Liquidity Event: Just as Painful as Building a Business

Building a business is hard but going liquid could be just as complicated if the buyers are looking to get a proper valuation for their firms. A good management team should be assembled, good governance ought to be implemented, and trusted professionals must be hired to negotiate the deal, writes Tesfaye Hailemichael (, a certified public accountant and author of Love’s Flight. 

There comes a time in a company’s life where significant decisions have to be made.

After a company grows to a certain level, founders usually explore their options and look into liquidity event. This may be achieved by going public in countries where a stock market exists, which is becoming difficult for small and mid-sized companies’ due to the complexity of the Securities & Exchange Commission (SEC) requirements in the case of United States.

In countries such as Ethiopia, the options are to attract a Joint Venture partner or sell it to a larger company. Either option requires adequate preparation to achieve the objective.

Some founders realise that accelerating growth organically may not be adequate to accomplish fast growth – they choose to increase growth by acquiring synergistic companies. It is proven that acquisition could deliver the best growth potential provided that it is executed judiciously. Successful integration ensures the economics of scale as desired provided a focused well thought out plan for integration is realised.

It is imperative that the acquirer investigates all aspects of the target business before signing a Memorandum of Understanding (MoU) or committing to a deal-making process. It is critical that the target management team is professional, honest, have business acumen and ethical conduct. Otherwise, the success of the deal will be in question.

I remember a deal where the firm I worked in decided to acquire a company that it competed with. We approached the company, but they initially resisted our idea. Over time they agreed, and an MoU was signed to start working on due diligence. The company was a private company where the financial statements needed to be re-audited for its past two years.

The audit took more than we anticipated – at the same time we were negotiating the details of the deal which we ultimately signed an agreement subject to closing conditions. During the negotiation, we were able to know the management philosophy, core value and how the company operated. The audit and due diligence, including speaking with target customers, took over six months.

In the middle of our due diligence, the CFO resigned, which was a red flag for us. The company has also missed its sells target for the past two quarters, which made us uncomfortable. Although they missed the two quarters, we were hopeful that the acquisition was worth pursuing with some adjustment to the agreed valuation. But a background check on the management was due, and we wanted to do an extensive one, for which purposes we extended the closing date.

We called a meeting with the management for their target at the beginning of their fourth quarter and asked them if they can deliver the revenue in their plan. Although they missed their numbers for the last two quarters, they appeared comfortable with providing the numbers for the fourth quarter. Unfortunately, they had missed their targets again.

This may seem like a long drawn out and unique process, but it is common, even in large transactions. The process is time-consuming and wrought with inconveniences and second-thoughts.

Business owners need to understand that most buyers are sophisticated. They do their homework by scrutinising the company’s product, market share, management, employees, customer views about the target product and services, financial statements and strategies for the next three to five years.

Thus, owners looking to sell their companies ought to re-organize their company before talking to potential buyers or investors. They need to understand that the value of their company is its management, product, assets, intellectual property, customers list, and goodwill.

An able CEO or CFO, if there is not one already, and the management team should be brought to the fore at least a year before talking to potential buyers. Reputable auditors must audit the books; all intellectual properties must be trademarked, verified and catalogued; board minutes must be compiled and current, and all taxes and government fillings must have been filed on time.

Sellers ought to anticipate a checklist that the buyer provides during the process and pro-actively prepare for such a request. Hiring a consultant or consultants to help management in organising the company for sale and identifying competent attorneys with experience should go without saying. Proper valuation of the company must be done to ensure that the seller has an idea of the value of the company. Such prior preparation will ensure that the seller would receive higher valuation and the sale goes smoothly.

A buyer may not be able to discover all inappropriate actions in the initial stages of the negotiation. However, the seller needs to understand that fudging the numbers is not only unethical, illegal or immoral, but it is also certain that it will be discovered during due diligence. In this instant, the financial consequences could be drastic. At the very least, the buyer will deduct from the retained amount. At the worst, the buyer could sue the seller and the management team for damages, tarnishing the creditability of the latter group.

Buyers are very selective, sophisticated and expect the best from the target company. Ethical conduct, transparency, good governance and implementation of Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and retaining competent people in the organisation are usually demanded. The last element applies especially to Ethiopia where skilled human power is in limited supply.

Being direct in the negotiation process will be an asset not a liability for the sellers. It will not hamper the deal but not telling the truth to a potential acquirer or investor will undoubtedly kill it. Everything needs to be brought to the table, and sellers should not appear to exaggerate. There is no need to do more selling once the buyer is at the table.

It is imperative that the seller must clean its house before talking to potential acquirer or investor by assembling a good management team, implementing good governance, and hiring trusted professionals to negotiate the deal. Greed is not good – better to be realistic about the value of the company. Having books audited by a reputable firm for at least the past three years will go a long way.

The above may not assure the success of a deal, but it gives a high probability of getting a serious offer provided that all the criteria that the acquirer is looking for are fulfilled. Starting and growing a business requires a great deal of work and sacrifice. Preparing a company for liquidity demands just as much sacrifice and energy in order to be successful.


By Tesfaye Hailemichael
Tesfaye Hailemichael (, a certified public accountant and author of Love’s Flight. 

Published on Jun 16,2018 [ Vol 19 ,No 946]



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