Getting ready for exit is a big job and covers every aspect of the business.
To keep focused on exit planning specifically, there are 7 key essential elements to being prepared.
- Reliance on owner
- Financial forecasting and reporting
- Corporate Governance
When a potential buyer looks to acquire another company, their view of profitability may be from a different perspective to the seller. All profits are not equal.
Buyers are generally looking for one or more of 3 things from an acquisition:
- Access to customers
Whichever is their priority changes their view of the business and its risks. If they are looking for capacity and scalability then they need to see that the infrastructure of the business is in place to do that OR be prepared to invest more funds in creating it. The amount of investment required for the future changes their view on the value of the business now.
Evidence of planning for the future always plays well with investors and buyers (and lenders for that matter). It shows awareness within the business of what’s possible and what the business owner has been thinking about. If this adds to evidence of sustainable growth and taking advantage of new opportunities, then value is added to the business. Execution of plans is even better. Plans mean nothing without actions.
Buyers take a look at all aspects of the various relationships your business has with customers, suppliers, competitors etc. Each rank in a different order of importance depending on the lens with which the buyer is viewing the investment they are about to make.
All buyers look at the risks involved. It’s worth using the “Porters’ 5 Forces” model to look at your business risks, strengths, and weaknesses:
- Threat of new market entrants
- Threat of substitutes
- Consumer / customer power
- Supplier power
- Competitive rivalry
Your ability to address these risks appropriately keeps the deal on track through the due diligence process. They are all factors that should be part of your regular strategic review and board meetings. If they aren’t now, then it’s a good time to get them on to the agenda so that future buyers can see you really paid attention to them.
Within an autonomous business, the executive team has the responsibility and authority to make decisions. The best performing teams have the same mindset as an owner, and this is usually supported by appropriate incentives and engagement. The business directors and managers who operate a business as if it were their own make decisions for the long-term value of the business as well as the immediate profitability.
Your succession plan is key to getting the right senior management team in place. See chapter 6 for more insight. Mitigating the reliance on a single or few individuals is a significant component of your succession plan.
Reliance on Owner
One big truth in business, the more the owner works IN the business, the less the business is worth. A business that relies on the owner brings with it inherent risks for the next owner.
A business that is autonomous is a more attractive investment because the next owner won’t need to worry about what happens if the owner disappears on a world cruise or worse (death, disability, disease etc).
Chaotic businesses do not forecast their performance and rarely have a working strategic plan in place. High performing businesses have both and actively set strategic plans which are communicated to their employees and allow their senior management team to make effective decisions.
Business efficiency is all about processes. A process is simply any input that is changed into an output. A system is a set of processes that work together to complete a complex whole.
Systems are not just IT! Information technologies are the tools that can be used to effectively operate and automate routine and repetitive processes. Advances in Artificial Intelligence and Machine Learning are allowing businesses to reduce the impact of the Human Factor (errors or inconsistency caused by varying levels of competence or boredom).
Systems in the context of efficiency refer to processes, procedures, and methods of working that allow a consistent high quality of delivery for repetitive or repeatable tasks or decision-making. Some are automated and once set up can be set in motion following certain triggers. Some are tasks and guidelines for human operation, making sure that each task is designed to give the same outcome regardless of who delivers it.
The benefit of “systems`’ is that you as the business owner can extend your influence and reach by showing others how to do increasingly complex tasks so that you can get on with more complex or higher-level tasks. Building a set of processes and written procedures allows you to scale your business more effectively without reducing quality.
Processes allow teams of specialists to work more effectively together and improve efficiency.
There are three types of process:
- Management processes
- Operational processes
- Support Processes
Each has a different function, and they all work in a hierarchy. Management processes focus on planning and are strategic. For example, if a strategy is agreed to develop a new product, the management process would be the planning to organize how the product will be developed and then the routes and timescale to market.
Operational processes are the tasks and steps required to delivery your core product / service delivery. This will include everything from taking the order, manufacture, or preparation of services though to final delivery and after care.
Support processes are all the activities required to make the other processes as friction free as possible. For example, taking on new staff, making payments to suppliers, making sure IT works etc.
Governance and Compliance
How your business has behaved has an impact on your business value. A past littered with late payments, errors in statutory returns and fines for non-compliance is a sign of a disorganized business. It’s a visible clue as to what is hiding behind the closed doors of the business. Buyers see this as a risk and reduce the price they are willing to pay as a result.
During a sale process you are required to make declarations about the levels of compliance on all aspects of the company from taxes to health and safety. Any potential future liability arising because of past activity is usually covered in the Sale and Purchase Agreement in the form of warranties and indemnities. This can often result in funds being held in escrow or being held back for a period IN ADDITION to a price reduction.
Well run businesses have a board of directors who understand directors’ duties, obligations, and liabilities. As a business grows, it is advisable to have independent director level input either as a non-executive director or independent business advisor who isn’t line managed by the owner (for example) and therefore isn’t afraid to ask difficult questions.
One of the major factors in business success is TIMING! Changes in the economy, in technology, in social attitudes all influence the outcomes for your business.
Bill Gross gave a TEDx talk on business success factors in 2015. He wanted to find out why so many failed! He wanted to know what influenced success. He did an analysis of 100’s of Start-Ups and was surprised by the outcomes.
He used to think that the IDEA was the key, though he also looked at the TEAM, the BUSINESS MODEL, levels of FUNDING and TIMING. Having looked at 200 companies, he judged that for 42% of all the companies, TIMING was the biggest factor in their success. This was followed by TEAM at 32%. Surprisingly FUNDING was the last factor in the list.
No one can ever be completely certain about timing for the market BUT you can be certain what’s good timing for you, your life, and your family. Getting exit ready means you can leave when you want to without leaving money on the table and your business is easier to sell on better terms. It is never going to be wasted time, effort, or money.
“Ask any comedian, chef or tennis player,
timing is everything.”
It’s a good time to ask questions that an investor asks and be prepared for it. That process alone might uncover hidden value in your business that you are blind to for being too close to it.
Now is the best time to address how you value your intellectual property, for example. What’s your “secret sauce”? Is it the patentable product, licensable service, or your unique processes? Recognizing these early and capitalizing on them by documenting them adds value to your business. Many businesses simply do not pay enough attention to their intellectual property to document it because they think it’s “normal”.
One way to reduce the risks perceived in your business is operating from multiple locations or showing expansion opportunity including unexplored export potential. Having these growth possibilities makes your business attractive to buyers who can exploit them either with more investment or by utilizing their existing position.
Explore the Options
An exit journey is not a single path. It’s more like the choices your satnav gives you when you plan a trip where you’ll be given the fastest route, the simplest route and the route that avoids motorways or toll roads.
Most business owners have a multitude of options available to them when it comes to transfer of ownership. This isn’t clearly understood by most business owners, and it is not explored by some brokers who are not motivated to educate their clients.
“Ask any comedian, chef or tennis player, timing is everything.”
A good broker or M&A advisor makes sure you understand your choices and what alternatives are available to you.
As the combination of options is so varied, I’m going to cover the general principals here but there are resources and further reading later in this book and you can always just give me a call! A 30-minute conversation illuminates what’s possible and gives you more insight than you have now.
What are the options? Here’s a few ideas – it’s not an exhaustive list and I have left out ‘closing the doors’ which is also an exit option:
- Transfer within the family
- Buy-out from other shareholders
- Become employee owned
- Management Buy Out
- Sell to a third party (this has multiple options within it)
- Merge with a competitor or adjacent industry
- Buy another company (which sounds counter intuitive)
- Get a public listing (IPO)
- Sell only part of your ownership
- Get investment from Private Equity or Venture Capital
Each of these options does not exclude any of the others, in fact you may choose a combination of them to get to your final destination.
As a business owner the best time to look at your options is as early as possible. You can explore on paper, the potential outcomes and prepare for the one that best suits you and your business. It may change over time. You may start out thinking you will sell to the highest bidder and then decide that you are going to become an employee-owned company. If you are a family business, the intention may be to pass it on to the next generation. If the next generation are not interested, then you must look at other options and prepare accordingly.
One thing is certain:
100% of business owners leave their business, one way
The only thing up for debate is how ready you are when it happens and how much control you have.
Understand the journey
With so little understanding of the exit process, it is no wonder that business owners get frustrated with the elements of the journey they are about to undertake.
Selling your business is a hard journey, both mentally, emotionally, and physically. If you aren’t prepared it is going to take its toll on you and may end up without a transaction to show for all the effort and anxiety.
You’re going to end up with fees to pay even if the transaction fails. But this is not the only price to pay. The disruption to your business has future impacts too, often in lost revenue, lost staff, and reduced efficiency for a period of time.
In more than one case I have joined a business where the broker is already involved, and the sale process has become stuck. In almost all cases the issue could have been addressed if the business owner had been given a clear idea of the steps in the process and what was needed in terms of preparation. It’s the equivalent of making sure your car is full of petrol for a long trip.
I’m going to summarise the journey here and go into more detail on the individual steps in later chapters. It’s worth knowing the general direction of your journey before delving into the actions you need to take. The headlines of an exit journey are:
- Preparing your business for the exit option you have chosen
- Finding the right advisors
- Writing a brochure explaining your business to a buyer
- Finding a buyer
- Undertaking buyer due diligence (there is also seller due diligence)
- Preparing the transaction documentation
- Negotiating the final details
- The transfer of ownership
- Post transaction requirements and commitments
To get into the right frame of mind you need to start looking at your business through a buyer’s lens. Attracting a buyer is very much like finding customers, you must give them what they are looking for, which means understanding what they are seeking from the acquisition of your business. The first issue is getting your business professionally valued.
“Before everything else, getting ready is the secret to success.”
Are you ready to leave. your business (no matter when it happens)? Click here to contact Christine by email alternatively you can book a call with the Business Mentor of the Year 2020, author and speaker. Who helps business founders get their businesses exit ready so they can enjoy a happier, richer future. She saves them THOUSANDS and increases the value of their businesses by MILLIONS.