A recent article in Business Insider says that in a survey of more than 150 M&A professionals, 97% say ESG reporting matters when considering a deal. So, if you are wanting to exit your business in the next 5 years, and you want to maximize the value and ensure a successful strategic sale, then you’d better have ESG embedded into the DNA of your organization. This shift from ESG being the biggest non-financial factor for private equity investment, to becoming a big deal in the M&A world, isn’t surprising, but it is a trend some of my M&A friends doubted would come anytime soon. I guess the data says they were wrong.
The data also shows this is a great time to be preparing for a strategic sale, which I hope my boomer friends in the industrial services sector are taking note of. Companies are looking to diversify revenue, buying across borders and the deal volumes and valuations (when companies hit all the strategic boxes including ESG) are at record levels and expected to peak even higher in 2022 and beyond. 87% of deal makers said ESG is a big consideration, especially with bigger buyers and bigger deals. It also says that large private equity firms know their targets may not have very mature ESG programs compared to larger organizations, but having ESG makes them attractive from the perspective of their ability to attract talent, retain clients and have a positive brand with the public that may actively support their growth.
Another trend identified is big companies adding M&A teams to their organizations to be more strategic and to focus on acquisitions as a primary strategy for growth. Meaning the best deals may be coming from major players in your industry who are doubling down on buying ESG conscious businesses to fuel their growth especially from a talent acquisition perspective.
Other trends identified driving acquisitions; the need to de-risk supply chains, so vertical integration and extending alternate supply channels is motivating more deals; and Covid is seen to be moving to the endemic phase, so later in 2022, the disruptions from it are seen as being less of a factor.
All in all if you want to sell your business for a strategic premium in the next 2-3 years, then understanding these “buyer” considerations and recognizing it takes time to ESG transform your business means you’d better be accelerating your exit planning and execution to capitalize on this trend.
Interestingly, ESG may not be as big a transformation as you’d think. My experience is that most of the small-medium business (SMB) owners I know looking to sell, run their businesses, very consciously. They care about and look after all of their stakeholders; their employees, their customers, their suppliers, their communities, the environment, operating with integrity and
high ethical standards. This is proven by the fact they typically pay themselves last after they’ve taken care of everyone else. Ironically, they are living the ESG conscious values, but don’t “brag” about it, so they aren’t seeing the full benefits. Getting the ESG story out and public is going to be crucial, so they need to reframe their perspective from “bragging”, to being a role model and challenging other businesses to match their high ESG standards. It is when their stakeholders sing their praises, with them telling their ESG story, they will define an ESG brand and image much better than a company can for itself. Which is how they can get great ESG scores that ma
ke them much more attractive and bump up the sale value.
Lastly, disruption is the new normal, we are living on an ocean of change, we can’t control the waves, but we can learn to surf. Proving the organization’s ability to surf; seeing the ESG waves coming and adapting quickly, is the kind of resilience buyers are looking for to de-risk their deals.
If these ESG ideas aren’t a part of your exit planning & execution, then make it so, or you may find it hard to attract buyers, customers, employees, partners and ultimately ensure a successful exit. This is your call to action to build ESG value in your business well before you start negotiating a deal in order to maximize your options, the value of your sale and have the legacy you truly want.