M&A for founders: maximising deal value

With M&A deals levelling out and returning to their pre-pandemic levels, it's no surprise that acquirors have become more rigorous in their deal making.

M&A for founders: maximising deal value

This, combined with the turbulent economic situation in the UK, leaves many founders wondering how to get the best deal possible when exiting their business. So, how can founders prepare in a way that maximises deal value? 

Be clear about what you want from the deal before signing heads of terms

This is particularly important where co-founders are involved. Being able to pin point what is driving the exit and what each founder is willing to contribute/give up will put you in better stead going into negotiations. Not only will you know where the parameters of the deal lie but putting on a united front and being able to articulate the most important elements of the deal will invite offers which are in alignment and save on wasted time and costs entering into negotiations which are bound to stall. 

Ensure you have the resources in place to manage the deal process

It’s no secret that an exit is a very hands-on process. There will be questions, requests for documents, meetings, calls etc. all of which you must be ready to deal with in order to keep the deal moving. One of the biggest but most often underestimated ways to devalue a deal is by not having planned for the amount of time you will be unable to spend on the day to day running of the business whilst navigating the transaction. This is especially significant where completion accounts are part of the deal. You will need someone you trust to step into your shoes and take on at least a part of the management of the business whilst you turn your attention to the deal at hand. Understandably, it can be frustrating for founders to loosen the reigns slightly but if you are only half focused on the day to day running of the business you are effectively losing sales, efficiency and cash all of which will filter through into the accounts and potentially lower the offer. 

Do your own due diligence on the business before agreeing to a price

The fact that the due diligence process is only for the benefit of the acquiror is a common misconception. In reality, most founders will have gone through a process akin to a type of due diligence prior to deciding to exit without even realising it. Going beyond this and conducting a full audit of the business can increase the value of the deal in two ways. The first being that you will be armed with concrete evidence as to why the price you have set is justified. It will give you more leeway to pick up on the weaker parts of the business and balance them against those in which you are excelling and which have great potential. This will help you to negotiate any reductions in price from the acquiror due to perceived shortcomings. You will also be able to check any calculations made by the acquiror against your own evaluations and it will highlight gaps in record keeping or governance that you may be able to address before sharing information with the acquiror, so that you can present the business in its best possible shape. It will also save you time when answering due diligence questionnaires from the acquiror as you will already have a set of responses ready.  

If continuing with the business post exit, consider what your role will be and how you will be compensated

If you want a clean break from the business then you should factor in your contribution to it into the asking price. If you are continuing, you are likely to encounter a form of deferred consideration, known as Earn Outs. These are often used where founders are set to continue and play some role in the business post-exit and the amount received will be dependent upon the profit/revenue made by the business. This is to encourage the founders to strive to make the business work even though they no longer have ownership of it. Whilst this seems reasonable in practice, in order to maximise how much value can actually be realised you should look closely at the terms of the Earn-Out and consider whether; (a) if you were an employee of the business, would you be making more or less than awarded to you under the Earn Out?; (b) is the Earn Out dependent upon things over which you will actually have control? If not, it may look good on paper but is unachievable in reality; and (c) is it an all or nothing deal as opposed to one where you would be entitled to consideration pro rata to the targets set? If all or nothing, you may effectively be working for free. 

If you are continuing solely on a service agreement, check whether the renumeration is at market rate and not just a continuation of what you might previously have been paid as often founders will take a pay cut in the early stages of the business and having been topped up with dividends, often choose not to increase their level of remuneration. 

This article comes courtesy of Dragon Argent, specialist advisory, accountancy and legal support for fast growth startups & SMEs in the UK.

Freddie Nicolle Brace
Freddie Nicolle Brace

Share via
Copy link