FAQs

It’s not a case of if, but when you will leave your business. Even if you never retire, you won’t live forever. But you may have many reasons to exit your business other than retirement. You might want to try something different. You might want to extract the full value of your business while your business is at a peak. You might wish to pass it on to your management team, a new owner or family member. Equally, there may be other stakeholders in your business who wish to exit for their own reasons. That’s why planning in advance is essential, so that you can leave on your own terms.

Your basic options for exiting a business are:

  • sell the business
  • pass it on to a family member
  • negotiate a management takeover
  • wind the business down

Your business plan should include a section on exit strategies, preferably with a Plan A and a contingency. These plans are so useful in shaping overall business strategy for privately owned businesses that they should be part of every plan from day 1 of business.

Start by deciding what you want to achieve from your exit. Do you just want to make as much money as possible? Are you also keen to see the business prosper and your legacy continue? Do you hope to pass it on to family? What do you want your life to be like after business? How much money will you need? All of these considerations will influence your strategy

Ideally from the very first business plan you write before you start your business.

With a plan in place, every decision you make is impacted by it. Without an exit plan, your day to day decisions could lead you and your business in the wrong direction.

If you have already started your business, then the next best time to start making exit plans is as soon as your business goes into profit. At this stage you will want to think about how those profits will be allocated (dividend versus investment in the business). Your exit plan, specifically what you want your business to look like when you exit, has an explicit bearing on where you allocate profits year on year.

Deciding when and how you will exit your business is one of the most important decisions you will make and should not be left to the last few years. Like a runner, you want to finish strong and you have a better chance of doing that if you know where the finish line is well in advance.

A good exit plan will include the following high-level elements.

  • Why: your reason for exiting the business. This will impact on various aspects of the planning. If you are exiting to retire, for example, it will impact the timing of your exit, how you exit (sell, succession, etc.), how you will provide for yourself afterwards, etc. On the other hand, if you expect to exit because you recognise you don’t have the skills or aptitude to take your business beyond a certain stage, the how, what, when and who of your exit will be different.
  • Why is also why would someone buy or take on your business after you. This will help you construct your business with longevity in mind and for a going concern after you. It will make your business more valuable and your succession smoother.
  • How: your preferred route of exit. There are only a few proactive routes, but being clear about which one you’re aiming for can change how you start, build and run your business. Exiting via an IPO involves a quite different business strategy to exiting via a family succession. Less obviously, but no less different, a family succession involves a different business strategy to an employee succession. It’s worth thinking about.
  • What: your plans after business. This might dictate how much you need to sell your business for or the dividend you decide to take when you put your business under management. This is one of the most important decisions as it can dictate the size and profitability of the business you’re trying to build. As such it underlies your year-on-year business plan.
  • What also refers to thinking through your successor’s needs when they take over. What will they be expecting when they take over and how can you deliver that to either make a sale more lucrative for you (because the business is worth more to your buyer) or make your succession smoother (or both).
  • When: your preferred exit date. Clarity about this helps to define the year on year progress you need to make to achieve you ideal exit. Even if this is ten or twenty years from now, it’s worth keeping it in mind as you develop your annual business plan and asking the question “will I be one year closer to my planned completion by following this plan?”. Your preferred exit might be intricately tied in with your post-business plans, so you’ll need to adjust each iteratively as you refine your thinking.
  • Who: your preferred successor. This may be obvious if yo want a family successor. The other options may seem challenging. If you want to sell, you can’t control who will want to buy, that’s up to them isn’t it? Well partly, but you may want to think about the kind of buyer you want buying your business. What will their values be? How will they treat your employees? What will they want to do with the business: grow it, merge it into their operations, carve it up and sell bits on? Being clear about this will help you to choose the most appropriate buyer for you and sell on your terms, not theirs. Similarly with a management succession; you may not have met your successor yet, but you can have in mind the kind of qualities you want them to have and then look out for them accordingly. And don’t fall into the trap of thinking you’re looking for someone just like you – someone with different qualities might be best placed to move the business forward once you’re gone.
  • Who is also choosing your team and your advisors. Building the right team will make it far easier to transition out of your business. You will also want an accountant, financial advisor, legal advisor, tax advisor, business advisor on board to help you execute your plan.

This is not an exhaustive list as everybody’s reasons for exiting a business are different. The specifics will be different for everybody. Get in touch, or book an appointment, if you’re inspired to discuss the specifics of your exit plan. We’ll show you how to build a better, more profitable and more enjoyable business that is easier to sell, more valuable and easier to transition to new management.

This is going to depend on a number of factors, some external to the business and some internal.

If you’re looking to sell your business, then the main external factor will be the state of the market. If possible you will want to sell when the market is strong and getting stronger so that a buyer has the confidence to pay high. So aim to complete the sale well before any anticipated downturn.

Internally it depends in part on the strength of your performance. If you are out-performing the market in general, then you will attract a premium price. Though it might be tempting to sell when things are tough, you will achieve the best price if you sell when you are approaching the peak.

If you have any choice in the matter, sell when you want to, not when you have to. Although we cannot promise that circumstances may dictate the timing of your sale, a clear exit strategy and plan will help.

You might decide that selling is not what you want to do, in which case timing your exit may be more about the internal organisation than external factors, although you are still better handing over the reins when things are going well. The timing of a succession will depend on your chosen successor having the right skills and knowledge of the company as well as the organisation being stable enough for a new manager to get up to speed without disruption. Your exit plan will involve putting these measures in place in the appropriate timeframe to meet your preferred exit date.

It is often said that a business is worth what a prospective buyer will pay for it.

This is not very helpful, nor is it entirely true. But let’s explore that a little to answer your question.

What will a buyer pay?

One consideration a buyer may have is can I build it for less using the resources and capabilities I have. This will put a ceiling on the value of a business. If you have some “secret sauce”, some intellectual property, a reputation with customers or a unique way of doing things that is hard to copy, then the value will go up because it is harder for them to replicate.

A second consideration is how much it would cost to buy other similar businesses. So the market will guide value too. Looking at business transfer statistics in your sector will help you to evaluate market conditions for your business and modulate it’s value year on year accordingly. Making such comparisons is often best done using the so-called enterprise value, or EBITDA multiple.

Beyond the buyer, why not set your own price – what is your business worth to you? Various considerations may go into this – how long you’ve been building and running the business, how many years you went without taking a salary or drawings of any kind, what you want to do afterwards. With this in mind you can then go about making sure your business is worth that much – there are some very specific ways to go about increasing the value of your business which you can implement once you have a clear target in mind.

There are some quantitative approaches to valuing a business based on earnings and cashflow or asset value. These are most useful at setting a base value for your business as they tend to under-value factors such as reputation, USPs or intellectual property. But at least with a base measure in place you can benchmark, year-on-year, if you’re heading in the right direction.

Get in touch if you’d like a valuation for your business.

If you’re planning on putting your business up for sale on the open market, then yes, it can be a good idea.

By setting an asking price you create a psychological advantage during the negotiation. Research has shown that setting an asking price creates an anchor in the mind of the buyer (Malhotra & Bazerman, 2008) and the final transaction price will be closer to this value than if you don’t set an asking price. In an unrelated way, that’s why second hand car sales lots always have a ticket price in the window.

The key is having a good idea what you think the business is worth and erring on the high side. That is not to say over-value the business. You will lose credibility if you put an asking price that is double or triple its actual value. See What’s My Business Worth?

The exception to this guideline is if you believe your business has something of particularly unique value to a potential buyer. Examples might be intellectual property, patents, a monopoly or unique value proposition that is hard to copy and that a buyer really desires. Selling a business with this kind of strategic asset is more akin to selling a piece of art. Who knows how high a buyer may go in order to possess such an asset. It is important to know you have such an asset – just because you have intellectual property, patents, etc. does not mean you have a strategic asset (one clue is being able to achieve a substantially higher gross margin or growth rate than the industry norm). It is equally important to realise that most businesses don’t have such a strategically advantageous asset.

Even in this situation, it is important to have a realistic number in mind. One way to calculate this is to determine the Open Market Value of your business and then add in an amount equal to a proportion of the synergy that the prospective buyer expects to see by combining your operations. You will only be able to determine this by talking to a specific buyer, because the synergy will be dependent upon your two companies.

 

The most obvious way to find buyers is to list your business for sale with a broker or transfer agent. They have broad access to potential buyers and a budget to market your business online to a wider audience than you may be able to reach yourself. However, bear in mind that you will be in a competitive marketplace and are likely to find primarily financial purchasers.

Alternatively, you could create a short-list of potential buyers from your suppliers, customers, competitors or partners. With the right modifications to your infrastructure and organisation and taking the time to “court” your preferred buyer, you may be able to achieve a premium. Start having informal meetings and conversations with potential buyers over a coffee, lunch, sporting event, etc. without ever discussing the possibility of a merger or acquisition. You may want to do this years before you’re looking to sell so you build a relationship, even a friendship, with prospective buyers.

The return on investment could be substantial.

Businesses are often valued as a multiple of profit. This suggests two ways to maximise the value of your business. Firstly increase profits and secondly increase the multiple. The former is obvious, but what about the latter. The multiple is strongly related to six specific qualities of your business:

  1. The credibility of your growth plan based on historic performance of your growth plans.
  2. Positive cashflow and growth funded by cashflow.
  3. A strong market position: USP, monopoly position, IP, patents etc. that confer a strategic advantage.
  4. Risk reduction: suppliers, customers, employees, competitors, legislation, economic factors, etc. can all pose a risk as can the state of your commercial documentation – showing how you are mitigating these adds value.
  5. Autonomy from the owner – if the owner is not required for day-to-day operations, the value increases.
  6. Reputation and customer satisfaction.

Review the other FAQs for additional ways to increase your company’s value.

Create a plan to maximise value based on these six qualities. Get in touch if you’d like help creating your plan.

How much you receive from the sale of your business as a proportion of the final negotiated price depends on a number of factors such as brokers fees, legal fees and taxes. This is legally complex so seek expert advise on how to maximise the funds from your business transfer – ask to speak with one of our financial, tax or legal advisors.

Ideally, build the business so they don’t have to take a role in the day-to-day running of the business.

Alternatively, understand their skills and aptitudes and train them for a role in the business that suits them. If they have the aptitude to be the managing director then train them thoroughly in how to fulfill that role and create a structure that makes succession easy.

But don’t feel compelled to make them managing director. You and/or they are still the owner, so it’s irrelevant what role they take (only ego dictates they take the MD role). If they don’t have the aptitude for the MD role, it may be better for them and the business to put in place a motivated, and properly incentivised, employee managing director.

Over a period of time, progressively delegate more and more of what you do to your management team and other employees. The aim is to have none of the day-to-day activities left as your responsibility.

Then create accountability channels to ensure everything is done properly, on time and to the required standard by having clear KPIs, board meetings, performance reviews and reporting cycles.

If you’d like to discuss how, get in touch.

An exit planner works with the shareholders of a business to help them devise and execute a strategy to exit their business in the most advantageous fashion and to make the transition as smooth as possible.

The nature of an exit plan depends on your reasons for exiting: your goals and what you want to happen after you leave. An exit planner will help you define these outcomes and create the best exit strategy for you.

At SEPA, our exit planners can work with you in four ways to:

  1. Develop and execute a plan to increase profitability year on year. The strength of your growth plan is a strong predictor of the value of your business should you come to sell fonte dell’articolo. It is also a strong predictor of a successful transition to new management.
  2. Structure the business for maximum value to an acquirer or ease of operation for a successor.
  3. De-risk the business to protect the value of your business for an acquirer. Many business valuations plummet during the due diligence phase of an acquisition because of risks that are uncovered. De-risking also takes away many of the challenges and fears faced by successors.
  4. Develop your end-game with you, from creating a prospectus and marketing if you decide to sell or managing the transition to a management team or family member.

Get in touch if you’d like to create an exit plan for you and your business.

 

If you have already exited a business before then there may be no need to work with an exit planner. However, even our clients that have been through a business transfer before say that it’s reassuring to have someone keeping track of all the elements of their exit strategy.

The reality is, though, that the vast majority of business owners have never exited a business before, and the first time may well be the only time.

In this case having a professional working with you that knows how to create the best exit and transition for you and avoid the many pitfalls involved, is not just reassuring, it could be the most lucrative decision you make in business.

Get in touch to discuss how we can help you achieve the biggest pay day you’ll ever have in business and a smooth transition to your successors.

The answer to this question is the answer to the question “when should I start planning my exit?”

The short answer is from the very first day in business fonte dell’articolo. Why? Because your exit strategy has an impact on almost every major decision you make, from the name of your company to your articles of incorporation and from your marketing plan and recruitment strategy.

If you’ve already been in business for some time, then it’s never too soon.

The barrier to thinking about your exit is that you’re already busy managing the day to day activities of running and growing a business. Why would we suggest you consider this too? Well, simply because of the impact it has on those day-to-day activities and decisions. If you don’t have a clear exit strategy and plan, then you have to live with the impact of decisions made without that context.

A useful question in time-management is “what can I do right now that would make everything else easier or unnecessary?” If you ask yourself this question daily in the context of your exit plan, then running your business becomes easier and more focused.

Without an exit plan you may have to expend considerable time and energy later to change those decisions in a hurry at the end. Putting an exit strategy in place, with or without the help of an exit planner, helps you avoid that eleventh-hour rush: you really don’t want to be rearranging the chairs on deck when you could be enjoying the sights and hospitality on shore.

At SEPA, we help clients put an Exit Strategy in place and review it once a year to ensure it is still fit for purpose in light of your evolving goals and current trading conditions.

 

 

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