Prior to the Great Crash of 2008/9 exits were usually managed through an ‘IM’ (Information Memorandum) process, organized though a corporate finance advisor.
A decision was taken by the shareholders to sell, and the process rolled out systematically from there. The IM, particularly for small to medium-sized enterprises, was used for financial and trade buyers, and whilst the process was handled a little differently according to the buyer type, the foundations started from the IM.
The subsequent years have proved challenging for vendors, even of good quality assets, and whilst the IM still works for financial buyers, it is no longer a sufficient starting point for trade acquirers.
Exits are taking longer to execute; in most cases, much longer. Buyers, who are fearful of making a mistake, are doubling their due diligence efforts, taking much more time to get to know their target and backing away at the sign of any key issue. Greater focus is put on the strategic fit for the purchaser. Trade buyers seem even less willing to find solutions to issues or take a view. Indeed it seems much more difficult than historically to engage with trade buyers.
This makes it even more important for businesses to nurture potential acquirers over a longer period of time. Emphasis must be put on why the company would be a strategic fit for each potential buyer and this message has to be got across, in an almost subliminal way, to an acquirer over a long period of time.
Venture capitalists have always said that they start considering the exit before they make the investment. Now investors must put action to this rhetoric by ‘nurturing’ the potential buyers of their investments for years before they expect an exit to materialize. All stakeholders in a business must try to get into the psyche of the buyers so that they see the strategic importance of the target and, when the time is right, can respond to a formal process, because they can appreciate the value opportunity this target brings.
If this nurturing goes well then a buyer may well make the first move, before a formal process is even started. The IM can then be used to stimulate competition, and an adviser driven process can take place, but the IM should no longer be used as the first introduction to a trade buyer. Forging long term relationships with financial buyers is also becoming more important: as private equity houses become more proactive in seeking scarce deals, they will want to build up a rapport with a company, which may only turn into a deal some years hence.
In summary, with the European IPO market largely closed for exits, sales of businesses will continue to be difficult to achieve and will take longer to conclude. Shareholders must start the process of nurturing buyers much earlier. If businesses do not adapt to this new environment, there is a strong risk that the buyer community will be smaller and that too much value will be left on the table – if an exit occurs at all.