Businesses being prepared for sale get tidied up carefully. Accounts cleaned, contracts documented, customer concentration addressed, owner dependency reduced, management team strengthened.
Currency exposure is almost never on that list, and it should be — because it affects the one number that determines the price.
How a buyer reads volatile earnings
An acquirer, and more importantly their adviser, values predictability.
Earnings that move for reasons the business controls get analysed. Earnings that move for reasons outside anyone's control get discounted, adjusted, or treated as carrying additional risk — which comes out of the multiple.
If your gross margin has swung three points over three years because of exchange rates, a buyer sees one of two things:
A business with structurally volatile margins, which is worth less; or
A business with a fixable control gap, which is a negotiating point they will use.
Neither helps you. Both are avoidable.
What diligence actually turns up
Financial due diligence on a business with international activity will look at:
Margin variance by period, and what explains it. Unexplained variance invites further questions, and further questions cost time and goodwill.
Whether a hedging policy exists. Its absence is noted. A documented policy, even a conservative one, reads as competent management.
Open positions and derivative contracts. Unhedged exposure is quantified and may feed into a price adjustment or a warranty discussion.
Supplier and customer concentration by currency, which is a dependency buyers care about and sellers rarely think about in those terms.
Pricing architecture. If international price lists were set years ago at a rate nobody has revisited, that's a margin issue a buyer will model forward.
None of this is dramatic. It's the accumulation of small concerns that moves a multiple.
Where sellers lose money specifically
The earnings period. Valuation is typically based on the last twelve months, or a run-rate. If a currency move has compressed margins in exactly that window, you're selling on depressed earnings. Hedging earlier would have protected the number you're being valued on.
The quality-of-earnings adjustment. Advisers normalise for one-off items. Currency gains are frequently stripped out as non-recurring; currency losses are sometimes left in as a cost of doing business. The asymmetry doesn't favour the seller.
Multi-year contracts at stale rates. A buyer modelling forward will apply current rates to contracts priced at historical ones. If your foreign currency contracts are less profitable at today's rates than they were when signed, that shows up in their model, not just yours.
Where the deal itself creates exposure
Separately from how the business is valued, the transaction carries its own currency risk:
Consideration in a foreign currency. If the buyer is overseas and paying in dollars or euros, the sterling value of your proceeds moves between heads of terms and completion — a period of months. On an £8m sale, a 5% move is £400,000, which is a substantial amount of money to leave to chance after years of building a business.
Earn-outs. An earn-out denominated in foreign currency and payable over two or three years is a long-dated exposure on money you've already notionally earned. It's also the most commonly unhedged element of any deal, because the attention moves on at completion.
Escrow and retention. Held in one currency, released later, exposed throughout.
Deferred consideration. Same principle, longer tail.
Our piece on cross-border M&A covers the instruments. The short version: committed amounts suit forwards, probable-but-uncertain amounts suit options, and the exposure begins when the price is fixed in the foreign currency — which is usually at heads of terms, not at signing.
What to do, and when
Two to three years before sale: put a hedging policy in place and operate it. The point isn't only the protection; it's that the earnings you'll be valued on are stable, and the policy itself is evidence of management quality.
Twelve months before: review international pricing against current rates and reprice where contracts allow. Don't take stale pricing into a sale process.
At heads of terms: address the currency of consideration explicitly, and hedge the deal exposure according to how certain completion is.
At completion: hedge the earn-out and any deferred element before the team disperses. Nobody will do it afterwards.
The framing that works with owners
Most business owners think about currency as a cost line. In an exit context it's better understood as a multiple issue.
A business with stable, explained margins and a documented approach to financial risk is a different proposition from one where the finance director shrugs at a three-point margin swing.
The cost of fixing that is small. The effect on a multiple applied to several million pounds of earnings is not.
William Fuller, Co-Founder of Orbis Exchange Group contact on 0203 918 5622
Ben James, Co-Founder of Orbis Exchange Group contact on 0203 918 5621