Preparing for a dual track sales process

FOR any CFO of a PE-backed business the prospect of entering a dual track sales process can be daunting. This involves simultaneously preparing for both a sale transaction and an IPO, with the sellers deciding which route to take at the last minute depending on which offers the best exit valuation.

The project plan

The project overview for the exercise can be outlined in a variety of ways. The main components are likely to be (1) context around past historical developments (2) potential sales pitches to different constituencies (3) due diligence around past trading, current status and outlook (4) marketing to interested parties (5) completing the sale and (6) transition to new ownership and delivery of plans.

There will be a significant volume of work to be managed. This article covers some of matters the CFO might face en route.

Potential sales pitch factors

Careful early preparation around the key messages in the sales pitch may be one area where the CFO can add significant value to the end result. By understanding what attributes might be most prized by which constituencies the CFO can identify how these can be most effectively emphasised.

It is quite possible that the pitch to institutional investors in an IPO situation might be subtly different to that employed in a straight sale to a new PE investor (or under a trade sale).

Institutional investors may want to look at KPIs used by other listed PLCs in the relevant sector to draw their own conclusions on the business’s track record and whether investing in an IPO at a certain price might represent good value to them. PE or trade investors might however be more focussed around different metrics which they use (or plan to use) for managing the business post sale. Compiling in advance the various KPIs and analyses that different parties may require as part of their decision to invest, and understanding how the story can be presented, could help the achievement of a better valuation for the transaction.

Ideally part of the sale pitch will be demonstrating how the management team has developed the business, possibly via gaining market share or through integrating acquisitions. Having robust evidence to support these achievements, especially in a way which demonstrates any successes can continue to be replicated going forwards, will also be essential.

Verification processes and potential liabilities of the management team

It is worth getting a lawyer to brief the management team early in the process on their potential liabilities under various transaction scenarios and how these can be mitigated.

If a misleading IPO prospectus is issued then the directors could be subject to legal claims. Consequently a detailed verification exercise is conducted on any prospectus to ensure every statement which an investor might rely on can be validated.

In the case of a sale to a third party the management team will be required to give certain warranties and indemnities and will be personally liable if breaches occur. Consequently any unrealistic aspirations cannot form part of any presentation materials as the management team will be unable to grant (or live with) the resultant warranties.

Due diligence processes

For the finance team generally the due diligence typically places a huge workload on the finance function. It can be protracted depending on the business’s normal planning cycles and whether additional analysis is required. At the same time the business needs to be managed on a day to day basis and so extra resources may be required.

An accounting firm will be employed to scrutinise past trading performance and to examine and to perform sensitivity tests around future projections. A vast amount of background information, useful for both the production of a prospectus and for briefing interested third parties (PE and trade), will be compiled and reported on. Commercial (market positioning, competitors etc), environmental, tax and pensions due diligence reports might also be commissioned.

Once the due diligence forecasts are available it should be noted that it is critical to stick to and deliver these numbers as closely as possible up to completion, which could be many months away. In some circumstances the business might subsequently need to produce a budget for the following year which should be realistic and ideally consistent with the due diligenced forecasts. Any drift away from these forecasts is likely to raise questions about how reliable the forecast processes are, and therefore whether these projections can be used as a basis for establishing a value for the deal. Any shortfall in performance is likely to lead to a reduced valuation for the business.

Marketing process

The due diligence has been prepared, the electronic data room has been filled with background documents and the time has arrived to start the sales process by presenting to a list of potential PE and third party investors and potential IPO institutional investors. Many of these parties will have already been warmed up with prior briefings (and probably a high level information memorandum). Different sales pitches and slide presentations will be tailored to the needs of various interested parties, although the core themes are likely to be very similar.

This will represent a particularly intense period for the senior management team as market appetite is assessed and a decision approaches on the preferred deal and counterparties. The CFO will have little time to attend to normal operational concerns given this burden, and there will be a continuous flow of questions post presentations which will need to be answered.

Once the sales process is over the existing management team is still likely to remain in place, but dealing with new shareholders. With that in mind it is essential that realistic expectations of trading post completion are established. The existing PE shareholders may wish to talk up future trading prospects for valuation purposes, but the management team in place will be responsible for delivering them and should not set itself up to fail!

One tricky element which will need to be assessed during this period is the nature and quantum of management incentive schemes which will be put in place going forwards. If the IPO route is pursued a nascent Remuneration Committee will need to agree proposals which are consistent with corporate governance guidance. If a sale to a new PE investor is anticipated then the management team will want to understand the nature of their incentives where terms could be more flexible than those acceptable in a listed PLC environment. In any event there is the potential for conflict between existing shareholders who want to secure the highest sale proceeds and the management team which has a continuing interest. External advisors to the management team are often employed.

In addition other stakeholders will need to be managed during this process, particularly if there is any external press comment. Employees will naturally be interested in developments. Pension Fund Trustees are also likely to need to be consulted as they will be concerned about the future strength of the company’s financial covenant, particularly if a pension deficit exists. Credit insurers will be mindful of any likely change in financial strength, and external coverage is likely to generate interest from customers. Bank loans and other financial arrangements may need to be restructured and debt raised, increasing the workload on the CFO (who may either lead or support such activities depending on circumstances).

Completion

Once a deal is agreed the completion process can nevertheless be complex. There will be a large number of legal documents which need to be checked, and the simple act of ensuring the cash movements at completion arrive in the correct bank accounts can be a major exercise. Advisor fees (normally sizable) will be settled, and naturally the business needs to ensure it retains enough cash and financial flexibility internally to execute its plans going forwards.

New owners

The CFO will probably feel in need of a rest following completion but the respite will be short-lived. New corporate governance arrangements and directors will need to be bedded in and any plan agreed previously implemented. The CFO may feel as if they have just run a marathon, but unfortunately the starting gun has just been fired for the next race!

David Tilston has been CFO of several listed companies and completed the sale of PE-backed Innovia Group