In our recent 'Uncomplicating Carve Outs' webinar we discussed key challenges from both sell-side and buy-side perspectives. One area that brings complexity to sellers is realising potential value in the sale from performance improvements not yet delivered.
It's an interesting balance between planning and credibility. While there are measurable results from pre-sale performance improvement intiatives those promised post-sale can seem rather 'jam tomorrow'.
How can sellers address this dilemma and ensure the sale value reflects the full potential of the asset?
- Set out a detailed Performance Improvement Plan: Ultimately the ability to obtain value from those performance improvement opportunities that are yet to be delivered is driven by the credibility of the Performance Improvement Plan (PIP), including the ability of the management team to deliver it.
As part of the deal planning phase, it is critical to ensure that the PIP contains sufficient detail on how management intend to deliver the identified opportunities, in the form of a detailed road map, and that this is clearly communicated to buyers at an early stage. You should expect the road map to form a critical part of buyer’s diligence if the intention is to use it to drive value, so it should be treated with similar status as the management presentation (or indeed included within the management presentation).
- Set buyer expectations by introducing the PIP at an early stage: By taking buyers on the journey upfront, not only are you setting out the key value drivers at an early stage, but you also ensure that buyers are continually thinking about the target in conjunction with the potential improvements to be delivered (rather than viewing them separately as an ‘add on’ to value). Including the impact of the PIP within the business plan figures also gives it greater weight, thus increasing the ability to demand buyers attribute value to them.
- Demonstrate management’s track record: Management’s track record of delivering PIPs in the past (if applicable) is also a key asset in our armoury. Demonstrating that the management team have delivered tangible results historically (particularly if with reference to a detailed PIP) will provide buyers with greater confidence in both the quantum of the available improvements, as well as the timing and certainty of delivery.
- Factor in ‘quick wins’ to process timing: Timing of the PIP in the context of the sale process is critical, as is the phasing of the various levers included within it. Ideally, we would wait until the PIP implementation phase to launch a sale process – value at this stage is significantly more deliverable than a PIP which is still theoretical, particularly if management are on track versus initial PIP targets set.
On a similar note, one should ensure that the ‘low hanging fruit’, or those improvements that are readily available are included in the early stages of the PIP, thus ensuring management’s ability to demonstrate success against the plan to date pre-exit. Not only do these ‘quick wins’ deliver value for those improvements successfully, but it also builds credibility over subsequent actions that are yet to be implemented.
Achieving this balancing act is challenging but, as with all elements of a carve out, preparation is vital. A solid plan and a convincing management team, as well as commitment to speed over elegance, will help convince buyers that there's greater value in the asset and this will be reflected in the price.