Working Capital Series: Preparing For Sale

Preparation for sale or exit should start the day you make an investment: potential buyers of your business in three or four years will look at long-term trends in determining their price. A sudden spike in earnings just before sale will likely be discounted and an abnormally good working capital profile will likely be ignored. You would do the same if you were the buyer, so put yourself in the potential buyer’s shoes from day one.

As part of your initial 90-day tactical plan, you should aim to make all of the working capital improvements discussed in another post, these early will establish a good working capital profile and show long-term structural improvements to potential buyers.

As a potential sale looms (before you even prepare a prospectus or deal book), draft a plan to deal with the negotiation tactics of potential buyers. The following list provides a few hints to maximise the final sale value:

• Pay out excess cash as dividends before anyone gets there hands on your financials. Buyers will no doubt try to justify why it’s not in fact excess cash and is actually required working capital. So pull out the cash long enough before the sale to show it’s not required.
• Make a particular effort to collect bad debts and late debtors. Potential buyers will exclude these from any net asset calculations, so it’s important you don’t give this cash away for free.
• Sell obsolete and slow-moving inventory. Buyers won’t place a value on excess inventory, so it’s better for you to profit from selling it. It will otherwise be absorbed by the buyer’s earnings multiple valuation.
• Sell all other excess and non-operational assets. Again, buyers will typically value your business on earnings, so excess assets don’t enter the equation. It’s best for you to profit from an asset sale, but make sure it doesn’t appear that you’re preparing the business for sale; buyers don’t like such premeditated actions.
• Fully prepare yourself for the “net asset” conversation. At some stage you will need to decide what the buyer will receive at the date of settlement. This means putting a stake in the ground and declaring final debtors, creditors, inventory, cash, etc. Understand all of the options, test all of the calculations and consider all of the scenarios. This will help you to maximise value when the topic arises, which it inevitably will (see Working Capital Series: Locked Box for the theory behind net assets at settlement).

As you can see, the best way to prepare for an asset sale is to imagine you’re on the other end of the transaction. Think of all of your own negotiation arguments when you’re making an investment and then turn them around to help you prepare for those same arguments, but from the other side.

 

Working Capital Series:

1. Introduction
2. References and Calculations
3. Drivers
4. Cash-positive & Cash-negative Profiles
5. Valuation
6. What To Do At Settlement
7. The Locked Box Approach
8. Measuring & Monitoring
9. Improvements & One-off Cash Wins
10. Preparing For Sale