Lord Leigh of Hurley, Senior Partner of Cavendish Corporate Finance LLP below discusses for CEO Today, the importance of non-executive directors (NEDs) in the sale of a company.
Non-executive directors (NEDs) are an often underused asset during the sale of a business. While a company’s owners, advisors and senior management team should rightly lead the process, experienced NEDs can provide invaluable insight and support throughout a transaction.
At a time when a business is planning an exit, there is arguably no more important moment when the skills and expertise of the NEDs will be more useful. A business sale is a hugely important event in the life of any entrepreneur or CEO and the advice of objective third parties, who will often have made similar decisions and had experience of similar transactions, is an asset to the management team at every stage of the sales process.
Assess the management team
Having the right management team in place is key when attracting a buyer. NEDs should be able to provide an objective assessment of the management team to ensure the correct people are in place to drive the business forward and convince buyers that the business will meet its strategic goals and deliver on the longer term growth. If weaknesses are identified within the management team, directors’ networks often make them well placed to find the right talent to fill any gaps. Also NEDs can advise if a particular functions, such as the finance role, needs to be strengthened to be able to withstand the due diligence rigors of a sale. Frequently it is the NED who will insist on extra or interim resource being recruited to assist management for the length (typically 6 months or more) of the sale exercise. Management teams consistently underestimate the real cost in terms of time demands and stretch on resources this will take.
Find the right advisor
Selecting the right advisor for a sale exercise is absolutely key and an NED can play a critical part in this. The first job is to identify the criteria sought and see if proposed candidates fit the bill. Questions to be raised include experience; genuine overseas reach; clarity over conflicts; appropriate transaction size “sweet spot”; commitment as to personnel on the transaction; fees, and an assessment of how the personal chemistry will work. it is easy to choose the smooth salesman but is he or she really going to be leading the deal and more importantly are they going to be tough enough when the moment comes to fight your corner?
Offer long term perspective
Management teams can often be focused on the short term, on meeting quarterly targets and so NEDs can help provide a broader, longer term perspective. They can view the transaction in its wider macro context, looking ahead for any potential industry and economic disruptions on the horizon, which might have the potential to undermine business projections and also cast doubt over a potential buyer’s suitability or whether a buyer will be in a strong enough financial position to complete the deal. Equally investment decisions now have to take in to account the effect on the capital value of the business as opposed to the immediate revenue effect
Whereas the management team will be fully immersed in the day to day running of the business and may struggle to maintain objectivity, NEDs will be able to approach the transaction more objectively. There can be delays or tensions in a sales process, disagreements between management teams and the potential buyer and NEDs can help smooth over these differences. The NEDs should be challenging the advisor in respect of the proposed choice of purchasers, the backup lists, and the nature of the approach as well as ensuring full transparency from the advisor which some try and avoid. For example, a full understanding is needed as to why every selected purchaser has decided to reject the opportunity
Advise on process
NEDs with previous M&A experience can give the management team valuable insight into the sales process. They can advise on the pitfalls to look out for, the different approaches buyers can take and give feedback on what to prepare for due diligence. Management teams can often be over ambitious in their projections and NEDs should also use their insight and knowledge to interrogate any sales documentation, question the underlying assumptions and biases of financial reports and forecasts to ensure they are credible and will withstand buyer scrutiny. Most importantly NEDs should be the one party not motivated to push or kill a transaction. Most advisors will have a proportion of their fee on a contingent basis. Others involved with the business will have their own agenda, so NEDs need to be sure they can offer truly independent and unfettered advice as to whether the transaction is right for the owner or if the process should be terminated.
Stand in the buyer’s shoes
During a sale, being able to have some insight into a buyer’s thinking is invaluable. NEDs with buy-side experience will be able to offer this perspective to assist management teams in what can be sensitive discussions and help them to come up with winning negotiating strategies to ensure they secure the best deal possible for the business.
Overall, close engagement throughout the sales process between NEDs advisors and the management team, allows the parties to combine their expertise and experience, ensure that the sale is approached with objectivity and clarity and thereby optimising the value on sale.