Sponsored Content: Getting ‘Sale Ready’ – Laying Groundwork Early Pays Big Dividends

By KPMG Deal Advisory

In today’s tough energy market, squeezing out every drop of operational performance is critical to secure the most value from a deal

As recovery in the energy sector remains uncertain amid lacklustre oil and gas prices and lack of consensus about the mid to long-term outlook, increased industry consolidation appears likely. To garner the best return in what has become a buyer’s market, companies need to distinguish themselves from the crowd by getting ‘sale ready.’ Properly preparing and optimizing performance in the lead-up to the transaction can help companies secure the most value from a deal. Given the pressures on time leading up to a transaction, management teams often seek external support to quickly ratchet up performance and present the company in the best way possible.

Ideally, planning should start early. For owner-managed businesses, management succession planning should begin as early as four to five years in advance of the transaction. However in the current market, companies often only have a year or less to think about how to plan for a sale. For an experienced advisor, a year is usually more than enough time to identify and implement improvement opportunities.

Why care about improving operational performance if you’re going to sell?

Attracting the right buyer group

Aaron Collier is a senior manager in KPMG in Canada’s Transaction Services. His experience is specifically focused on value creation – improving deal value through operational improvement initiatives. Collier explains that improving profitability not only demonstrates to buyers that they are getting a good value business, but also helps attract a more desirable buyer group. 

A business that has shown improvement in operating performance and can show credible future upside is more likely to attract growth investors. Conversely, businesses with flat or declining profitability are more likely to attract turnaround investors looking for businesses at discounted valuations.

From the field

"It is never too late to start thinking about improving operational processes," shares Collier. KPMG recently worked with a business in Western Canada with $60 million in revenue to achieve tangible results in just a few months. The focus on improving operational processes helped reduce run-rate costs by over $4 million, supporting bid values that were $20 million more than what otherwise would have been possible.

The power of the multiplier effect

In transactions, companies are often valued based on a multiple of profitability, where earnings before interest, tax, depreciation and amortization (EBITDA) is used as a proxy.

The effect of the EBITDA multiplier can turn somewhat modest improvements in operational efficiency into big increases in transaction value. Consider an oil and gas service company with $50 million in revenue and $5 million in EBITDA. Valuing the business based on a four-times multiple of EBITDA, a typical valuation measure, would value the company at $20 million.

A $2 million improvement in operating costs, which may only be about five per cent of the impactable cost base of the company, would improve EBITDA 40 per cent to $7 million. At the four-times multiple of EBITDA, that would lift the sale value to $28 million, an increase of about $8 million.

“By focusing on operational improvement prior to a sale of business, you are getting four-times return instantly to the purchase price, rather than collecting the savings over a four-year period,” said Collier.

 Key tips on getting ‘sale ready’

Be prepared

Many small and medium sized enterprises in particular do not have the skill set to undertake a sale process. This is where KPMG professionals may be able to help.

“Being prepared has always been important when you go to market and initiate your sales process. That preparation has become more complicated in light of dynamics in the service sector; most likely recent historical 12 month results are undervaluing company performance. We are helping sellers highlight the latest trends, or delineating results between asset categories to show the real and often better performance of the business,” said Alex Henderson, Partner in Transaction Services at KPMG.

In addition to guiding the sales process along, advisors have access to skilled data scientists and experience in the creation of increasingly detailed data books that have come to be expected in the sector.

Be able to tell a clear story

A financial baseline is an effective tool for establishing a starting point for financial performance. A baseline view of current financial performance, usually consists of a 12-month view on past results. Having a solid starting point is critical to being able to explain a clear and logical operational improvement journey to potential buyers.

Almost any energy services deal or company for sale currently has a mix of legacy issues offset with positives from very recent upticks in active and operational changes that may not yet be reflected in financial results.

“We help sellers identify and properly quantify issues, whilst also finding upsides up front. This provides bidders and bank financiers with the support, underlying trends, and documentation necessary to understand the company’s story,” said Henderson.

Know your buyer

When deciding on which areas of your business to go searching for value, consider the likely buyers of your business and what they care about most.

“Financial buyers like private equity funds evaluate a business on the basis of the standalone profitability it can generate, and in these cases the company’s EBITDA or profitability potential is the single most important factor. A strategic buyer such as a competitor will consider your business’s EBITDA as well as the potential growth and synergy opportunities through the additional revenue and customers,” said Collier.

Keep it simple: costs over revenues

Cost improvements are generally viewed by buyers as being more sustainable and long-lasting than increases in revenue. While it is important not to rule out revenue as a source of value, cost improvements should be the primary focus.

When searching for areas to improve costs, look at things that can reasonably and economically be changed. For example, costs that might be incurred under a 10-year lease that would be uneconomic to break should be considered less impactful.

Experience has shown that with an aggressive timeline, savings of five to 15 per cent of the cost base are manageable. Primary areas of cost improvements vary by industry. In the oil and gas service environment, efficiencies can be driven from operations labour utilization, logistics optimization, footprint rationalization and support function efficiency.

Focus on low-complexity opportunities that can be implemented quickly

The best opportunities are those having low complexity where management has the capability and bandwidth to implement them prior to sale. These will garner the best value from prospective buyers. Highly complex changes that cannot be completed before the sale, and may take months or years to implement, will be perceived as risky.

How operational improvement fits into a sale of business timeline

No matter the timelines to sale, a mergers and acquisitions (M&A) advisor should suggest performing an operational review of the business to identify deal upside opportunities. This usually entails a rapid assessment of two to three weeks to perform an initial review of opportunities and understand the ‘size of the prize.’ Further steps to implement those opportunities are usually then taken if the value warrants further exploration.

No matter the timing of when you start, implementing improvement opportunities prior to closing of a sale transaction will garner the greatest value from buyers. Focus should be placed on what can be done prior to sale.

The bottom line

Strategic planning does not cease when a decision is made to sell a company. This final stage is the most important one of all — where maximizing the operational value of the business can pay big dividends.

Engaging an M&A advisor with experience working on both sides of such transactions is one of the most effective ways a company can ensure it receives full value for the sale of a business. These advisors not only have expertise, but provide a new set of eyes that can quantify company strengths and recommend the most effective measures that can be put in place in the timeframe available.

DealCast

For more in-depth discussion of this topic, listen to KPMG’s on-demand DealCast webinar, Maximizing sale proceeds by optimizing performance and getting ‘sale ready'.

kpmg.ca/dealcast

To view more energy services specific content visit

kpmg.ca/energyservices

Alex Henderson
Partner
Transaction Services
Deal Advisory
T: 403-691-8140
E: alexanderhenderson@kpmg.ca

Aaron Collier
Senior Manager
Transaction Services
Deal Advisory
T: 403-648-7130
E: acollier2@kpmg.ca