Exploring the pivotal moment in an entrepreneur’s journey – from inception to exit strategy. Discover expert insights from Stuart Fitzgerald on streamlining financial preparations for a seamless business sale.

The two biggest decisions in an entrepreneur or SME owner’s life are the day they start their business and the day they exit. Usually, the seller will feel that they’ve brought their business as far as they can in terms of their business plan and enterprise value, but sometimes it’s simply a case of reaching the stage of life where they’re ready to retire. 

Stuart Fitzgerald of Fitzgerald Power accountants in Waterford is an expert at offering strategic financial advice to business owners who have decided to sell and aims to do so with as little hassle as possible. Stuart feels the owner should ensure that there’s no expenditure in the P&L (Profit and Loss) account that’s non-core while also ensuring that all revenue and profit opportunities have been maximised. Ultimately the value of an asset is going to be determined by a multiple on maintainable earnings, so maximising earnings is key. 

In Stuart’s opinion the major questions that need to be asked before bringing an asset to the market are: Is the business itself ready to bring to the market? Are macro-economic conditions favourable?  Are the right commercial and legal advisors in place in execute the transaction efficiently and effectively? 

He feels the answer to the question on macro-economic conditions will be driven by factors such as the interest rate environment, market and sector sentiment, consumer sentiment, economic forecasts and the presence of international consolidators which has been a feature of the Irish M&A (Mergers and Acquisitions) scene in recent years. 

When considering if the business is ready to bring to market, Stuart focuses on a number of areas which must be taken into consideration. Non-essential expenditure will need to be assessed as valuations will be based on a multiple of maintainable earnings. The working capital cycle will also need to be properly managed – stock and debtor days in particular. He suggests tying large customers and suppliers who are essential to your business into an LTA (Long Term Agreement) and to consider appropriate executive succession planning. Ensuring the business premises to include plant and machinery is sufficiently invested is also vital. ‘If these areas are under invested the cost of the investment may be deducted from your exit price’ he warns. 

Stuart is very clear when initially advising business owners who have decided to sell: ‘Getting an independent valuation is an essential first step to establish an idea of what an independent third party believes the asset would command on the market. That’s really useful and can help to crystallise people’s thinking. If the valuation report is comprehensive, it will also show where the value drivers and value drainers are’ he says.

The business value drivers he refers to involve a number of different areas. These include 3-year revenue and EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) CAGR (Compound Annual Growth Rate), quality of earnings, recurring revenue, defensible market position and the market growth opportunity. Further value drivers include customer concentration, key person risk, continuity / succession, the macro-economic environment & the cost of capital. 

The business’s existing accountants and legal team will play an important role in getting the business sold but Stuart advises to engage the services of both an expert corporate finance agent and corporate legal firm. He actually refers to not engaging with a specialist law firm as a ‘recipe for disaster’. Speaking to colleagues, business owners and people within your network who have gone through the experience before either on the buying or selling side can offer valuable feedback before selecting an advisor. A corporate finance firm will often recommend a legal practice. ‘We (Fitzgerald Power) keep a panel of commercial lawyers who have worked with and have seen deliver excellent work. The real experience of a vendor or purchaser can’t be beaten in my opinion. The referral of a trusted advisor or contact is the best way in terms of advisor due diligence. Having proper representation is absolutely essential to getting a deal completed efficiently, effectively and in ensuring that legally you’re not left exposed with anything within the share-purchase agreement that could come back to haunt you later on’ he says. 

The legal documentation that Stuart stresses must be fit for purpose before bringing an asset to the market includes paperwork relating to freehold title / leasehold interest, employee contracts & handbooks and key customer & supplier agreements. 

Bringing their business to the market when it’s not ready or it’s in decline s(i.e. too late) are two common mistakes he has found among business owners intending to sell. ‘When I say not ready, I mean the core drivers of value not being in place, sub-standard financial information or not having completed the tidy up exercises in relation to contractual arrangements with key suppliers, customers and employees. Having too much of a concentration risk in one key customer and not having maximised all profit opportunities can also be problematic. Sometimes you see a really good business but the cost base is just too high. You’re trying to convince the market that there’s post-acquisition upside in terms of cost rationalisation. Once you’re explaining you’re losing.’  ‘In an ideal world cost rationalisation happens before an asset is brought to the market. Rushing it and not having all the homework done or coming to the market too late when the business is in decline leads to sub-optimal outcomes’ he notes. 

There’s a number of moving parts involved in arriving at a fair market valuation for a business. Essentially what a potential buyer is purchasing is the right to a future income so it’s based on the maintainable future earnings of the business and is based either on a market valuation approach (i.e. a multiple of earnings based on recent comparable deals) or a DCF (Discounted Cash Flow). 

‘You can do mathematical exercises, a detailed discounted cash flow and build in all these sophisticated assumptions but ultimately what a business is worth is what the market is willing to pay for it’ Stuart believes. 

A potentially difficult aspect of a business sale can occur when one shareholder wishes to sell while another is unsure. The shareholders agreement should govern this with ‘drag and tag’ provisions common in the vast majority of cases. The majority shareholder would have the ability to ‘drag’ along the minority shareholder if they accept a bone fide offer. A ‘Tag’ provision is where the majority shareholder can’t sell without the minority shareholder ‘tagging’ on. Stuart notes that to not see this in a shareholders agreement would be unusual and alarming. ‘There is a possibility that you may end up with tricky disputes, particularly in family situations, a bit like the hit TV series Succession but maybe not as glamorous’ he laughs. 

Stuart believes the time of year a business owner chooses to sell usually won’t affect the price but the Macro environment will. He also stresses that once a transaction drifts into the summer months key decision makers tend to be difficult to reach so the process is in danger of being delayed. Similarly, if a transaction isn’t completed by the second week of December, in his words ‘It won’t get done until the end of January!’. 

If Stuart was to offer just one solitary piece of advice it would be to start planning for the sale of your business as early as possible. ‘If you’re trying to assemble your advisers while getting your financial position maximised including core books and records in the middle of bringing your asset to the market, you’ll really be up against it’ he concludes.

Stuart Fitzgerald is Fitzgerald Power’s Chief Executive Officer and a fellow of Chartered Accountants Ireland. Stuart provides strategic financial advice to enterprises across Ireland and the UK. With a robust corporate finance background, Stuart advises a diverse clientele, including multinational corporations, SMEs and visionary entrepreneurs on their acquisition, disposal and corporate fundraising initiatives.