By Andrew Jones, Andrew JonesCorporate Finance Partner
10 February 2021
Our corporate finance team has seen a significant increase in deal activity over the last six months across all types of deals including divestments, acquisitions, equity and debt capital raisings and IPOs.
With large pools of public and private capital looking for investments as well as cashed up companies looking for strategic acquisitions it is an opportune time to consider a capital raising, divestment or acquisition. Before you consider undertaking a financial deal of some form it is important to ensure that your business is ‘Deal Ready’.
Deal Readiness comprises two components:
- Business Optimisation – financial performance, prospects and position are optimised to maximise value
- Process Readiness – all elements are in place to effectively present value, manage separation / integration and ensure a smooth deal process
Business optimisation – maximising value
Business optimisation involves ensuring that all appropriate steps are taken to maximise the value of the business prior to starting the deal process. This will increase the capacity of the business to raise equity or debt, maximise the proceeds from a sale of the business or increase your business’ share in a merger.
Business optimisation will also enable the business to access a greater number of potential capital providers, acquirers or acquisition targets and often on better terms.
There are three factors that will increase a business’ value:
- Increasing Return On Invested Capital (ROIC)
- Increasing growth
- Lowering the Weighted Average Cost of Capital (WACC)
While growth may seem to be the obvious factor to focus on, not all growth is equal in value. It is important to understand which areas of the business provide the highest ROIC and therefore the best opportunity to maximise value through growth. Growth in an area of the business that has a negative ROIC will actually decrease the value of the business.
PKF Corporate Finance’s Strategic Valuation Advisory methodology helps business owners and leaders to identify the key drivers of ROIC, measure it accurately and determine which areas of the business should be invested in, maintained or rationalised to maximise value.
Minimising the level of working capital required to support the business will have the dual benefit of releasing cash tied up in working capital and increasing ROIC. It is important that working capital is not reduced beyond the levels required to support the business otherwise there will likely be a requirement to increase the investment in working capital in the short to medium term.
A review of the business’ fixed capital structure (equity and debt) will identify opportunities to lower the cost of capital. While this will increase the value of the business it will typically not have as big an impact as increasing ROIC and growth in high value areas of the business. Larger gains in value from lowering the cost of capital should be achievable once opportunities from increasing ROIC and growth have been maximised.
Process Readiness – ensure a smooth deal process
Taking the time to ensure that the business is ready to commence the deal process will minimise disruption to the business and assist in achieving the optimum terms for the deal.
There are a large number of factors to consider which an experienced financial advisor can guide you through. Some of the key factors to consider are:
- Financials – preparation of suitable historical and forecast financial information to potential investors, financiers or acquirers, including appropriate supporting information. This should include consideration of appropriate normalisation adjustments to historical financial performance to remove the impact on non-recurring and/or non-business related items as well as pro forma adjustments to present the business on a basis consistent with the expected structure of the business post deal (where appropriate)
- Valuation & Benchmarking – Understanding the value of your business as compared to peers
- Synergies – Identification and analysis of potential synergies arising from the deal
- Separation and integration – Analysis of the nature and extent of separation and integration issues and development of separation / integration plans
- People – Key employees secured and incentivised with respect to ongoing financial performance, managing deal confidentiality, no key employee gaps
- Business infrastructure – Systems, facilities, plant and equipment all secured and suitable for the business and its growth plans
- Legal – Resolution or mitigation of legal claims, change of ownership issues identified, appropriate protection of intellectual property, contractual arrangements in place (as appropriate for all key commercial relationships)
- Pre-deal Due Diligence - Highlight deal specific risks from an investors point of view, and execute mitigating strategies
- Supporting analysis and material – Preparation of a data book or financial model, vendor due diligence (financial and/or legal), population of a virtual dataroom
- Advisors – Experienced financial and legal advisors appointed
- Wealth planning – Implement comprehensive financial planning strategies to build generational wealth from the sale proceeds
- Tax planning – Reduce tax payment on the business sale and maximise the final payout to shareholders
If you are considering undertaking a capital raising, divestment or acquisition reach out to a member of our Corporate Finance team to discuss how you can become Deal Ready and ensure that you achieve the best possible outcomes for your deal.