How To Easily Get Exit Ready

How easy would it be for you to just handover the keys to your business and walk away with your proceeds?  

Being exit ready is about how dependent the business is on the owner.  There are other factors such as financial and corporate governance, product / intellectual property, and the business model.  

Separating the 3 roles that a business owner takes on is essential for getting exit ready.  The 3 roles are Shareholder, Director, and Employee.  When these roles are blended and bundled together it’s difficult for anyone to know which role the business owner is performing at any one time.  

Here’s a quick summary:

  • Shareholder – you OWN the business, you don’t control the day to day, you set the strategic direction and the expectation of the return on your capital.  There are very separate liabilities, responsibilities, rights, and duties.
  • Directors – you CONTROL the business, implementing the strategy to give the shareholders their return while also looking after all the stakeholders such as employees, creditors, and legal requirements (health and safety, compliance etc).  There are extensive legal liabilities, responsibilities, and duties.
  • Employees – a fair day’s pay for a fair day’s’ work.  Most business owners are in a job.  It’s essential to recognize this job role also has responsibilities and should be treated as any other employee is in this role.

Get clear on role separation BEFORE thinking about selling and you will save thousands£’000 and a lot of time.

“Begin with the end in mind.”
    Stephen Covey

Credit worthiness

Many acquirers look to finance the purchase of your business in some way.  YOUR BUSINESS creditworthiness has an impact on their ability to raise finance.  

If you are raising finance, your creditworthiness influences how much it costs you in interest.  

The balance of debt in your business compared to the share capital and reserves is a key measure used in banking assessments of credit worthiness, especially when seeking additional or extensions of existing debt facilities.  How easily can your business repay the loan capital and interest from available cash flow?  How long does it take to pay the debt back?  And what happens to the debt if you were to close the business?  These are all questions that anyone looking at your business wants to be able to answer with certainty. 

Start An Action Plan

“Words may inspire but only action creates change.”
Simon Sinek

What Gets Measured…….

If you understand how your business is valued, you can start to measure these metrics and build long term, capital value as well as your operational profits – and be able to balance the two in your decision-making.

EBITDA is commonly used as a base value that is applied to a business looking to sell. Value is EBITDA times a “multiple”, which depends on your industry and business model and a number of other factors. It’s a very blunt instrument to measure the economic value of your business. It is not, by any means the only method of valuing your business .  

(note: EBITDA = Earnings Before Interest, Tax, Depreciation & and Amortization).

Earnings are your net profit before you’ve charged the cost of borrowing. Depreciation and amortization are simply the spreading of the economic value of the purchase of fixed assets. Depreciation being implied economic cost of tangible fixed assets, such as machinery and cars in a financial year. 

Amortization is the spreading of the economic value of intangible assets, for example, goodwill, intellectual property, or patents, for example.  There are specific accounting rules for intangible assets which you should discuss with your accountant.

Measuring non-financial metrics is uncommon in most small and medium size businesses.  I’ve seen multi-million turnover businesses with a very poor grip on basic financial reporting let alone anything non-financial.  It doesn’t have to be complicated.  Nor does it have to be a full suite of real time data put in place overnight.  Start with some simple metrics first and build up your business dashboards.  

The more relevant the data, the more likely it is tracked, especially if it’s a measure of performance that is linked to the financial rewards of your team.  Deciding what to measure in your business, and why, is a challenge.  If you want to brainstorm effective performance indicators, this is a good exercise to get your employees involved in.

Where to start

Once you have valued your business and diagnosed where the strengths and weaknesses in your business lay, you know where help and intervention can be quickly focused.  You discover where the biggest impact can happen, not only to your business but to your life.

Big things happen when you get the little things right.  You just need to know what the little things are first.  A business without goals or targets rarely achieves anywhere near the success that one with a clear action plan does.  

If they are in writing, then the chances of success significantly increase.  It sounds complicated but as you see in the Planning chapter of this book, it can be made simpler and much quicker than you might have imagined.  Simplicity is the key to getting started.

Without insight and information on how the business is performing, the effectiveness of decision-making is diminished.  A business may fail, or fly based on the adequacy of the decisions made by the senior management team (even if that team is one person – you, the business owner!) 

Having some basic management accounts and key performance indicators on a regular and consistent basis helps you fly your business in the right direction rather than as if you were blind.  Do you already have the information? Is it regularly produced to a high standard of accuracy?  

Do you need to build some reports from scratch?  It does not have to be complicated.  Keeping it simple is the way you keep on top of it.  Many accountants produce sheets of numbers that make no sense to the leadership team in a business, which makes the whole activity an expensive waste of time.  

As you start to grow and bring in new team members, having systems creates consistency which avoids compromising your standards of service delivery.  Everyone knowing their role in the organisation is one of the most commonly missed parts of the system.  And systems don’t mean technology – apps and software are simply the tools of a system.

It’s processes and procedures that are critical to a scalable business.

Having the right skills and attitudes to allow expansion of the business and liberate YOU from working IN the business to working ON it is a critical factor for scaling-up.  

Many business owners do not see the value of bringing people into their organisations with the skills and attitudes that allow them to be released from some tasks to achieve more – and generally that translates into earning more.  

Seeing people only as a cost is a sure-fire way of keeping your business smaller than it needs to be.  Building a team is not easy and looking after staff, if you don’t get the right ones on board, can be debilitating and demotivating.  

Having a pathological attitude towards cash management and monitoring allows the life blood of the business to flow.  Without a flow of cash, the business quickly seizes up.  

Running out of cash is one of the most common problems in business failure.  Understanding the difference between cash and profit is essential for every business owner.  Getting this wrong kills your business.

Your business is not a job, though it often feels like the worst job in the world!  The most successful business owners are driven by a bigger purpose than having an income that covers their survival needs.  They have a passion and drive that exceeds the average employee.  They take risks to achieve a bigger life and appear to be driven by wealth.  

More commonly it’s not wholly about money at all – it’s about the things that financial freedom can buy.  If you don’t have the energy and conviction for your business, how can you inspire others to feel that way too?  Being tired of your business or losing the passion is a key indicator that you should think about getting your business ready for your exit – either by selling or by building a management team to get you out of the day-to-day activity.

My first conversation with a new client who knew it was time to leave his business started with his declaration “I know I’m becoming the biggest problem in the business, and I know I’m holding it back”. After over 2 decades of riding the entrepreneurial roller coaster he wants to explore other adventures and take the weight of his business off his shoulders.  

He’s ready to step out of the day to day and only work at a strategic level while he develops his senior management team.  But, as long as he turns up to work every day, the team still defer to his decision making.  He has to let go and allow them to fail, which is scary.  It won’t happen overnight but it’s already taking huge leaps froward.

Reverse Due Diligence

Undertaking your own due diligence process is a great way to see your business from the perspective of a buyer AND give the process a dry run without the pressure of time and external oversight.

There are more details of the DD process in the chapters on Legals and The Transaction.  If your team of advisors is in place, they will give you a basic DD checklist (in reality it’s a series of checklists on different subjects).  

Working your way through these is good preparation for your future, whether that’s selling, passing on to the next generation or transferring to employees.  You end up with a company “bible” of important documents as well as the opportunity to re-look at some of the contracts and commitments that may be well overdue for renegotiation or simply cancellation.

Being able to do this over a period of time is a lot less stressful than the mad dash to get a data room populated and up to date (the documents required for formal “seller” or vendor due diligence).

Employee Participation

I’ve seen business owners tie themselves in knots trying to keep everything in the business a secret from their employees.  Yet transparency and clarity set you and your business free.

It all starts with recruiting personnel for values and attitudes over skills.  This  might sound counter intuitive – especially when you know you need a specific skillset – but getting your team full of people who share values and support each other is much easier in the long term than trying to retrain a highly skilled person in new attitudes.  I’d argue that retraining values is impossible!

Having worked in an environment where one critical skill was required and the individual who had it was already in the organisation and definitely not a team player, I can testify to how destructive misalignment of values can be.  

At its worst, the rest of the team exercised a targeted programme of isolation to the individual, making decisions without him and then finding ways of getting his passive buy in.  The energy and distraction this took was notable and the rest of the team came to resent the challenging individual whilst grudgingly recognising how his specific skill contributed to the project.  As soon as the project was complete, the individual was legally and joyfully expelled from the team – and ultimately from the company.

If you have worked in any big organization, you know exactly what I am writing about here.  Shared values are critical to overall success and team dynamics.  When you have the right team, you’re happy to engage them in the planning process, including in exit planning.  It makes the journey easier for you and them.  

As the company grows and develops the skills and experience required changes over time.  Some employees come in with lower levels of skill that allows them to grow and develop into new roles with the organisation.  Others join with high levels of skill and eventually can’t get the professional development they need within the organisation.  They leave for new challenges OR stay and become dissatisfied and potentially destructive, possibly passive and disillusioned.  

Understanding who you’ve got in your team makes planning for these circumstances easier.  You can have honest conversations with employees about their contribution to the value of the business and remunerate them accordingly.  

In my first exit experience I was the last one out of the business HQ which was made gradually redundant as the disposal of the business was completed over a period of 18 months.  I was happy to stay until I switched off the lights and locked the office door for the last time because I’d been party to the entire plan from the beginning – it took 4 years!

Having a clear structure for delegating decision-making to the people in your organisation requires that you also invest them with appropriate levels of authority, responsibility and accountability to enable them to perform effectively.  Trusting people to make the right decisions, within a framework, allows them to flourish and you to get on with strategic planning and actions.  

Most people come to work to do a good job – you have to get out of the way and let them!  Recognising that as a company grows the structure of the organisation also needs to change is often missed by busy CEO’s, yet it is essential to keep the organisation functioning effectively, efficiently and relevantly.  

The Final Event

At some point you are going to be at your leaving party, assuming everything goes to plan.  It may be that, like many business owners, you slip away without much fanfare.  Have you thought what that looks and feel like?

After all the stress of preparing your business then going through a transaction process, you might have not given a lot of thought as to what happens next.  When I left my first business, having sold my shares, resigned as a director and handed over the day job, I had a few weeks of just decompressing and resting.  But then came the day when I realizeised I had no purpose.  It was a very empty feeling.

Worse than that was the feeling after my first visit back to the business.  Seeing it run without me and the team seemingly having not missed me for a moment left me devastated.  Yet it was evidence that I’d done the right things.  The business operated smoothly without me.  In fact, it ran better without me getting in the way with my ownership thinking.  It’s a matter of pride that it’s still going nearly 20 years later.

If you engage with your employees, you can enjoy a team celebration of the business transfer.  They might go back to the day job the following day whereas you are on a different path, but you avoid the very hollow feeling of it just being a transaction.

“Coming together is beginning, staying together is progress, working together is success.”

Henry Ford

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.