Contents
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.
Profitability
Employees
Reliance on owner
Financial forecasting and reporting
Efficiency
Corporate Governance
Timing
Profitability
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:
Capacity
Capability
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.
Employees
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).
Financial Forecasting
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.
Efficiency
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 organise 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
disorganised 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.
Timing
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.” Meg Rosoff
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? Recognising these early and capitalising 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 utilising 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.
Again – “Ask any comedian, chef or tennis player, timing is everything.” Meg Rosoff
A good broker or 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
or another.
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.” Henry Ford
Are you ready to sell? 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.