Shaping your exit strategy

20 November 2015 / Published in Business

This article originally appeared in the National Business Review.

Grant O’Neill, Executive Manager Capital Solutions at ASB, has worked with dozens of business owners considering selling their business. Here’s what he’s learned about achieving a successful exit.

Earning a premium price for your business doesn’t just happen, you need to prepare. Your bank can give you independent advice to identify your potential opportunities and issues.

Exiting your business is one of the most important parts of ownership. You put a lot into your business over the years: money, risk, management and energy. Selling part or all of it should be your reward.

But selling your business for the right price and on the right terms doesn’t just happen. You need to plan and prepare.

It also takes a different mindset. You’re not only selling what you’ve created. You’re selling what your business can become.

The first thing is to understand the most common groups that make up your potential buyers outside of the public markets: private capital, trade, management and family.

Private capital buys potential

Private capital buyers could be wealthy families, individuals, or private equity or investment companies.

They buy potential: what your business could become. They want opportunities to create value with capital, ideas and energy.

They evaluate a lot of businesses, and they’re looking for established businesses with potential for growth. They want clear ownership structures, a simple business plan with the potential mapped out, clear finances and good management to drive the business forward.

Other businesses buy value

Other businesses, typically referred to as trade buyers, want value. They want what your business has, to help them achieve their strategic goals. It might be as simple as buying their growth target, or they might want your products, people or processes. In some cases, owning your business might give them more influence over price, distribution or suppliers.

It’s not just competitors in this group. Your distributors or suppliers might want to expand their position in the value chain. Businesses in other sectors might see an opportunity for diversification or additional growth.

Your management buy control

Your management and employees often become potential buyers when you want to fully or partially exit your business.

They buy control, or at least a pathway to control. They’re typically loyal and committed to your business. It’s not surprising they want more tangible ownership – especially if you’re stepping away.

Your family buy continuity

Less common today is family succession.

Your family buy continuity. It may be the continuity of your legacy, or of their lifestyle.

Selling to family members can be challenging. Emotions can run high, and conflicts of interest are almost inevitable. Squabbles over money and control can start long-lasting family issues. But family members often take a longer-term view of the business and its profitability.

Are you critical to your business?

If your business can’t operate without you, then it’s difficult to secure an outright sale. You could sell a part share, and bring the new owner or management team up to speed over time. But even in that case, you’re asking the buyer to take on a significant risk.

If you want a clean, quick sale, the most important thing is to make yourself a smaller part of your business. That means ensuring your business has what it needs to run itself: documented processes, well-trained people and, most importantly, a good manager or team who can make big decisions.

Your new product is your business

Selling your business means changing your focus and the earlier you start the better. Once you’ve decided the most likely buyer types, you need to shape your business strategically to ensure it has the features your buyers will find most appealing, in order to pay a premium price.

What should you add or remove to make your business more valuable? Should you consider acquiring other businesses to fill any gaps in your offering? Should you dispose of any non-strategic assets? How do you position your business to take advantage of key future growth drivers?

Involve your bank early

All of these questions are hard to answer from inside your business, so step back and find some impartial advice. Your bank is a good starting point. They are involved with business sales all the time, from both sides of the transaction.

They can act as your strategic sounding board to help find your best exit path. They can also help fund any strategic acquisitions before the sale, help fund your management team to buy a share, or help you buy out another shareholder.

They can also introduce you to their network of businesses, investors and advisors. They may be able to help identify a potential buyer, without you having to commit to a full sales process.

Wrap and pack your business

When you’ve decided to sell, the first thing to do is make your business sale-ready, even if your planned sell date is years away.

That’s because the exact timing probably won’t be in your control. You might get an unexpected offer or approach, or have a change in your health or personal situation.

If you’re sale ready and a buyer or investor does pop up, you’ll have the numbers, growth plan and information on hand. That gives them immediate confidence that they’re looking at a well-run and well-prepared business, which can drive value perceptions.

So what does sale-ready mean?

First, simplify your shareholding. Behind-the-scenes spouses or silent partners can complicate negotiations.

You also need your shareholders to be 100% agreed on the sale process. That includes agreeing to sell at all, and on acceptable sale terms and time frames.

Next, work on your elevator pitch. This short, simple summary of your business tells someone what you do and what makes you unique. It sounds cheesy, but it helps clarify your own thinking. It also creates confidence when you and your team can all clearly describe your business and its growth plans.

Your finances must be in good order. They need to be up to date, accessible and clear. They can’t be muddied with personal or family transactions. Tools like Xero and MYOB are excellent and can make the due diligence process much smoother.

Your business plan needs to be up to date. Cover off your staff, marketing, competitive environment and anything else critical to your success. It should clearly show your growth opportunities, even those that you have decided not to pursue at this stage. Buyers want upside, not a ‘squeezed lemon’.

Types of sale – simple is rare

You should also think about the type of sale you want to achieve.

The simplest sale is where you walk away completely, with a nice premium for your business. That happens, but it’s rarely that simple or clean.

Instead, there’s often a buy-out period, where you stay on for a period of time to ensure a smooth transition. You typically get part of the settlement up front, and the remainder when targets are met.

You can also exit in two stages. Your buyer pays you for a shareholding, which gives you some initial cash and potentially reduces your risk profile. Then you build the company together. At an agreed point you either both sell the business outright, or your new partner uses the increased value to finance a full buy out of your remaining shares.

You may also have to offer vendor finance. If the buyer can’t close the gap between their finance and the sale price, you treat the balance as a loan from you. You take the partial payment, they take ownership, and then pay you back over time, with interest, from the company’s earnings.

Letting go

Once the sale is complete, you can bank the cash and enjoy the rewards.

But very few successful business owners just stop. You’ll probably soon get itchy fingers. Your friends are busy working, your partner will be trying to push you out the door, and you could get bored.

But those are high quality problems – and something to look forward to solving.

ASB Capital Solutions work with organisations to find the best ways to fund strategic growth. They connect people, ideas and capital.

If you’d like to discuss exiting your business, contact ASB’s Grant O’Neill on grant.oneill@asb.co.nz


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