You’ve spent years building your business with the inevitable sacrifices that brings and now you have one eye on the exit. There’s good news - you won’t be short of potential advisors offering to help for, perhaps, a not-so inconsequential fee; accountants, lawyers, banks and others. But if you are serious about the process and want to maximise your exit value, it’s worth considering the appointment of a non-executive director (NED). Here is why…
Non-executive directors (NEDs) can be a huge asset during the sale of any business. While the owners, management team and external advisors will inevitably lead the process, a highly experienced non-executive director
can provide insight and support. This insight
comes in many forms, but largely, it stems from the benefit of hindsight
a non-executive will have from their participation in previous deals. Anyone who has been through a transaction will know how stressful it can be and having this kind of support will make things a little smoother.
NEDs will also help provide an impartial assessment of the incumbent management team, ensuring the right people are in place to drive the business forward. This is important because the management team will be the ones who must convince buyers that the business will meet its strategic goals and deliver on the longer-term growth they have projected in financial and commercial documents or plans.
From time to time, management teams are incomplete and should a weakness (or gap) be identified, a non-executive’s network can often mean a fast resolution, finding talent to fill any gaps. It is often the NED who will insist on extra, short-term support being recruited, assisting management (typically for 6 months or more) during the sale exercise. Almost all management teams dramatically underestimate the real cost in terms of time demands and stretch on resources this will take. As for the financial cost, this too can be hugely underestimated. Should a deal not progress, there needs to be adequate financial planning to cover the costs.
, founder of Viddyoze
recently walked away from a substantial deal in January 2021 and comments, “As a Board, we decided the deal wasn’t right for us at that time and walked away. For other businesses, with less financial stability, I suspect the £six figure professional advisory and due diligence fees could have easily sent other businesses under. Our NED helped us plan for such an eventuality and as such, we were well prepared.”
Finding the right advisor for the deal
It goes without saying that the selection of the corporate finance advisor will be key to achieving the right outcome. NEDs can play a critical role here, too. Well qualified NEDs will question the advisor’s experience, true reach, appropriate transaction size “sweet spot”, potential conflicts, fees and almost more important than the rest, the personal chemistry between the advisor with the CEO and management team. Too many times, the “smooth salesman” is not the one fighting your corner in the heat of a transaction!
NEDs think long term
Management teams will inevitably focus on the shorter-term aspects of the business; meeting financial objectives on weekly, monthly or quarterly timeframes. Non-executive directors will counter decisions that spring from this short-termism by offering long term perspectives. Viewing a deal in its wider macro context, allows the NED to identify potential impacting factors which may undermine business projections.
NEDs approach the impending transaction objectively and allow the management team to focus on achieving the day-to-day objectives. In most transactions, there will also be disagreements between sellers and potential buyers; NEDs help to overcome these differences, whilst challenging advisors on the choice of purchasers, backups and ensuring full transparency to help the seller gain a proper understanding on why selected purchasers decided to reject the opportunity. Believe it or not, advisors often shy away from relaying awkward feedback!
The value of NEDs with M&A experience
Appointing a non-executive director who brings previous M&A experience to the table can offer management a valuable insight into the whole process of selling a business. Identification of as well as awareness of different approaches buyers take can also be very valuable. M&A experienced NEDs are able to use their benefit of hindsight to interrogate and question assumptions and the inevitable bias of financial reports/forecasts (by management teams) to ensure credibility. Management teams are often over ambitious in their assumptions and financial projections; an experienced NED will take time to make sure the information passed to advisors withstands buyer scrutiny.
Most advisors will set a proportion of their fee contingently and others involved in the process have their own agenda. With this in mind and despite the fact a NED may also be financially benefiting from the successful conclusion of a transaction, NEDs need to be sure they offer unfettered advice. If the transaction is not right for the seller, the deal should be aborted.
, a non-executive director and founder of Reach Commercial Finance says, “Our clients and contacts have seen huge upsides to engaging non-executives to lead them into periods of business grooming and ultimately exits.”
A foot in both camps
Non-executives who have buy-side experience will be able to offer advice to management teams that mean they can formulate and implement a successful negotiating strategy
To summarise, NEDs can be a vital asset in the process of selling a business. Along with advisors and the management team, they will work tirelessly to allow the individual parties to combine their expertise, ensuring that the sale is optimised and the true value is achieved for the seller.