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Exit planning makes perfect sense
Exit planning makes perfect sense, as, at some point, we will want to take a step back from our business and be rewarded for all our hard work. Interestingly the stats would suggest that around 34% of mid-market firms are actively planning to sell their business at any one time.
Here are some top tips to get you thinking about what’s involved and the key steps to starting planning if you want to sell your business.
What makes a business valuable?
Contrary to what many believe, it isn’t just profit. We see this very clearly when looking at some of the slightly bonkers valuations given to so called ‘unicorn’ businesses such as UBER, where they are loss making (often eye wateringly so) but have sky high valuations.
More common, I’ve heard of a local business turning over £3million and although highly profitable proved pretty much impossible to sell for any money at all.
Did you know that every year over 100,000 profitable VAT registered businesses close their doors and cease trading.
So something else is at work here.
The local firm effectively sells on a one-off basis, with no repeat custom and everything was centred around the business owner. Ideal for maximising profits, but hopeless at building value within the business. When thinking of buying such a business, what in effect are you actually buying? Where’s the future income streams, the relationships that will drive future sales? The tacit knowledge within the business is all in the owner’s head!
There are multiple ways of valuing a business, and none are perfect or universally applied. It’s beyond the scope of this article to go into too much detail, as there are far more qualified people than me who can advise you. However let’s look at the common methods used, certainly as a starting point to negotiations.
Enterprise value – normalised/sustainable EBITDA (earnings before interest, tax, depreciation and amortisation) adjusted for cash and debt. Quite a common valuation technique and expressed as a multiple of EBITDA.
Asset basis – the market value of trading assets and liabilities. Once would have been very common, but as we move far more into a knowledge economy, becoming less so. Frequently businesses have precious few physical assets, and the only ones that feature is stock, often priced at value. In reality most stock is never worth it’s face value or anything remotely close!
Affordability and funding capacity of the business – a buyer will probably need to borrow to finance the purchase, and therefore it needs to be attractive to a lender.
Market forces! Ideally you need a willing buyer and willing seller – motivated on both sides.
What should we doing?
Rather than focus purely on increasing profits and EBITDA, in exit planning, we should be looking to increase the multiples that will be applied. That’s how we maximise value.
We can build value by focusing on our management teams and not just short-term profit.
Remember if the owner is the business, then where’s the value?
We increase value by not having the owner at the core of the business, instead having clearly defined processes and systems in place and a strong management team.
The more we can reduce risk, the higher multiples we will achieve – perfectly logically if you think about it.
Key influences of value
Number one is the strength and quality of the management team in place – the higher the better of course. The team needs a full understanding of how value is created within the business.
To build exceptional teams remember you aren’t looking for good all rounders, but people with exceptional skills in different areas.
Culture is important – it’s what you stand for and how you do things within the business.
Get strong protocols in place throughout the business, at every stage and level.
The overall quality and exclusivity of product or service you supply can make a huge difference.
Customer retention is crucial, and you need a strategy that’s demonstrable and effective.
You want an innovation culture with the evidence to prove you are constantly improving and using technology effectively.
Contractual revenues are a big attraction, although need to be aware that frequently contracts will have a break clause enabling a customer to walk away in the event of a sale and change of ownership.
Highlight the visibility and certainty of future profits if at all possible…this reduces the risk.
Today we are very much in the knowledge economy – 100 years ago it was physical assets, but not now. There are two main types of knowledge at play here – Tacit and Explicit.
Tacit – know how
- Knowledge we don’t know we have
- Takes time to acquire
- Hard to share
- Informal knowledge network
Explicit knowledge – know what
- Text books
- Training courses
- Easily gained
- Easily shared
Our aim is move our tacit knowledge to explicit, so it can be shared and thereby increases the overall value and worth of the business.
Bottom line, as with most things, it’s quality over quantity that really matters, in everything to do with exit planning.
Where and when to start
With exit planning, there is no better time than to start now, for two reasons.
Firstly these things can take years rather than weeks or months.
Secondly, it’s a great discipline to be ready for sale at any moment. As it means you know your numbers and have a clear strategy in place. Start with an end to end business review, getting rid of any baggage too.
Other Key Points
Review what’s happening in your sector, being aware of any coming legislative and environmental changes. Understand the potential impact this will have on your business and the sector generally.
Start to build your knowledge of perspective acquirers, as you may want to make a direct approach as some stage – it’s a fact that most sales will be to other firms in your sector and not your family.
It makes sense to increase your company profile in your industry (PR and leadership/awards).
Formalise the exit planning strategy: set targets and milestones with a realistic timetable, involving senior management throughout so they are onboard.
If you have an over reliance on one major customer, recognise this is a problem. They can veto any deal and frequently have escape clauses if control of the company changes, plus of course can simply change to another supplier.
Start your retirement planning early – what are you going to do if outside of the business? How much money do you need – this will help you set a realistic expectation if you start early!
When it comes to sell, remember you need due diligence on the purchaser – check they can complete and have the necessary funds and know how to run the business. There are quite a few fantasists out there!
We recorded an excellent podcast with Rod Springall, a highly experienced professional who has been advising on buying and selling for years. Catch it here: Buying and selling advice
We have a very strong network of local professionals if you need help. Plus I successfully sold my own business a few years ago. So I understand the highs and lows. Get in touch if you want any help and advice – it costs nothing other than decent coffee.
The Government has some useful legal tips too: Government Legal Advice
There are plenty of other sites with useful information, such as: lawdonut
Good financial planning can make a huge difference here too, and many firms offer this type of service. Here in Norfolk, one that specialises in exit planning is Chadwicks, which also run a series of fascinating Masterclasses – find out more here: Chadwicks Home Page