The last thing you want to happen is to be forced to sell your business in a hurry because circumstances have robbed you of your desired outcome. An Exit Plan is one of the most important tools you should have in your business. It’s a plan that considers your future desires and ensures that you remain focused on achieving those goals whilst removing you from the business. Some well organised business owners have an Exit Strategy as part of their business plan and make no secret about achieving this goal.
Putting strategies in place regardless of whether you have the desire to sell in the near future or at some other time in the future can significantly help to achieve your optimum sales price. This is because businesses with systems in place and are operated under management are more attractive to a broader market of potential buyers.
A good Exit Plan enables a smooth transition with less likelihood of disruption to the operation. By planning your exit well in advance you can maximise the value of your business and enable it to meet your future needs. We recommend that you make sure your plan is attainable - set a realistic timetable and measurable milestones along the way and stick to them.
An Exiting Strategy or a Succession Strategy is a multi faceted process that includes an analysis of your business, a valuation of your business, the preparation of your business for sale, setting a realistic time frame and many other considerations.
What is involved in a business exit strategy?
An exit strategy is all about preparing your business for the eventual sale of your business on your terms therefore it is important to prepare it in such a manner which is attractive to a wider range of potential buyers. It is believed that you should start planning your exit strategy from day one, it should form part of your business plan and be the underlying force which guides the processes of how you operate your business.
You will need a strategy that will maximise your selling price, but please don’t worry if you haven’t formed a plan as yet. This is where we bring the greatest value to the process, we can advise what buyers are looking for when they purchase a business and suggest strategies to satisfy their needs making your business a more attractive proposition.
When you are ready to starting planning your
business exit strategy,
you will need to consider
- When do you wish to exit (time period)
- What do you wish to achieve financially
- If you are prepared to invest the time, effort and money in the process
- If the time, effort and money required is worth the eventual result
- The method of sale that best suits your circumstances
- Removing yourself from the business
- Make sure your accounting procedures are in place and are easy to follow
- Make sure that your profit and loss and balance sheets are well prepared and clean
- Complete a business plan
- Complete a marketing plan
- Ensure your plant and equipment is in good working condition and has realistic values
- Ensure your intellectual property (if appropriate) is well documented and up to date
- Make sure there is the appropriate lease security in place
- That your customer contracts are secure and transferable
- Employee contracts are well documented and signed off on
- Your operating procedures are documented and are in use
- That your employees are familiar with your operational goals and objectives
What are buyers expectations?
This can vary depending on the type of business (industry), their experience and their own goals and objectives, but there are some common elements –
- Security ensuring sustainability
- Acceptable return on investment (ROI) and acceptable risk
- Attractive industry fundamentals and growth potential
- Some form of barriers to entry or protectionism
- Easy or simple to operate
- Easy to manage and ideally under semi or full management
- Attractive lifestyle (ie. short hours)
- An industry in which the buyer has some related experience
- Sound, transparent financials
- In situations of mergers and acquisition, strategic and synergistic fit.
When a buyer evaluates your business they will want to review the following information. Of course, there has to be a balance in what you show them to attract their interest and secure a contract and what you should show them during the due diligence period.
- Your involvement in the business
- Financial records
- Financial procedures
- Operating procedures
- Debtors
- Creditors
- Customers
- Databases
- Contracts
- Employee records
- Your premises
- Location
- Competitive analysis
- Lease conditions
- Intellectual property
- Legal issues
- Insurance
- Business plan
- Marketing plan
- Licenses and permits
- Stock
- Working capital
- Plant and equipment
- Other assets
Building and maintaining these points are critical elements in order to maximise your selling price.
Ways to exit your business
According to our research the following are the most likely exit strategies for an owner –
Advertise the business for sale without identifying a buyer |
26% |
Sell or pass on to a child or another family member |
25% |
A trade sale to someone in the industry |
19% |
Close the business and sell the assets |
17% |
Sell to management or staff |
7% |
Don’t Know |
5% |
*Source Small Business Survey Program April 2004 CPA Australia
In summary, we look at the six principal options. Click on the topic that interests you –
Selling your business
The most common exit strategy for a business owner is to sell the business to another person or company. This is usually done privately or through a broker.
One of the most challenging issues when selling a business is how to price the business so that you achieve your desired price and still meet market acceptance. This is where the exit strategy plays a significant role during the process, but only if you have realistic desires and if you allow an appropriate timeline. Selling your business will also be easier if you can -
- show year-on-year increasing profitability
- create a high-quality product or service
- develop an innovative product or piece of intellectual property
- build a strong customer base
- recruit a high-quality team
- maintain premises and assets in good condition
Pass to a family member
You may want to pass on or sell your business to a family member and why not? If you have children who are capable financially and technically and have a desire to maintain the family business you should consider passing the business by way of gift or sell it to them.
If you are looking at selling it to your children the banks are going to want to see significant documentation on the ongoing resources and plans of the business after you have gone. We can also assist in this process, making sure that the transition is impartial and that all issues are addressed to benefit all participating parties.
Mergers and acquisitions
A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another with no new company being formed.
Acquisition usually occurs when a similar or larger sized business wishes to acquire your type of business. Depending on the industry, what makes this option attractive to a purchasing company is the ability to merge the two businesses reducing the infrastructure necessary to run both businesses. This is referred to as "economy of scale".
Classification of Mergers:
Horizontal mergers take place where the two merging companies produce similar product in the same industry. In microeconomics and strategic management, the term horizontal integration describes a type of ownership and control. It is a strategy used by a business or corporation that seeks to sell a type of product in numerous markets. To get this market coverage, several small subsidiary companies are created.
Each markets the product to a different market segment or to a different geographical area. This is sometimes referred to as the horizontal integration of marketing. The horizontal integration of production exists when a firm has plants in several locations producing similar products. Horizontal integration in marketing is much more common than horizontal integration in production. It is contrasted with vertical integration.
Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine. In microeconomics and strategic management, the term vertical integration describes a style of ownership and control. Vertically integrated companies are united through a hierarchy and share a common owner. Usually each member of the hierarchy produces a different product or service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration is one method of avoiding hold-up problems.
Conglomerate mergers take place when the two firms operate in different industries. A conglomerate is a large company that consists of divisions of often seemingly unrelated businesses. Conglomerates were popular in the 1960s due to a combination of low interest rates and a repeating bear/bull market, which allowed the conglomerates to buy companies in leveraged buyouts, sometimes at temporarily deflated values.
Reverse Takeover is a unique type of merger also called a reverse merger used as a way of going public without the expense and time required by an IPO. A reverse takeover RTO), also known as a back door listing, or a reverse merger, is a financial transaction that results in a privately-held company becoming a publicly-held company without going the traditional route of filing a prospectus and undertaking an initial public offering (IPO).
Rather, it is accomplished by the shareholders of the private company selling all of their shares in the private company to the public company in exchange for shares of the public company. While the transaction is technically a takeover of the private company by the public company, it is called a reverse takeover because the public company involved is typically a "shell" (also known as a "blank check company", "capital pool company" or "cash shell company") and it typically issues such a large number of shares to acquire the private company that the former shareholders of the private company end up controlling the public company.
Source reference: http://en.wikipedia.org/wiki/Mergers_and_acquisitions
Of course, you could always wait for one of the above to happen. Or if your business is prepared correctly and ready for the process we can assist you in targeting potential purchasers protecting your confidentiality and possibly offering the second best chance of achieving the highest price for your business. It is fair to say that there are two levels in the Mergers and Acquisition market, privately owned companies and public listed companies; we deal with privately owned small to medium sized opportunities.
Sell your assets and close the doors
This is a reasonably simple process. It requires you to obtain or place a value on the plant and equipment and then sell them usually to competitors or similar type of industries. You may also want to sell your customer database or other assets not normally considered in this method.
Before you undertake this method of sale discuss with your solicitor if there are any legal implications to just closing the business and selling the assets. You may have lease commitments which are not that easy to neglect, you may have warranty claims to consider, it is always better to consider all options before closing the doors.
Management or employee buy outs
This is another viable option and I am surprised that more transactions do not exist using this method. I recognise that not all employees are good managers but if you have a successful exit strategy one of the elements you should be adopting are to remove yourself from the business anyway and all processes should be documented diminishing your involvement.
A management buyout (MBO) is a form of acquisition where a company's existing managers buy or acquire a large part of the company. The goals of such a buyout may be to strengthen the managers' interest in the success of the company, or just as often to save their jobs (the plant may have been scheduled for simple closure, or an outside purchaser may bring in its own management team, leaving the prior managers unemployed).
MBOs have assumed an important role in the corporate restructuring besides mergers and acquisitions. The key considerations are the fairness to shareholders, the price, the future business plan, and legal and tax issues.
There will always be the concern of not wanting the employees to know, or concerns that they may want to leave if the business is sold. Let’s say for example that you don’t tell the management and employees that you are selling the business, you go through the entire process finding a buyer only to see at the eleventh hour that the employees or management leave anyway.
You will lose both the money you have invested in the process and the buyer and/or have to reduce the sale price significantly to convince the purchaser to complete the contract. Advising the Management of your intentions can be easily managed if you know what to do. This method should not be discounted if this is your only concern.
Public listings
There are two types public listings the first is through an Initial Public Offering or IPO. The good news is that you stand the chance to receive the highest payout using this method against any other exit strategy. The bad news is that it is very expensive to obtain an IPO, and you can easily spend half-a-million dollars on attorney and accountant fees.
In addition, there are a lot of restrictions to achieve liquidity through an IPO, so if your business is outside certain industries or has less than $2 million in revenues, we strongly advise you to consider a different strategy. Most important, you cannot control when the IPO markets are strong or weak so it is much harder to plan for an IPO for specific dates.
The second option is to form an unlisted public company, there is still a journey to be undertaken but it can be another viable option, we can help with a major portion of this strategy and requires a meeting to discuss your goals and objectives.
Whichever method you choose you should discuss the strategy with your accountant for tax implications. We are happy to work with your accountant to achieve the most desirable outcome.
If you are ready to take the next step and to have us evaluate your current situation please contact us. With technology it doesn't really matter where you're located we can assist you to achieve your desired exit strategy.
