Founders determine an exit strategy through what they want for themselves: this could be anything from wealth derived from a sale, how they want to occupy their time, or a desire to see their business thrive in someone else's hands.
But preparation is key to achieving an effective strategy and delivering a business sale that founders are happy with.
When should you devise your exit strategy?
When founders start out in business there is a lot to take on, they’re juggling many balls and wearing many hats doing everything themselves. Growth tends to be the focus and thinking about the exit might seem counter intuitive. But the earlier you introduce the exit thought process the better particularly in the fast-growing tech sector, where businesses are sold at a much younger age than more traditional businesses.
When should you sell the business
The key part of any strategy is working out when you should exit, what criteria you want, and then implementing the actions to meet those conditions.
Paul and Alex Dodgshon run a business broker firm in Cheshire providing sell-side advice in the Northwest. Paul says “Set the right time to exit when it suits you, not when you judge the peak of the market to be, because you will be very lucky to hit it and you could be chasing that peak forever. Have a goal in mind that is achievable and exit when the business can deliver that. If you’re above the level where you can achieve your goal, every day you’re running your business you’re actually taking a risk. You don’t know what’s around the corner, as we’ve seen it could be a pandemic, inflation or the knock-on effects of a war which take the bottom out of your market with one swipe.
Make your business investable
“An investable business is one that doesn’t depend upon the owner. You have to think about what makes a business investable as you put your early business plans in place. You’re looking for a marketing plan and a business that is scalable and can deliver high growth.”
All the thinking involved in achieving growth needs to filter into what that means for the exit plan. How big is the market you’re going after? How will you recruit and train new people to achieve growth? What does the product supply line look like? Can you multisource?
Another area to think about are your operating procedures. It’s not glamorous but put processes in place that the buyer can see and feel confident about. Can you create recurring revenue streams?
Do your due diligence early
All the documentation you hold in your business is crucial at the point of sale. Paul says: “Business owners should go through a due diligence process so that the buyer can come and check the facts and find everything they need to know is in good shape. They need to do that before they put the business on the market so the seller is in control of it, and not under the pressure of a buyer. If the buyer uncovers problems at the end, it’s going to cost the seller by way of a reducing offer and may even lose the deal.”
The seller needs to ensure the business legal obligations, such as employment contracts, environmental regulations requirements are in place and up-to-date. On the commercial side, you need information about the market, how big is it, what’s your customer base like, what does the credit risk on your customers and suppliers look like? Then you need to ensure that your financials add up.
Avoid pitfalls
As you’re gearing up to exit the business, avoid actions that might concern a buyer. For example, being tax efficient is one thing, but minimizing tax too much in the years before a sale could be problematic. Reducing profits to reduce tax could affect your valuation.
Secondly if you strip out costs too aggressively, such as your marketing or advertising, to boost profits, buyers are likely to spot it and ignore it. In the meantime, you’ve possibly slowed growth in your own business. Dressing up the accounts ahead of a sale could backfire.
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