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“Failure is the road you will travel to success; just be sure you take the correct exit.”
Tim Fargo
What is exit readiness?
You might not be thinking of selling your business right now but there is a 100% guarantee that you will leave your business at some point in the future. The only debate is whether you’ll be in control of the process – or not.
From personal experience, I know that most business owners have not considered their exit timeline and have an unrealistic view of how much time they need. It’s estimated that nearly 90% of “baby boomer” business owners do not have a written exit plan.
Business owners are simply too busy or are unaware of how vital exit planning is to sell a company. Every business owner eventually faces the decision of what to do with his or her company. When they decide the time is right, they need to be fully informed about the M&A process.
If you are like most entrepreneurs your biggest assets are two items:
- Your home; and
- Your business
Chances are good that your entire retirement depends upon what you do with these two items.
Being as exit ready as possible adds value to your business as well as de-risking the investment you’ve made into what is probably your biggest financial asset. The more your business relies on you being there, the less it is worth to a potential buyer or investor, including if you are considering a management buy-out or employee ownership.
Exit planning is an on-going process not a single event.
Exit planning is one of the most neglected areas of business risk management, which is surprising given the number of business owners who are reliant on the value they can release from their business to fund their retirement.
Lack of knowledge about the sale or ownership transfer process means that most businesses are poorly prepared for the exit of their owners. The owner is usually equally unprepared and avoids thinking about “what’s next” and gets busy reacting to the day to day needs of the business.
Being ready for the unexpected is as important as being prepared for planned activity. The value of a business is based on more than the numbers (I know I keep saying this but it’s worth repeating because it is so easily forgotten). It’s the non-financial aspects of a business that makes deals fall apart when the due diligence process gets started.
Exit readiness means preparing your business so that a buyer finds it an attractive investment in the future. The more attractive, the higher the value.
“Every exit is an entry somewhere else.”
Tom Stoppard
Exit Ready – Understanding the Essentials
Most business owners only sell one business in their lifetime, and few have a clear understanding of the process before embarking on the journey.
One of the most important factors to remember is that being exit ready does not mean you have to be thinking about selling or transferring ownership right now. Being exit ready protects the value in your business AND shows that you are considering the impact of an unplanned event. It’s something your family, employees and customers will thank you for if something unexpected happens to you that affects your capacity to run the business.
“Every exit is an entry somewhere else.”
Tom Stoppard
Having an effective shareholder agreement, a buy / sell agreement and the appropriate insurance in place are some of the essentials to arrange immediately if you don’t have them already in place.
When a business owner starts to think about selling, it’s often while they start looking for someone to help them with the transaction. They’ll take recommendations from friends or peers, but they rarely address the issues that may reduce the value of their business before getting M&A advisors to help with selling.
This frequently leads to finding a broker who takes fees regardless of success. Beware of those brokers in the market who declare how many businesses they have sold – a better question is “what percentage of client’s businesses have you sold?”
But before we get ahead of ourselves, let’s look at what the essential requirements a buyer looks for in a business that makes the sale get across the line. Remember nearly 80% of all businesses that ‘go to market’ never get sold. There are 4 parts to getting exit ready:
- Explore the options
- Understand the journey
- Get your business valued
- Take the actions to move the current value to your expectations
Exit Ready and Knowing Your Weaknesses
If you know what a buyer is going to find when they undertake due diligence, you’re prepared for it – or better still you can take the actions that add the most value.
There is no point in thinking that you can hide the weaknesses in your business because the due diligence (DD) process picks everything apart to find them. If not found in the DD, they are covered in the Sale and Purchase Agreement (SPA) with the warranties and indemnities.
By knowing what’s good and what’s not the best in your business, you’re able to focus your time, energy, and money on improving the things that make the most difference and add the most value. Or you’re fully aware of what value you are leaving on the table when you sell.
I always think of business performance as a graphic equalizer. Some of the buttons are up at 8, 9 or 10 whilst others are down at 2, 3 or 4. Making sure the highs stay high is good but raising the lows up a point or two makes a big impact. Going from 2 to 4 is doubling performance and probably taking a lot less effort than moving 8 to 9.
Are you stuck in the day-to-day of your business with no time to plan for the future? A Professional Business Mentor is just the leverage you need to get out of the rut and flying. Discover how you can make your business worth more AND avoid leaving money on the table when you finally leave your business. 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.