What do you need to do before you Exit?
Exiting a business takes time, but it can be a smooth transition or an arduous process depending on how well you’ve planned your exit strategy. How much you get from exiting your business is also greatly determined by the measures you have taken in preparation.
Given how much is at stake, it may come as a surprise that 48% of business owners don’t even have an exit strategy. Another study puts the percentage of small business owners who have no exit strategy at a staggering 72%.
If you’ve only started to think about this for you, and care what happens to your business after you have stepped away, here is what you need to do:
Identify Your Goals
Knowing what you want to accomplish after exiting your business sets the foundation for your entire exit strategy.
Do you want to sell your business, and if so, who would you like to sell to? As importantly, who would you not want to sell to? Are you looking to hand over the reins to a family member? Is it immediate retirement that you are planning for, or do you see yourself playing a consultancy role after exiting? Do you simply want to get the highest value out of a sale, or do you want your successors to build on your legacy?
The answers to these questions will guide your every action for the entire exit process from planning to execution.
Plan Your Communication
Your exit must be communicated clearly to every major stakeholder, from investors to management, but deciding what to say to whom, and when, needs to be planned carefully.
You and your buyer will both want to be sure that your key customers, employees and suppliers will be happy with the new ownership and remain loyal to the company; key workers, must be retained for a business to be able to continue successfully.
Ignoring the market is never a good idea. If you are considering a trade sale, it is vital to keep the good news machine going - but make sure potential buyers don’t assume you are just getting excited about the fact you are selling, otherwise they will think you have taken your eye off the ball.
Market and competitor analysis and stakeholder interviews will help clarify your position and to suggest the messages that you may need to be putting out.
Whether you are giving up your business for sale or passing it down to an heir, it needs to be able to operate without you. You must be able to extricate yourself from key processes, while ensuring those processes still run smoothly.
Progressively reduce your contact with customers and clients. Arm your staff with the knowledge and power to run the business. Let them make important decisions.
Get Expert Valuation
If you know how much your business is worth, you put yourself in a good position when negotiating the sale price with potential buyers. You can also take the necessary steps to improve what you can to optimise and even add value to your business and not leave any money on the table.
Only an estimated 20% to 30% of businesses for sale get sold on the market. It is not enough simply to check your balance sheet and annual accounts. Calculate your earnings before interest, taxes, depreciation, and amortization (EBITDA).
Find a third-party expert in your industry that can give you an unbiased valuation. M&A advisors and local business brokers are your best bets for a professional opinion.
Review Your Accounting
Your company’s finances will face scrutiny, whichever exit route you take. Get your accounting in order, with detailed breakdowns of your assets, debts and liabilities, and profit forecasts. If you have been doing a good job of officially noting every financial transaction, it will be a much easier process attracting buyers when selling your business. Financial transparency is crucial.
Write down all the crucial operational procedures. Such documents will not only serve as manuals for running the business that the new owners can use; they will also sweeten the deal for buyers looking for stability in your everyday operations. These documents can be proof that the processes you have put in place are practical and profitable.
Plan with Flexibility in Mind
Planning ideally should start 3 to 5 years before your desired exit. The closer the time comes for the actual transition process, the more granular the plan needs to be, with the remaining 90-120 days mapped out in detail. As the one leaving the business, you need to visualise what you and your business must do to realise your shared vision.
However, you must bear in mind that emergency situations out of your control - unexpected deaths, drastic market downturns, epidemics, or political unrest – can throw you off course. Be ready to evolve your goals should the worst come to pass.
Starting your exit planning 3 to 5 years before you actually want to exit gives you time to work on what needs improvement and to grow the strategic value drivers of your business. Doing so will result in a higher market valuation when you eventually put it up for sale.
Can you enlarge your loyal and diverse customer base? Can you increase your market share? Is there new IP, such as patents or trademarks, or are there new technologies exclusive to your company that you could develop, and which competitors would pay good money to gain access to?
Consider Your Exit Options
There are multiple paths to exiting a business, each with their advantages and disadvantages. Here are some of the more common routes:
- Trade Sale — Your business is sold to another company in the same or associated industry. If your business is solvent, you can get a good pay-out and the process can be relatively quick. It does require marketing and due diligence to be done successfully.
- Management Buy-In (MBI) — External management purchases a controlling ownership stake in your business and replaces the old managers. You can profit from this, but you will face greater accounting scrutiny, warranty and indemnity protection, and dissatisfaction from current employees if the new management does not fit the culture.
- Management Buy-Out (MBO) — Internal management purchases ownership of the company. You will likely sell the business for less than its value, but the transition process will be smoother due to the management’s familiarity with the company.
- Employee Ownership Trust (EOT) — This is an indirect form of employee ownership of a company, in which a trust holds a controlling stake, paying shareholders in tranches from the company’s profits. You sell for full market value without capital gains tax liability. Preparation of employees for ownership is key, as they will be responsible for generating the future profits from which you will be paid. If you need a lump sum on exit (partial or full share value), banks will lend to EOTs if the underlying business is sound. Also, part of the exit plan could be to build up a cash surplus in the business from which a lump sum can be paid.
- Passing to the next generation — You pass on the business to a family member. This can be straightforward considering you won’t have to deal with a third party. It can also be complicated, should tensions arise between family members vying for the position.
Make an Exit Plan Today
Whatever reason you may have for leaving your business behind, it is important you have an exit plan. Otherwise, you might have to extend your stay with the company fixing problems instead of retiring or starting a new venture. Or worse, walking away from your business with nothing when you decide to do something else.
If you need advice on putting together an exit strategy that will benefit you and the business then why not get in touch with us at hgkc today and we can sit down to discuss your options over a coffee.