Make Sustainability Central to M&A
Tom Otley, Director at Oury Clark, highlights the benefits of ESG due diligence when preparing to sell a business.
When planning to sell a business, it’s natural to focus on the most immediate priorities. These might include ensuring that financial records are accurate and up to date, consolidating key contracts with suppliers and customers, and securing a realistic valuation that reflects the true worth of the business. These aspects are undeniably critical and form the backbone of any successful sale. However, one crucial area that is often overlooked, especially in the early stages of preparation, is ESG considerations.
Why ESG due diligence matters
ESG factors are becoming an integral part of the due diligence process for potential buyers, and their importance cannot be understated. Buyers are no longer solely concerned with a company’s financial health; they also want to understand how a business manages its environmental impact, treats its workforce and community, and governs itself. These factors can significantly influence a buyer’s perception of risk, value, and long-term potential. Let’s break down some of the most important advantages of ESG due diligence:
Reducing risks – Much like ensuring there are no surprises when selling a house, tackling ESG risks in advance is wise. Early identification and management of environmental liabilities, governance concerns, or social issues can prevent unwelcome obstacles during negotiations, saving time and effort.
Boosting value – Strong ESG performance can increase your business’s valuation. Many investors, including private equity firms, now consider ESG compliance essential. Demonstrating progress in this area makes your business more attractive to prospective buyers.
Staying ahead of regulations – Even if you’re compliant with today’s regulations, buyers will assess your readiness for future standards. They’re looking for businesses that won’t require major adjustments to align with tightening and ever-changing regulatory frameworks.
Standing out in the market – Buyers are drawn to businesses with unique selling points, and ESG credentials are increasingly part of that mix. Sustainability is becoming a key factor in what sets one business apart from another, aligning with the values of new investors.
Improving operational efficiency – Businesses with a strong focus on ESG often benefit from enhanced efficiencies. Measures such as energy-saving initiatives and streamlined governance processes contribute to cost savings and demonstrate a well-run organisation.
Building trust with stakeholders – Buyers value businesses that foster trust among stakeholders, from employees to customers and local communities. A solid ESG record can enhance your reputation and make your company more appealing to investors.
Steps to prepare for ESG due diligence
Whether you rely on internal expertise or engage an external consultant, these steps will help you prepare effectively:
Identify key ESG issues – Focus on the areas most relevant to your industry. For instance, while environmental impact is critical for manufacturers, an IT business might prioritise social aspects such as employee retention.
Assess the impact on your business – Evaluate how ESG factors influence your operations and profitability. A clear understanding of material issues allows you to prioritise actions effectively.
Conduct a baseline audit – Perform an honest assessment of your current ESG standing. This might involve an internal audit of policies and practices or enlisting a consultant for an independent review.
Develop an ESG strategy – Create a plan that addresses any gaps and aligns with your business goals. Include measurable targets, timelines, and a commitment to integrating ESG into your broader strategy.
Take action – Start implementing your ESG plan. Buyers will value evidence of progress. Even if you haven’t achieved all your goals, demonstrating intent and a clear roadmap shows commitment.
Engage with stakeholders – Communicate your ESG initiatives to stakeholders, including customers, suppliers, and investors. Building partnerships and highlighting your progress will strengthen your reputation.
Benchmark your performance
While some businesses can manage ESG preparations in-house, external consultants often bring valuable insights. They can benchmark your performance against industry standards, identify risks and opportunities you may have missed, and provide an independent view of your ESG health.
Consultants can also assist with reporting and communications, as well as helping you present your ESG credentials in a compelling way. For businesses seeking more expertise, they can offer training for senior leaders and support the integration of ESG into company culture.
More than a checklist
Preparing for ESG due diligence well in advance of selling your business can make a substantial difference. By proactively addressing ESG-related matters, you position yourself as forward-thinking and responsible. This not only helps to attract a wider pool of buyers but also reduces the likelihood of unexpected issues arising during negotiations. ESG credentials are no longer a ‘nice-to-have’; they are increasingly becoming a prerequisite for investors, particularly as they often operate within strict ESG frameworks.
Preparing your business for sale is all about showcasing its strengths while minimising risks. By prioritising ESG due diligence, you not only meet growing buyer expectations but also position your business as future-ready. The effort you invest now could pay dividends when it matters most.
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