Preparing for exit

Key factors in preparing for your business exit

Time to prepare for your exit

Our one key piece of advice is to take your time and prepare properly for your exit and succession. The longer you have to prepare, the better the result will be. The best time to start planning is about three years before you want to exit.

Preparing to sell

You will need time to decide the best exit option for you before consulting your team. If your team think a sale may happen, they may push for an MBO, but from a shareholders' perspective a trade sale may be a better option. Communicating with your management team later in the process is crucial to achieve a successful sale and to manage the transition.

Making your business attractive to a third party buyer is an essential to increase its value. Ensure your financials are in order and look at ways to increase your EBITDA (earnings before interest, taxes, depreciation and amortization). Check your operations and infrastructure are in good shape and processes are structured.

It is important to focus resource on key areas that will increase business value pre-sale. If you currently run a ‘lifestyle’ business more time will be needed to build value and to transition.

Time to prepare for your exit

Preparing for a management buy-out

Your management team can be a potential exit strategy for you, but you will need to help to prepare them for running the business and not just working in it and also give them time to prepare financially to buy the business.

Preparing for family succession

If you run a family business, we would encourage a lot of succession planning. Make sure that whichever family members will take over are prepared for what they are taking on.

The most important step when deciding the best exit route for you is to seek advice from an advisor. An experienced advisor, such as Barnes Roffe can explain all the options available and help decide on the best course of action. Only then can a shareholder put steps in place and decide when to bring in management.

Time to prepare for your exit

Increasing business value

Many business valuation methods use a multiple of earnings approach to calculate the value of a business. A higher multiple will be achieved when a buyer attaches less risk to the ability of the business to maintain its earnings into the future. The multiple used therefore has a significant impact on the value achieved for your business – but there is no scientific formula or calculation used to determine precisely the ‘correct’ multiple.

External factors will influence the multiple – such as the type of industry you operate in - but many internal factors, within your control, will also be instrumental in determining the multiple. All the value drivers below will affect the multiple that your business sale achieves.

Over dependency on people,
suppliers, customers,
products/services.
Capital expenditure.
Quality of profits vs quantity
of profits
Business structure.

Strategic planning.
People / management team.
Operations.
Formalised contracts & legals.
Marketing brand and competitiveness.

Scalability.
Customer Quality.
Contracted/repeat income.
Capital Expenditure requirements.
Intellectual property

Time to prepare for your exit

Stepping back from the business

We know that stepping back from a business that’s been an integral part of your life is complex. It’s not surprising then that many business owners delay their exit planning until the very last minute.

Running a business that isn’t dependent on you, the owner, is crucial before you attempt to exit the business. Your business needs to be able to survive without you, as this can significantly affect the handover period, the future of the business and the value when you sell.

Your successor

If you don’t already have a clear successor, you need to find one. Whether you decide to choose someone internally or recruit externally, finding someone that can help you let go is vitally important. Your role can then change and develop over time on the run up to your exit.

If your successor is a family member, then planning well ahead could give them time to gain valuable experience in the business or elsewhere. Emotions can be heavily involved in this type of succession, so take a step back and check that it’s the right thing to do.

Time to prepare for your exit

Your people

People are the key asset to most businesses. Ensuring you have experienced people in key management positions and that they’re motivated. A shortage of skilled labour and good quality management makes it difficult for the owner to achieve the transition they want. Change often brings uncertainty. Managing this and ensuring continuity is key to ensure it’s ‘business as usual’

Often the right people can be found internally by promotion. If, however, they can’t be found from within the organisation, business owners should be clear on the people they need to ‘plug the gaps.’

Investment & growth

It’s important to not put off big projects that will add long-term value to the business, even if you’re planning your exit. The temptation is to not spend the money before sale or buy-out, but often large-scale projects can add value and make your business more attractive to external buyers.

It’s far better to continue on-going investment on the run up to transition than to stand still. That’s easier said than done when often economic challenges mean that many businesses standstill, or investment is made more difficult.

Time to prepare for your exit

Financials

Poor financial information sends the wrong message to potential buyers, employees and management. Good quality, regular, up to date financials make good sense and will help buyers see the reliability of your financial results much easier.

If you are selling your business, looking at an IPO or MBO, then financial due diligence on your business will be part of the process. Challenges during your exit process will be much smoother with the right financial information in place. Financial areas to focus on for your exit are:

Good quality, regular
management accounts
Cashflow statements &
forecasts

If you are looking to sell a business and your accounts have been audited, that can provide reassurance to a potential purchaser. An audit adds credibility to financial statements which can in turn enhance value. It may also reduce the amount of due dililgence a purchaser might seek to do because there has been regular external scrutiny of the figures.any businesses standstill, or investment is made more difficult.

Profit & Loss/Income statements
Balance Sheet
Profit trends

Revenues & margins
Capital expenditure
Cash, debt and working capital