- “Failure is the road you will travel to success; just be sure you take the correct exit” Tim Fargo
- Exit planning is an on-going process not a single event.
- Knowing Your Weaknesses
- Being P.E.R.F.E.C.T.
- Reliance on Owner
- Governance and Compliance
- Explore the Options
- What are the options?
- Understand the exit readiness journey
“Failure is the road you will travel to success; just be sure you take the correct exit” Tim Fargo
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 the majority of 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 face 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 area 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.
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 if the essentials to get into place immediately if you don’t have them already in place.
When a business owner starts to think about selling, it’s often at the same time that 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 clients 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
Knowing Your Weaknesses
If you know what a buyer is going to find when they undertake due diligence, you’re be 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 equaliser. 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.
Getting ready for exit is a big job and covers every aspect of the business. Some of the elements we’ve covered in the chapter on Succession Planning chapter.
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 busines 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.
All buyers look at the risks involved. It’s worth using “Porters 5 Forces” model to look at your business risks, strengths and weaknesses:
Figure 1. Porters 5 Forces
Buyers take a look at all aspects of the various relationships your business has with customer, supplier, 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.
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.
Governance and Compliance
How your business has behaved has an impact of 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 as a result 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 of time 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 as 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.
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 there is to address how you value your intellectual property, for example. What’s your “secret sauce”? Is it the patentable product, licensable service or just your unique processes? Recognising these early and capitalising on 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.
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 the majority of business owners and it is not explored by some brokers who are not motivated to educate their clients. 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.
“Ask any comedian, chef or tennis player, timing is everything” Meg Rosoff
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 is 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 have to 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.
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 have to 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
The feature image “Sell It!” is available on Amazon.
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.