Many factors affect the value of a business and there is always a gap between buyer and seller expectations in any transaction. If you run a competitive process, a founder will often get multiple offers on their business, ultimately giving the market view on a range of valuations. A founder should only decide if they are selling once they see that range of offers.

John Bowe, partner with Mazars, says that preparation is key.

“The more prepared you are the better chance of achieving your expectations. A slip in current trading can derail expectations. If the business's performance during the period under review by potential investors falls short of expectations, this will inevitably influence the valuation. Similarly, for instance, losing a significant contract during the due diligence process will also have an impact,” says Bowe.

Áine Sheehan, director, Deloitte, is very sensitive to her clients’ concerns. She points out that often times, effort and even the family name can be attached to a business, making the process both a business transaction as well as a personal one.

“Getting to know your client and understanding their motivations for sale are key. Why are they choosing to sell now? What do they want to do next? Are valuations just too strong to overlook? Are they ready to move on to the next challenge or opportunity? Do they wish to retire? Perhaps, they are looking to de-risk but continue to contribute to the next phase of the company growth. Are they driven to maximise valuation or is finding the right home for the business and its people just as, if not more, important than the size of the cheque?

“All this information and insight will help formulate a bespoke process that seeks to achieve their objectives with respect to M&A. It speaks to the type of deal they are looking for, a minority or majority sale, a strategic investor that will partner with them on the next phase of growth or a buyer for the business that would give it access to new customers, new markets, skills and compelling synergies,” says Sheehan.

She also stresses that it is important that there are upfront discussions with respect to valuation before embarking on a process. This involves doing research, checking out what have similar companies traded for recently, or what are similar quoted companies trading at in the public markets.

“Deals are taking longer than they have in the past as they attract heightened degrees of scrutiny by boards, investment committees and lenders. Sellers should be aware of the likely timelines, their time requirements for the deal and prolonged distraction from ‘business as usual,” says Sheehan.

Ronan Murray, Corporate Finance partner at EY, says the sales process can be a challenging time for companies. Internal resources can be stretched with investors requiring certain information before they enter into a formal agreement. An experienced M&A advisor is important as they will manage this information flow to keep the process as compact as possible, allowing management’s focus to remain on the business. This ensures management are not distracted from the day-to-day operations of the business and significantly reduces the risk of a business underperforming in the months prior to a transaction closing, which will help to maintain value.

“At the beginning of any process it is critical to set out the key objectives for all stakeholders. This involves clearly understanding the potential exit options available (e.g. a full sale or a partial divestment), upfront versus deferred consideration/earn-outs and shareholder preferences on continued involvement in the business post transaction. This helps to manage expectation for the vendor and also helps define the rationale for sale when discussing a transaction with potential buyers,” says Murray.

“Sellers should engage with advisors early in the process to help in setting realistic value expectations before the process starts. Through their experience and resources, corporate finance advisors play an important role in guiding and defining what a successful transaction is for a seller. Sellers should understand their business’ value drivers more than the buyer, so the onus falls on them to demonstrate the maximum value,” he says.

The key is to understand the various funding options and their implications for facilitating future growth, mitigating risk for founders, and determining the level of control relinquished according to Bowe.

“You are trying to align a founder’s personal and business needs with the types of funding available. Clearly laying out the funding options available and what are the differences between debt and equity and within equity, between minority and majority ownership.

“Factors such as the seller’s goals with regard to staying on or exiting, debt capacity within a business, existing management team capability, and shareholders’ openness to working with new structures, new board members, and new shareholders all come into play,” says Bowe.

Businesses should adopt a funding structure which strikes the balance on its risk tolerance — retaining ownership or control of shares versus interest payments and collateral requirements being onerous on the business.

When considering funding structures that will support a business achieving its strategic objectives, it is important that the business is not exposed to undue financial risk. The profile of cash flows, predictable or changeable, will dictate the level of leverage that could be tolerated.

The stage in the Company life cycle or underlying market will also dictate the level and source of funding that is available — stable and mature business will likely tolerate higher levels of debt versus early stage and high growth.

“Depending on the strategic objectives of the business, an equity investor can often bring more than just cash to the table and ultimately help accelerate shareholder value creation,” says Sheehan.

Prior to pursuing a management buy‑out, it is imperative that the vendor consider all liquidity options available to the company, which may range from a 100% strategic sale to a minority private equity investment.

James Loughrey, managing partner at MC2, stresses that all management buyouts should involve legal, tax and corporate finance advisors.

“A key risk for a management buyout is that internal senior resources within the business will be focused on the transaction at the detriment of business performance. Having corporate finance advisors to structure and manage the transaction, as well as regular communications to keep all parties informed of progress, is important to ensure management can continue to focus on the business while momentum is kept in the transaction,” says Loughrey.

Murray concludes: “Stakeholder motivations in a buyout can be intricate, but they ultimately revolve around one core aspect: value. Existing shareholders seek fair compensation for their years of hard work in building the company, while management want to ensure they purchase the business at a fair price to generate future value,” says Murray.