Preparing a company for sale
Whether the sale is a succession or an exit, a buyer tests the numbers before the price is final. Exit readiness means answering the questions below in advance, from the company's own books.
What does a buyer check?
In the financial due diligence, the buyer's advisers rebuild the earnings and the balance sheet from the books. Five areas carry the price:
- Quality of earnings: adjusted EBITDA, each add-back with its evidence.
- Working capital: the normal level, agreed as the peg, and the closing balance measured against it.
- Net debt: financial debt less cash, and the debt-like items added to it.
- Revenue quality: concentration on the largest clients, retention year on year, the pipeline.
- The data room: the documents behind every figure, numbered and complete.
How far ahead does preparation start?
A quality of earnings review usually reads the last two to three financial years and the months since, month by month. A buyer values the company on the last twelve months and compares each month with the one before.
A month closed cleanly at the time needs no reconstruction later. Accruals booked monthly, a stable chart of accounts and the same conventions every year make the history readable. Preparation that starts two to three years before a sale has that history on record.
What does the seller hold when the process starts?
With CFO Foundry, the work a buyer checks is part of the monthly pack, built from the company's own exports:
- the monthly reports per entity and for the group, every figure traceable to its account
- adjusted EBITDA month by month, each adjustment with its category, rationale and source document
- net working capital against its normal level, from the monthly history
- net debt and the bridge from adjusted EBITDA to equity value, with the open findings that could reduce it
- a data room filed along a sell-side checklist, with a count of what is still missing
The seller reads these figures before the buyer's advisers do.
Where is the price argued after the multiple?
The multiple sets the enterprise value. What the seller receives is the equity value, and four items move it:
- The peg: a closing working capital below the agreed normal level reduces the price by the difference.
- Net debt: financial debt comes off the price and cash is added, on a cash-free, debt-free basis.
- Add-backs: each adjustment to EBITDA is multiplied by the multiple, so each one is tested for evidence and recurrence.
- Debt-like items: accrued bonuses, deferred revenue, provisions or payables stretched beyond their terms may be treated as debt.
Each of these items is calculated from the books. A seller who has calculated them first argues from figures already on record.
Two ways in
- Transaction Readiness Sprint: a fixed scope of six to ten weeks, for a company preparing a sale without a monthly mandate. Adjusted EBITDA, the peg, net debt and the equity bridge are worked out, and the data room is put in order.
- Engagement: a fractional CFO runs CFO Foundry in the company month by month, through five stages up to transaction readiness, so the history a buyer reads is built as it happens.
FAQ
What is exit readiness?
The state in which a company can answer a buyer's financial questions from its own records: earnings adjusted with evidence, working capital and net debt calculated, and the data room complete.
What is a vendor due diligence?
A due diligence the seller commissions before the sale process, so the findings are known and dealt with before the buyer's advisers start. Monthly figures that are already in order give it a prepared base.
How long does it take to prepare a company for sale?
The figures can be put in order in a sprint of six to ten weeks. A clean monthly history takes as long as the months it covers.
What goes into the data room?
The documents a buyer's advisers ask for: the financial statements and trial balances behind each period, the workings for adjusted EBITDA, working capital and net debt, and the contracts, staff and client records. They are numbered along a sell-side checklist, so every question points to a document.
What is a working capital peg?
The normal level of net working capital, agreed in the purchase agreement and usually derived from the last twelve months. If the working capital at closing is below the peg, the price falls by the difference; above it, the price usually rises.
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