Sooner or later, every private equity investment culminates in exit. But a sale doesn’t happen overnight. In fact, it takes about 18 months or more to get a business ready for sale. Like the 100-day plan, the 500-day exit plan offers a detailed, easy-to-use road map that can ensure the divestiture goes smoothly.
One of the benefits of planning early is that firms have time to identify and correct any issues that might turn off a potential buyer. There are, of course, many ways that exits can go wrong, but most problems can be avoided by closely managing the exit process.
The most common reason deals fall through is price misalignment, when a seller thinks the company is worth more than the buyer. While there’s always some back and forth when it comes to price, the two sides shouldn’t be so far apart that a deal can’t be made.
There are three underlying causes of price discrepancies. How can you avoid them? Take a look.
How to avoid it: Create a realistic business plan with credible, proven initiatives.
How to avoid it: Start the exit process early and focus on strategy, value creation opportunities, and potential buyers.
How to avoid it: Build a deep understanding of the relevant industry sector, and integrate it into the vendor due diligence process.
A 500-day plan approaches divestiture from two angles: a top-down review, followed by a value-creation plan for exit. Together, they outline six steps to exit.
Compare the company’s performance with best practices. Look at metrics such as growth, margin, return on capital employed, and more. If the company underperforms that benchmark, then come up with ways to improve the business.
Consider the risks that could trip up a sale. That would include competitive position versus industry trends, sources of competitive advantage, and how macroeconomic exposure could impact the operation. Think about risks and contingency opportunities as well.
Try to think like a buyer, and perform a vendor due diligence. If you were the bidder, what would you find attractive or concerning about the asset? Understand the potential investor’s needs in the exit process, and identify, within your own company, which difficult business units could trigger divestments.
Private equity firms need to identify and prioritize their initiatives. Which parts of the business should be improved upon first? It may be financial metrics, the bottom line, the top line, or any combination of factors. Prioritize these initiatives by impact and ease of implementation.
An exit needs to be guided by a clear, detailed road map that outlines the steps the firm should take to get the business ready for sale. The plan should touch on all key performance indicators. The firm needs to create an enticing equity story that’s in line with the road map.
Start implementing selected initiatives well before the sale. Show the potential buyer that work is being done to continue creating value. However, don’t do everything. Leave some value potential for the prospective buyer.