Preparing for Exit

As we can see from the political uncertainty we are currently living through, fully preparing for any exit is critical!

On the day when we were supposed to be leaving the EU, we thought it would be useful to share some practical tips for business owners on the timing and preparation for an exit.

At JDC our experience is that owner managers often delay planning the sale of their company because they are caught up in the day-to-day operational demands, or because they find it difficult to acknowledge that the time has come to let go of their business. As a result, many companies are reactive when it comes to planning succession. This lack of forward planning can mean, at best, a failure to maximise value and, at worst, could see the company fail to sell at all.

Effective succession planning begins long before an actual sale. As a business owner, you need to give yourself time to manage the process in a calm and calculated manner.  In all likelihood this will be the single largest and most important transaction you will ever be involved in and whether you are thinking about selling your business in the next six months or in five years’ time the following tips should help you enhance value.

1. Demonstrate long-term relationships with customers and clients

Contracts with guaranteed revenue are desirable, but, if not practical in your industry, then you need to show that the clients have been happy with the products/services supplied for a prolonged period of time. This will give comfort to an incoming party that the relationship is solid and likely to continue for the foreseeable future, greatly increasing their view of value.

2. Develop a solid management team showing the business is not dependent on the departing owners

If the shareholders still generate revenue, meet with clients or are the face of the company, then a purchaser will rightly be concerned about the negative impact of them leaving post-sale. Therefore having a fully managed business including day to day operational aspects, financial reporting and client interaction not directly linked to the vendors is crucial. This is an important step in the evolution of any company and, in relation to an exit, puts vendors in a much stronger negotiating position. By withdrawing from the front line and introducing a dependable second tier management team, you increase not just value, but also the range of exit options, including the possibility of a debt or equity funded MBO or vendor-initiated MBO alongside a trade sale and, most importantly, also opening up the possibility of not needing to sell at all.

3. Get your house in order

Any potential buyer will scrutinise the financial results over the past few years in order to understand the risks and rewards of this potential investment. If there are discrepancies or anomalies in your accounts, then a buyer will discover these in due diligence and the goodwill built up between both parties will quickly evaporate: either the buyer will renegotiate the price or, in the worst-case scenario, walk away altogether.

4. Introduce regular management reporting

This will help buyers understand the key metrics and performance indicators used to manage the business.  In addition, demonstrating how well the company is run from top to bottom, with proven policies and procedures, will give an acquirer comfort and when compared to your peers will help justify the premium price that you are seeking.

5. Start considering who the ideal buyer will be and how they perceive value

Understanding a buyer’s value drivers can help you to position your business to highlight these points. Understanding who would be best positioned to benefit from a deal, whether it’s a defensive acquirer or a new entrant looking to diversify will allow you to identify synergies, which would enhance the future deal value. Presenting this in a detailed and credible business plan to the right purchasers at the right time can make a significant difference to the value you achieve on exit.

6. Understand the strengths and weaknesses of your business

A critical review of your business at an early stage can help you to shore up weaknesses in the short to medium term prior to approaching the market, whilst also ensuring you are fully prepared for any tough questions during diligence.  Conversely, be ready to highlight all of the key strengths at the right stage of negotiations.

Conclusion

In summary, proper planning will always optimise value and allowing yourself the time at the earliest possible stage to develop a coherent strategy and build a team will enhance value whether you ultimately decide to sell in the future or not.