BASE Check Overview
When is a company ready for a sale? We often discuss this question. To avoid leaving the answer to chance, it is wise to take a systematic approach, as dozens of factors play a role. This consideration led us to develop the Board Advisors Strategic Evaluation (BASE) Check. Following the motto “measure it or forget it!”, BASE aims to answer this central question for many entrepreneurs in a quantified way, providing clear options for action.
To be ready to approach the market for the sale a company has several dimensions:
- The personal, emotional dimension of the owner
- Attractiveness of the company
- Alignment of company valuation and equity story
- Preparation for the transaction
In today’s discussion about M&A experience, I spoke with my colleagues Christoph Löslein and Felix Brokatzky about this, focusing on the following questions.
What does it mean to be ready for a company sale?
Martin: When is a company and/or its owner ready for a company sale? And what does it even mean to be “ready” to sell?
Christoph: The answer to this question is indeed more complex than one might initially think. Essentially, there are several levels: the shareholder level, the company’s attractiveness, organizational readiness, and key valuation questions.
Personal Component
Let’s start right from the beginning, and this concerns a very personal component: can the founders part with their “baby”? Naturally, this is harder when companies are family-owned, perhaps across multiple generations, meaning capital and management are not separated. Decisions should always be made rationally; every economically functioning system is set up this way. But at this point, factors often come into play that have their origin elsewhere—partially hidden forces. If these are not addressed and clarified, then the company cannot be considered “ready to sell.” This applies even more when the number of shareholders increases. Being aligned as a group for a transaction is essential for successful saleability.
Preparation
The other component is preparation for the transaction itself, involving questions such as: Are the data properly prepared and gathered, ideally in the form of a structured data room long before? Is there already a professional company presentation, which not only looks good but also includes essential strategic aspects, both internal and external?
Attractiveness
The sale readiness of a company, to be meaningfully assessed, must be viewed from the perspective of potential buyers. Does the company have everything necessary to be attractive for an acquisition? From our experience, even if a company appears attractive based on client lists, finances, etc., essential elements that truly make it ready for sale may sometimes be missing. The checklist is not short, here are some keywords: Is the management team complete and capable of leading, even if the owners are no longer present? Are there investment backlogs? Is the technology state-of-the-art? Are there central dependencies?
Buyer Perspective
Martin: You mention important aspects. Besides the internal factors, the perspective of potential buyers is also essential. Felix, you have extensive experience dealing with investors. What makes a company attractive from their perspective?
Felix: Investors typically have criteria by which they initially filter offers: these include industry, business model, company size, and profitability. But that’s a bit simplistic. We like to distinguish the following aspects:
- Does the company offer an interesting solution (product) for a relevant problem? And how does it make money with it?
- Is there a sufficient market or outlook for this problem?
- How does the company implement its ideas, i.e., marketing, product, production strategy, adequate team, cost structure?
- And does this fit with the current interests of investors/buyers? This is also subject to certain trends!
Clearly distinguishing these aspects helps present the company to interested parties.
Martin: Indeed. In this context, I like to refer to the “10-page pitch deck.” There is often a temptation to write more. But if you can’t distill it down to just these 10 pages, you’re still too unfocused.
What is an Equity Story?
Christoph: Agreed; brevity is key. After all, attention spans are only a few minutes during the initial assessment. It is also necessary to distinguish between a company presentation for customers and potential buyers. While the product offering and market are, of course, central, these two groups, unsurprisingly, view a company very differently. The so-called equity story is not a product demo that one might present to a potential customer.
Martin: Can the equity story arise from the attractiveness analysis? And what is essential here?
Christoph: As mentioned, the quality of a company’s equity story is central to a successful transaction. Depending on the buyer group, there may be different buying interests, and therefore, there are always various aspects that are particularly significant in an equity story. With few exceptions, revenue growth, high profitability, and free cash flow are always of interest. Other aspects might include:
- Synergies with an existing portfolio company,
- Access to specific reference customers and, thus, potentially new vertical markets,
- Technologies,
- Production capacities, and
- Employees
Felix: Correct, with the ideal buyer in mind, the strengths of the company must be realistically portrayed and aligned with the company strategy. Inconsistencies are harmful. At the same time, certain improvement potentials within the company can even add value for the buyer.
What Role Does Company Valuation Play?
Martin: Readiness for sale and attractiveness play a major role in the disposition, and BASE can transparently determine this. What role does company valuation play?
Christoph: Valuing a company can indeed be complex and depends on many factors, which are also closely linked to the equity story. In fact, the equity story is essentially the representation of valuation factors.
Revenue size, profit, sustainable growth, and the efficiency of capital employed are relatively reliable, decisive value drivers. The previously mentioned aspects, however, can drive additional value or potential for development. Therefore, it is important to consider this when developing the equity story.
Felix: Not insignificant here is the personal aspect: Does the expected company valuation align with the shareholders’ expectations? If there is no consensus on expectations that align with market expectations, it will be difficult, if not impossible, to successfully complete a transaction.
Christoph: Yes, when there’s a mismatch, we have sometimes walked away from a deal.
Preparation for the Transaction
Martin: This brings us directly to the topic of “true readiness,” or preparation. Once we’ve confirmed the company’s attractiveness, have clarity on the equity story, and understand the associated valuation, can we then start preparing for the transaction?
Felix: Professional and comprehensive preparation for the transaction is absolutely essential; we’ve discussed this in previous conversations. Once the buyer market has been approached, you lose at least full control over the timeline. The earlier and better prepared you are with core analyses and documents, data room, company presentation, the smoother the process will go. You should be well-prepared for expected questions.
Christoph: Also, in the M&A process, the first impression is always the most important and difficult to correct. It makes a difference, even on valuation, whether everything appears organized and well-structured—meaning you have a grip on the company—or if it looks a bit chaotic at first glance, which might lead, perhaps falsely, to conclusions about the conditions within the company.
Key Takeaways
Martin: Each of these aspects could warrant its own discussion. Summing it up, what are the essential points?
Christoph: Selling a company is a one-time event. Complete and thorough preparation, as well as realistic valuation, are crucial for success.
Felix: Absolutely. Thorough preparation is critical to a successful transaction. In fact, you can start years in advance and take your time. Allowing yourself to be guided not by your own perspective or that of the customers but by the ideal buyers you have in mind sharpens the equity story and can reveal entirely new values.
Martin: These aspects seem worth delving into further. Let’s explore them in more detail in future conversations. For now, thank you both very much.