Exit Preparation
Exit preparation is the work done in the twelve to eighteen months before a company sale: audit-ready accounts, a reconcilable three-year history, individually documented earnings adjustments, a complete data room and a factbook. The aim is that buyer due diligence finds nothing that costs purchase price or time.
What is being prepared
A sale process takes six to twelve months. What gets examined, though, is the three years before it. Exit preparation brings those three years into a state that survives a financial due diligence without discounts. The result of that work is called exit readiness – the term for the state; preparation is the road there.
Why early
Whoever starts with the launch of the process can no longer change the numbers, only explain them. Changes in the chart of accounts, in systems or in accounting practice can be reconciled retrospectively, but that takes months. Preparation therefore sensibly begins twelve to eighteen months before the planned start.
The four blocks of work
Quality of numbers. Monthly closes on fixed dates, consistent accruals, reconciled balances, an unbroken history. The test: how long does it take to produce reconciled monthly reporting for the last three years by product, customer and region? Days means the base is there. Weeks means it is not.
Adjustments. Adjusted earnings are the valuation base. Every item – one-off costs, shareholder remuneration above market, discontinued operations, transaction costs – is documented individually. What is not documented gets struck out; how it is calculated is set out under EBITDA normalisation.
Data room. Contracts signed and complete, shareholder resolutions filed, ownership documented. The most common reason for delays in due diligence is not bad numbers but missing documents. Structure and set-up are described under data room.
Dependencies. Customer concentration, key people, supplier ties. A point you raise yourself is a fact. The same point, discovered by the other side, is negotiating leverage.
Factbook and vendor due diligence
Preparation often ends with a financial factbook: the prepared numbers, frequently produced together with an audit firm. In larger processes a vendor due diligence is added. Both speed up the process, because questions are answered in advance, and both expose your own weak points before the buyer does.
What it costs when it is missing
Struck-out adjustments reduce the purchase price directly, because adjusted earnings are what the multiple is applied to. Missing documents extend the exclusivity phase, and every week in it shifts negotiating weight to the buyer. Undiscovered dependencies come back as a price adjustment or an earn-out.
Who does the work
Preparation is additional load on top of day-to-day business and ends with closing. Duration, utilisation and day rates for a mandate covering this situation are set out under Interim CFO for exit preparation; all other situations in the overview.