Sealing the Deal: Exit process through the lens of finance

Selling your business is a goal for many founders. Selling can mean massive growth, great exposure or the freedom to pursue your next project.

Securing the right offer

An offer can emerge from different avenues. It might come from an acquisitive customer who sees strategic synergy, a fundraising conversation that pivots toward acquisition, or a formal decision to list the business for sale. Whatever the source, this early stage is crucial for setting the tone and direction of the sale process. To make the most of it, it's essential to understand the buyer's underlying motivations and strategic needs.

Key Questions to Guide Your Early Evaluation

Consider these foundational questions to gauge the buyer’s interest and refine your approach:

1. What unique value does our business bring to the buyer?
   Think about what the buyer doesn’t already have but seeks in your offering. For instance, are they after market access, complementary technology, or customer segments you serve well? Defining this will help you position the business more compellingly.

2. Why now? What’s driving their urgency?
   Timing often reveals the buyer’s immediate goals. Are they expanding their AI capabilities, seeking to consolidate market share, or building out a competitive advantage? Also, consider how acquiring your company might impact their own valuation, as many acquirers seek transactions that amplify their own worth.

3. What aspects of the business do they value most?
   Understand which performance metrics or business qualities resonate most with the buyer. Sophisticated acquirers may prioritize metrics like strong churn rates, ARR growth, product innovation, market potential, or an exceptional product roadmap. Pinpointing their focus early on can help you align your business narrative to emphasize these attributes.

4. Are they interested in the team or simply the product?
   Assessing whether the buyer wants to integrate the product into their existing portfolio or values your team’s expertise is critical. If the buyer seeks the team’s know-how and innovation, this can become a valuable negotiating point, particularly in structuring deal terms related to retention or consulting agreements.

Strengthening Your Negotiation Position

Arming yourself with this understanding helps you anticipate the basis of the buyer’s valuation, as it is unlikely they will disclose it explicitly. When you know their motivations, you can better influence the offer’s structure, highlight key performance areas, and focus on the aspects they value most to maximise the offer.

Case Study Insight: Timing and Competitive Advantage

In a recent case, timing proved crucial. The product was ahead of industry standards, and the buyer needed a competitive edge. By identifying this early, my client could highlight how their unique innovations made customers more engaged, increasing ARR and customer retention.

• Metrics that Sealed the Deal: By focusing on generative AI’s role in the platform’s growth and engagement metrics, we could show how this addition had bolstered ARR and reduced churn. We underscored the product's impact on customer engagement, ultimately showcasing a competitive advantage the buyer couldn't ignore.

• Value in Key Personnel: This assessment also revealed how essential our team’s expertise was to the buyer’s strategy, allowing us to negotiate confidently on staffing terms. By understanding their interest in retaining key personnel, we could structure a deal that met their needs and maximised value for my client.

Negotiation has several components, it’s not all about agreeing a top line price. Details are important as is efficiency in negotiation. Knowing what needs to be agreed and when is at the heart of a successful deal. So what are the key considerations?

Timing

Think about what needs to be known now to make you happy with the deal, Remember that if they are interested, there is real value in your business. Questions to ask yourself are:

1. How will the consideration be paid, to what extent is it payable in the future and exactly what are the terms of that payout?

2. When will the deal complete? Are you targeting a specific date, if so how does this impact your negotiation position? Not revealing too much information on this point can give you a lot of strength down the road. If the buyer wants a quick deal, ask yourself why and whether you can facilitate that

Key terms

1. Price: The key term above all else. This will very often be based on your current metrics but also a view of future performance. Having a robust financial projection is key to ensure a competitive price. This projection should be detailed and defensible. Examine closely how you can demonstrate strong future growth.

2. Future consideration. If there will be future consideration then, know what it is based on, who has rights to receive it and when.

3. High level items to take you to a final equity value. See below.

4. Employee packages. Current terms should be bettered where possible, what’s possible in the scope of the buyers structures?

5. Management incentives. Will there be any management incentives payable on completion. The sale process is very intensive, how can you incentivise key personal to get it done.

All of these questions should be asked with a commercial mindset. Understand the key details but also know that nothing is binding until the deal is signed, exclusivity does not mean a deal so ensure you don’t put off the buyer with excessive detail or demands. This time is all about high level core deal points such as headline price, earn out terms, roll over requirements (if you will stay with the business), high level salary and team expectations.

The EV to Equity Bridge

Depending on the structure and financial position of your business the EV to equity position can have a material impact on the final deal value. Debt in the business, the cash position, tax considerations, uncertain liabilities and working capital are all critical. Whilst methodology is standard, an early understanding of key definitions like normalised working capital, the intention to use locked-box or completion accounts and a view of receivables and payables now in the future should all be thought about early.

Case Study Insight: Agree key terms early and reiterate them

In a recent transaction, early agreement on essential terms proved crucial. Sophisticated buyers often present appealing projections and valuations but may exclude or gloss over elements that impact the final deal value. By pressing for clarity on items like the EV to equity bridge, future consideration, and employee incentive structures, we secured significant material value for the client.

The diligence process can be long and expensive but it doesn’t need to be. All parts of the diligence process are equally important as one failed area of diligence jeopardises the deal, whether its legal, tech, tax, finance or operations following the principles below helps you get ahead and complete the deal without taking excessive resource from your key focus, growing the business.

1. Get organised

   Diligence requires you to retrieve a lot of information on an array of topics. Get ahead by unifying your records. Get all of your financial data together across at least 3 years. Have it ready to share and in one place.

2. Operate simply

   Complex loans, excessive external parties, complex shareholder structures or messy financial records can significantly damage your chances or a successful deal. They will all become discussion and negotiation points. When making business or financial decisions, think how an external person would view it. Just because something happens in the past does not mean it won’t be a problem in the future.

3. Act on points you discover right away.

   You will discover things about the business you didn’t fully understand, it’s a part of growing a business, things happen fast. 9 times out of 10 these can be resolved as soon as they are discovered. Finding an issue and fixing it is always better than someone else finding it.

4. Disclose and discuss openly

   Diligence can feel like a drag and that you’re just ticking boxes but its not. Sound DD can help strengthen your negotiation position as it shows you are open and organised. If there is uncertainty, disclose it or discuss it with an expert. Legal professionals, financial advisors and other technical experts have probably seen your issues before and can help. Moreover providing more information early means you don’t enter a loop of follow up queries that slow or threaten your timeline.

Case Study Insight: Prepare early and be sure

The diligence process can be somewhat of a tick-box exercise if you have your ducks in a row. If you don’t, it can reveal facts you didn’t even know about. In this recent case, we performed a full systems reconciliation as soon as deal discussions began. This encompassed everything from subscription software to the ledger, taxes, pensions, and cash flow projections. Having all of this information documented and presented meant a vast majority of the deal process was a straightforward exercise of manipulating data to answer questions. It was conducted confidently and without doubt; the buyer clearly recognised this, even stating it was one of the smoothest diligence processes they have ever seen. Don’t wait until you want to sell the business; start today.

A note on warranties

Warranties are a necessary evil. Know exactly what is industry standard on % exposure and time period. Ultimately warranties, whilst a key legal area will only concern you if you don’t run a good diligence process and a clean business.

Light at the end of the tunnel. Only a few more steps. Here’s a few things to be mindful of.

1. Funds Disbursement and Payment Structure

For a successful close, it’s vital to secure an efficient mechanism for the disbursement of funds. Engaging in early discussions about this with the buyer and involving your financial and legal advisors ensures a smooth process and mitigates potential financial roadblocks.

• Upfront vs. Deferred Payments: Determine the breakdown between immediate cash payments and any deferred payments, such as earn-outs or contingent consideration. Deferred payments should be structured to minimize risk—evaluate earn-out metrics to confirm they’re achievable and realistically tied to business performance.

• Escrow Arrangements: For smaller SaaS deals, buyers often require an escrow to cover potential post-close liabilities. Analyze the percentage held in escrow and the release terms, as this will impact cash flow post-close. A well-negotiated escrow can reduce your client’s cash exposure while ensuring buyer confidence.

• Shareholder Distributions: With multiple shareholders, establish a clear payment distribution structure. If you have a complex cap table—such as with early investors or crowd funders—ensure all shareholders are aligned on the distribution process to avoid delays.

Advisor Insight: For international shareholders, ensure that currency exchange considerations, tax withholdings, and compliance requirements are addressed early. Cross-border distributions can introduce complexities that, if planned in advance, can prevent cash flow issues and tax inefficiencies

2. Pre-closing approvals and permissions

Do you have the required permissions for the deal? Do not wait until the last minute to secure these. If you fundraised via crowd platform, or have a complex cap-table, ensure you have sufficient signatures or power of attorney in place.

3. Tax Optimisation: Structuring for Maximum After-Tax Proceeds

The tax treatment of sale proceeds is one of the most material aspects of any M&A transaction. For small-scale SaaS companies, strategic tax planning can significantly impact the net proceeds founders ultimately receive.

• Capital Gains vs. Ordinary Income: Aim for a deal structure that maximises capital gains treatment, as this typically results in a lower tax rate than ordinary income. Pay special attention to any deferred consideration or earn-out structures, as these can sometimes be classified as income if not carefully planned.

• Timing of Tax Liability: Consider how and when tax liabilities will be triggered. An immediate lump-sum payout versus phased or deferred payments may affect your annual tax liabilities, so structure payments in a way that avoids pushing them into higher tax brackets.

• Founder Reliefs and Tax Schemes: If applicable, explore founder-specific tax schemes (e.g., Entrepreneurs’ Relief in the UK) that might reduce tax rates on the sale. Ensure the deal structure supports eligibility for these schemes, as well as any relevant tax benefits related to employment income vs. shareholder income.Case Study Insight: Consider tax throughout the deal

Tax is a highly material, highly sensitive and complex area that is constantly changing. In this case, a very clear understanding of the legislation informed what parts of the deal carry the most value. For example, whilst a deferred payout might seem appealing, consideration had to be given to whether founders are receiving this as a future employee or as a shareholder, the tax impact is very different.

All that’s left to say is good luck, deals are complex, but a considered approach and clean business structures mean they don’t always need to be. Think timing, be organised, set priorities and be commercial and you will get the outcome you want.

If you would like to discuss an exit or any other work book a session with me.