan says.
Stephen Kane, head of corporate advisory with Goodbody, agrees that the highest valuations are rarely achieved by businesses that prepare for sale at the last minute. The most successful exits are typically the result of years of preparation focused on improving earnings quality, reducing perceived risk and demonstrating a credible pathway for future growth, he says.
Businesses that command premium valuations typically exhibit sustainable earnings, strong cash conversion, resilient market positions and multiple identifiable growth levers.
“Buyers are ultimately purchasing future cash flows, so anything that enhances visibility and confidence around future performance will support valuation,” says Kane. “Sophisticated buyers increasingly back management teams as much as businesses. A capable leadership team, diversified customer base and a business that is not dependent on the founder materially enhance both buyer interest and transaction value. Exit readiness is largely about reducing uncertainty. The easier a business is to understand and diligence, the broader the buyer universe and the greater the likelihood of achieving a premium valuation.”
Justin Fennell, who leads law firm PJ O’Driscoll & Sons’ corporate team, notes that an owner who is considering a sale or fundraising should first appoint their own internal team to handle the exigencies of the due diligence process but should factor in that some members of this team may have to devote their full-time energies to the sale process.
A well-qualified external team of advisers should also be appointed, including solicitors; accountants, consultants and sector experts who can guide the business owner to make well-informed decisions.
“The business owner needs to decide whether they are looking at an outright sale or alternatively whether they wish to extract value from the business while still retaining an interest. Where the requirement is to retain an interest while raising cash, some examples of the options available include the spin-off of noncore assets, strategic joint ventures with another business in the same or related fields, or the sale of a minority stake to a private equity firm,” says Fennell.
It is vitally important, he adds, that when considering these or other options, business owners should take specialist tax advice from suitably experienced accountants and tax advisers so that whichever option is chosen, it can be executed in the most tax-efficient manner.
“In the event of an outright sale the business owner should be encouraged, in consultation with their advisers, to identify and understand the profile of potential buyers they should hope to engage with. This exercise will in turn inform the seller’s decisions on earn-outs or deferred consideration. Structured consideration can allow a seller to achieve a higher price as it will allow a seller to extract value based not just on historic performance but also on future profits,” Fennell advises.
There are many things that a business can do to ensure it is optimally set to sell, such as ensuring diversity of customer base, security of customer and supplier contracts, staff contracts, significant sales pipeline, strong management team and succession tree in place and, last but not least, that it is at “an optimal point in their profitability journey”, notes Brian Murphy, partner, Corporate Finance Associates Worldwide.
“The stark reality, however, is that many sale approaches will come when they are not expected or planned optimally for,” he says. “The most important of all, the most significant driver of optimal value, is at a time when the market is most mature and acquisitive in the sector that the business operates in. Business owners should sell when the market is paying the best rate, which is not always necessarily when they are perfectly ready.”
By way of example, he says the market for accountancy practices and medical companies is currently at its most acquisitive and at its peak in valuation. “Deferring a decision to sell because the company may ‘not be quite ready’ will absolutely mean missing the boat in those sectors. The timing in those and some other sectors is absolutely now, not even next year.”
The current Irish market is active but highly selective, notes Ronan Murray, partner, EY Corporate Finance. International buyers continue to show strong interest, while Irish companies are increasingly pursuing acquisitions within the domestic market. On the ground, that means quality businesses can still attract real competition, particularly in technology, healthcare, financial and business services, renewable energy, and construction-related sectors, he says.
“However, buyers are scrutinising earnings quality, cash conversion, customer concentration, margin resilience and forecasts more closely than in the low-interest-rate era. Management should therefore be in a position to explain not only historic performance, but also how the business would withstand changes in demand, input costs, regulation, technology and geopolitics. A credible plan for AI and digital investment is also increasingly part of the equity story, but buyers distinguish practical capability from fashionable claims.”
Murray agrees that the best time to prepare a business for sale is before the owner needs to sell it. Given that for many entrepreneurs the company represents decades of work and a substantial share of family wealth, an exit should be considered a multi-year value creation project rather than a six-month transaction exercise.
