Your Exit Strategy

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Sooner or later, you will want to sell or exit your business either in total or so you are involved for fewer hours with less risk and responsibility. This could be via a succession plan with family or employees taking over, via a trade sale to a competitor, or sale in full or in part to an investor.

To ensure maximum return, the sooner you start preparing for this inevitable day the better. Any buyer will be looking for the lowest risk and the best possible return, and you need to think about who might be attracted to your business and how you can “groom” it to make it as appealing as possible and to “de-risk” the purchase process as much as possible.

An issue for many businesses owning “baby boomers” is that over the next 10 years, many of us will want to cash out of our business to fund travel, for that new bach, dream boat, flash car, and a happy and deserved retirement. The difficulty looming is that there are going to be a lot more businesses on the market, and those younger keen generation X and generation Y buyers who may be interested are today burdened by big mortgages, student debt and bringing up expensive
children. Their ability to borrow from traditional bank source may be severely curtailed.

So therefore, some creative financing and planning will be called for. As an example, many business owners may prefer ongoing income to lump sum capital. A 1m capital sum invested in the bank today earns a mear 4.5% ($45,000) but via a “work out” or time payment scheme your 1m may be better coming to you as 150k a year paid out over an agreed term with interest and with a staged sell down of shares and perhaps some ongoing part time involvement by you in the
business. This is just one option as a straight cash sale and exit may be not be possible

Pre Sale “Grooming” Steps You Can Start Taking Now

1. Make the business less dependent on you by training staff or changing procedures your goal should be to try and make yourself redundant!

2. Put in place standard systems and process and document every stage of your operation so someone can easily step in and take over

3. Make sure your lease is up to date and assignable

4. Make sure all employment contracts are up to date and can be assigned to a new buyer without invoking redundancy provisions

5. Ensure debtors and creditors are kept up to date and current including PAYE and GST

6. Ensure your database of customers and suppliers is up to date and complete

7. Have all financials up to date including LYR’s accounts (most buyers will want to see the previous 3 years of accounts) and YTD P+L and balance sheets debtors/creditors all up to date

8. Get rid of any “cashes” in the business and make sure all sales are processed legitimately through the business. Don’t take personal expenses or excess drawings out of the business unless necessary and justified. Your goal is to maximise sustainable profitability within the business and preferably over a three-year period as your purchase price is likely to be based on a multiple of fully accounted for earnings

9. A buyer will be looking ideally for a business that is showing growing sales, customers and profits with upside as well

10. Ensure all customer and supplier contracts are up to date and that they are assignable

11. Look at your marketing and presentation material, company signage, your website, brochures and promotional material is it all current smart and attractive

12. Ensure your asset register is up to date along with depreciation schedules and that all asset’s owned by the business are well documented

13. Update your customer testimonials look for “social proof” that your business offers great service and has happy customers

14. Try and resolve any outstanding disputes or legal arguments

3 Questions on Any Private Investor’s Mind Looking at Your Business

1. Will I lose my money?

First make me comfortable…. I won’t lose my money. An Investor will look at:

A – The experience of the business owner
B – The experience of your advisors and mentors (create credibility through your advisors) build an advisory board not just shareholders or directors
C – Proof of concept , how proven is the proposition e.g. existing customers, or market research, and pre sales

2. When will I get my money back?

They want to know what the exit strategy is, if the business owners are committed to the exit strategy and the potential risks that may delay the exit

3. How much money can I make?

An investor is looking for 2 things:

a) Growth potential
b) Strategic value. Ask who can make more from this business than I can and why? Who might in the future buy this business?

Two Things Need to Be Done for an Investor to Minimize the Risk and Maximize the Growth

1. The number 1 risk is being too dependent on the owner
2. Make the future real – e.g. evidence, research, customer testimonials

So, what’s my business worth?

The reality is your business is worth as much as someone is prepared to pay for it! That said there are a number of different ways to look at the value of your business. There are also a range of calculators online if your Google “what’s the value of my business” Some of the common ways of arriving at a valuation include

Asset valuation

Your business may have a lot of high value assets such as plant and equipment, an exclusive patented process and your business may be worth the value of these assets less any liabilities

Cost of entry:

Another way of valuing your business is to look at how much it would cost someone setting up or entering your sector to get to the trading position you are currently at with the turnover, plant, customer base and trading you currently enjoy.

Price earnings:

A very common way of valuing an SME business is to look at the price earnings ratio and place a multiple on the sustainable and ongoing earnings the business is generating. In most Australasian SME businesses this is 1 -2 time’s normalized net earnings however in some high growth sectors and for many public listed companies this can be much higher. (you can see the PE ratio of public listed businesses in your daily newspaper)

Sales multiple:

In some sectors (especially when a trade sale is involved to a competitor) the buyer may pay a % based solely on your sales volume as they may be able to add it to their existing volume and leverage advantage from this.

Summary

Your business is probably your biggest asset and its final valuation on exiting will play a huge part in you enjoying a comfortable future. The time to start thinking about selling is the day you buy or start a business. Make sure you put in place right from the outset systems and process that will facilitate a future sale. Work now to ensure the business isn’t dependent on you.

A great definition of a successful business is “A Commercial, Profitable Enterprise, That Works, Without You” now what do you have to do with your business to get it into this saleable state?

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