Every entrepreneur or small business owner has a plan when they start their business, but many don’t plan how to exit. This can lead to problems, particularly if their exit is prompted by something outside their immediate control or expectation. Industry estimates suggest that around 50% of business exits are triggered by one of the 5 D’s: death, disability, divorce, distress and disagreement. At best, having a well-thought-out exit strategy can enable founders to maximise their return on the effort and sacrifice invested in building a business; at worst, it can significantly reduce the complexity and stress of all involved in an unplanned exit.
Having an exit strategy in place provides direction and focus for the business owner and other shareholders. It is also an important input to the overall business strategy. For example, if you are targeting a sale to a competitor you may focus on growth and market disruption whereas if you are planning a public flotation or open market sale then EBITDA is the key metric.
There’s no right time to initiate the process; certain entrepreneurs consider it right from the start and include it in their initial business plans, others are prompted to develop it when they are seeking 3rd party investment, whilst for other founders, it may only come on to their agenda when they are approaching retirement age. My advice to business owners is to give it some consideration earlier rather than later, as having at least some semblance of a strategy will inform your long-term plans, potentially improve your focus and provide peace of mind. It can also save you time, money and stress if something unexpected happens and you need to move quickly.
I have worked with several SME clients to help them clarify and execute their exit strategies. Here is a brief overview of the key topics that we consider:-
Generic Exit Strategies
- Merger or acquisition.
Included under this heading are open market sale, strategic acquisition and competitor merger.
Pros: Potentially high valuation reflecting either strategic significance or possible multiple competitive bids.
Cons: Detailed due diligence is required.
- Initial Public Offering (IPO)
A public sale of the shares via listing on the appropriate stock exchange (LSE or LSE Aim Market).
Pros: Potentially high reward.
Cons: Significant overhead (time & cost) in detailed due diligence, documentation & marketing. High risk.
- Management Buyout (MBO)
A sale of the equity to the management team or broader employee base, usually supported by debt funding.
Pros: Significantly less cost and due diligence. Easier transition preservation of legacy.
Cons: Can be complicated by funding issues.
- Family succession
A transfer of leadership and shares to a family member(s) trained to take over the business.
Pros: Procedurally straightforward.
Cons: Risks around competency and family and/or management relations. May not release cash for the founder.
The closure of the business either via a sale of assets, voluntary liquidation or enforced bankruptcy.
Pros: Can be quick and simple.
Cons: Yields low value. Potential legal and reputational consequences of bankruptcy.
The first consideration is what the motivation or trigger for the exit is? They can be many or varied, but they typically fall under the following categories:
o the founder is bored, burnt-out, has health issues, wants to focus his energies on other interests or is seeking to retire.
o the business has reached a milestone valuation that the founder has set.
o the readiness and aspirations of a family heir to takeover.
o a particular market opportunity.
o negative financial performance, market downturn, competitive pressure, or product/service obsolescence.
When discussing the objectives and motivations with the business owner, I always ask what they seek in terms of legacy. It’s often an important consideration for a founder who has built a company over many years as they are likely to have developed strong emotional attachments to their role, the product and especially the people. Exiting a long-term business can have a significant mental and emotional impact, and some owners desire to stay involved whilst others want a complete break. Either preference can influence the choice of exit strategy and will affect the transition.
Timing is always an important consideration as it can significantly influence the exit value. With sufficient lead-time and flexibility built into the schedule, it provides the opportunity to prepare the business to optimise the valuation and leverage the negotiation. A good exit plan will allow for fluctuations in market conditions, business cycles and buyer demand. As indicated, the various exit strategies have different implications for the lead-time required for a sale. Those transactions that require a large amount of detailed due diligence can take a long time to complete and will consume a great deal of management time and focus.
The Preparation Process
I don’t usually go into too much process detail with the business owner when discussing the exit strategy, however I find it helps to highlight some key points. Having an awareness of what lies ahead means the CEO can ensure that the business is in good shape for the scrutiny and transition when the time is right. The main points I flag are:-
It’s vital to ensure that the companies accounts, order book, sales forecasts, contracts, systems, HR succession plans, asset registers, risks and liabilities are all well documented.
The chosen exit strategy will determine which valuation methodology you will use. You need to ensure that you have the company’s historical performance information available and access to the relevant industry data and benchmarks.
Marketing the business for sale
How you market the business will also be influenced by the preferred exit strategy. For example, trade sales and MBO’s may well be negotiated directly by the founder/CEO with the support of legal and fiscal advisors. In other cases, a broker may be involved, and for IPO’s it will be necessary to appoint a broker, nominated advisor (Nomad), non-exec directors and various professional advisors as there is a very stringent legal process to follow.
Legal & fiscal advice
As referenced above, it will be necessary to involve legal and fiscal advisors; having the right advisors engaged with the business well in advance of the planned transaction can help the process run smoothly.
Planning and preparing for the leadership transition is probably one of the most critical important activities and requires the longest lead time particularly if legacy is important.
This is a highly sensitive and, at times, complex process. Maintaining confidentiality is always a major concern, given the sensitivity of the transaction across multiple stakeholders. Consideration must be given to the timing and content of the communication to the directors, investors, management team, unions, employees, customers and suppliers.
If you are a business owner and you haven’t considered your exit strategy then maybe now is a good time to give it some thought. If you need some help please get in touch.
Professional Business Coach, Mentor & Advisor