4 ways private equity firms can prepare for the sell-side M&A process in a downturn

Selling to acquirers remains a difficult exercise in the current economic climate—between the steady march of Federal Reserve rate hikes, rising inflation, and more challenging private credit market, the last few months have been anything but easy. 

It’s also forced several types of businesses—including startups struggling to raise later-stage venture capital, firms looking at M&A as a safer alternative to a SPAC or IPO, and companies long-held by private equity—to reconsider their options. For firms navigating the sell-side process for the first time, this is especially notable.  

Strategic buyers are looking to deploy dry powder are becoming more selective. This creates a potential win-win for the seller if the valuation exceeds that of the prior round of financing—though the final value may be at a lower valuation than the record prices paid earlier this year across the private markets.  Valuation aside, the sell side process can catalyze innovation efforts for the acquiring organization through the addition of key team members and valuable IP.  

What’s more, U.S.-listed companies only raised $4.8 billion through their IPOs in the first half of 2022, a sharp decline from a $155 billion boom in 2021. SPACs, responsible for a number of high-profile exits in 2020, have all but faded. 

Sellers want to ensure there aren’t any valuation surprises during their exit, and they want to drive the narrative around their exit—two variables better controlled for in a private sale rather than the public markets.  

These shifts in market conditions place a higher burden on private equity firms and companies engaging in the sell-side process to prepare their assets for sale in the face of more meticulous buy-side due diligence processes—especially as more buyers use diligence to not just evaluate risk but to also identify value creation opportunities. 

Here are four ways sellers can successfully navigate the complexities of the sell-side process in a market downturn. 

1. Develop a value creation story 

One of the most significant steps companies can take in the sell-side process is crafting a clear value creation story that articulates the company’s value proposition and foundational technology and operations. Here are a few key principles sellers should keep top-of-mind as they develop that narrative:

Be clear about the story you’re trying to tell

Every compelling narrative should have a story arc that leads buyers through the company’s genesis, its current state, and the untapped potential that buyers might realize in the future. Tie every decision made during the company’s growth to intent—i.e., be prepared to articulate why key decision-makers made the complex technical choices they did. Ultimately, your approach should be about transparency as much as it is about storytelling.

Recognize learnings and document processes

Here’s a recent example of this in action: A client with innovative technology we recently helped bring to market experienced a cyberattack during the sell-side process. By articulating the challenge to the buyer and focusing on the immediate steps to address the issue, we were able to send a message that unexpected technological setbacks wouldn’t impact the buyer’s future financial success. They were later acquired by a noted Tier 1 technology company.

Share metrics and communicate the impact of digital investments

Prepare to demonstrate how technological capabilities underpin company-wide operations. Ideally, a potential buyer will perceive your business as a turnkey operation ready to drive value while seeing opportunity for continued success on the horizon.

Highlight positive KPIs that demonstrate improvement over time. In addition, a sell-side report from a neutral third party can provide benefits to both buyer and seller—including faster due diligence and vetted analysis.  

2. Build a realistic roadmap  

Sellers need to be as transparent as possible in the sell-side process to attract prospective buyers. Below are three crucial pillars for building a roadmap that can show prospective buyers where the business has been—and where the acquirer can take it in the future: 

Have a clear and executable roadmap 

Many companies skip this crucial step or fail to effectively articulate roadmaps that they have already developed, bungling deals with abstract plans and unclear direction. When developing a roadmap, sellers need to put time and thought into what their companies’ goals are, define them clearly, and ensure that they are achievable—then translate this into the tactical steps necessary to realize objectives. A track record of past success will always amplify value. 

Consider how data ties to your roadmap 

A good roadmap features budget, resource allocation, and a timeline—and ensures all of those factors are aligned with an overall company vision or strategy. If your company or firm has only thought about the high-level strategy and hasn’t tethered that strategy to data, buyers will struggle to act on the roadmap and fail to have a holistic understanding of the vision. 

Connect investment inputs to the output of every dollar  

Sell-side readiness is about eliminating surprises for sellers and buyers alike. That means having quantified, planned, and budgeted next steps to advance the business before a buyer applies their own estimates of operating and capital expenditure they’ll need going forward. 

3. Prepare for exit 

Companies and private equity firms need to understand the single most stressful factor for an acquirer’s management team: not knowing what they’ll uncover in the buy-side process. Buyers are looking for peace of mind and confidence in an acquisition before anything else. 

Having a sell-side advisory group in your corner can drive financial value for potential buyers and accelerate the exit process. This can also help proactively identify causes of unanticipated purchase price reductions and frame the discussion around both realized and recognized opportunities by contextualizing planned investments with technical and industry insight. 

4. Plan for strategic buyers  

In the event of a recession and a subsequent drop in valuations across various sectors, strategic buyers with strong balance sheets are likely to enter the market hoping to capture synergies through acquisitions. To court them, sellers will have to be calculated in their approach to the dealmaking process. 

Strategic buyers often pay more—with an interest in acquiring innovation, employee headcount, or intellectual property. This means sellers need to align their service/product offerings with strategic buyers’ overall strategy. They also can be more thoughtful and methodical than financial buyers, so sellers will need to lean on their roadmap and value creation story rather than just numbers.  

In this volatile M&A market, dealmakers are more methodical than ever. Gone are the days of colossal bidding wars, particularly now that credit markets and banks are stymieing buyers’ access to easy capital. But by following these four steps, sellers will be able to push for a successful sell-side process, freeing them up to tackle broader market obstacles that impact valuation in a downturn.