When should management prepare an exit strategy?
8 June 2014
Corporate finance partner
It may sound like self-interest but, on this one, your advisers are definitely right: it’s never too early to plan for the exit. An exit strategy is integral to the broader business plan and, if you’re acquiring the business, should ideally shape the approach to the acquisition itself. Whatever the exit timeframe, developing key objectives early is essential. Some short-term objectives can be critical to delivering the longer-term plan, and many PE-backed businesses will adopt a 100-day plan at the outset with that in mind. Entrepreneurs may have more flexibility and broader personal objectives may play their part too but, for all except a very lucky few, the exit is a hugely significant moment that needs careful long-term planning. Few strategies survive unscathed on the way to exit, but getting the business into the best possible shape will help to maximise value and enable you to be ready for the unexpected.
+44 (0)117 939 2218
Evolution Complete Business Sales Ltd
An exit strategy should, ideally, be part of a company’s initial business plan but, in my experience of hundreds of SMEs, this is rarely the case. My advice is to devise an exit strategy several years before a proposed exit. It takes significant time to create, requiring careful consideration of the owners’ long-term personal, financial and business goals. In a family business the top-level strategy may be to leave a legacy for the next generation, resulting in an operational plan centred on building fiscal stability and sustainable growth. If the top-level strategy is to achieve a premium exit price, via a trade sale for example, the operational plan is likely to centre on building strategic value to make the business more desirable and likely to realise a premium price. An exit strategy provides the framework upon which business plans develop and thrive. The earlier it is created the more likely it is to achieve a successful conclusion of the entrepreneurial dream.
+44 (0)118 959 8224
Diverco has more than 45 years’ experience in selling family-owned businesses, and the succession or exit strategy should be considered when the family member first takes on the role of director. It is never too early to plan. The following generation needs to be fully consulted to see if they really do want to take on the reins. There are often too many assumptions made by both generations and seldom enough open dialogue. If an external sale is a possibility then a plan needs to be considered. An early discussion with a broker ensures the right plan is put in place, the first part of which will be in developing a team who can manage the day-to-day operations. Like any plan, it should be periodically reviewed and a serious strategy for the sale should be detailed three years beforehand. Diverco, as the oldest family brokerage company in the UK, assists owner-managers throughout the process.
Partner & head of corporate
A successful exit strategy starts with planning and preparation. A management team which seeks to extract maximum value and feel rewarded for hard work needs an exit strategy. What determines the timing?
• In a family business, where there is no succession and ageing leaders
• Declining margins and difficulty of continuing
• Need for capital or equity injection
• Top of the market
• Competitor needs your business and is offering an exceptional price
• Owners can see better use of funds elsewhere
On a practical level, ensuring that document management systems are maintained will assist a disclosure exercise in the event of a sale. Similarly, develop board structure, improve corporate governance principles and build a growth strategy for the business.
+44 (0)20 7079 8140
Planning your exit may not feel like a top priority but planning a sale early and fully is critical. It’s about being ready to sell at the optimum moment. You can’t know in advance when that may be, so planning can never start too early. Key aspects will include:
• Ensuring you withdraw into an executive and strategic role, so a buyer sees the value in the business, not in you.
• Carrying out basic housekeeping on all aspects, including equipment, stocks and property. There’s only one chance to make a first impression.
• Ensuring all systems and procedures are robust, to give a buyer confidence in the business infrastructure.
• Making sure financial information is up-to-date and transparent, to demonstrate the business worth to a buyer.
• Finally, don’t forget the people – they will be the business after your exit.
Most of this is common sense, but it will all take more time than you imagine, so start immediately.
Corporate finance director
Cavu Corporate Finance
Strategy is the gel that holds the senior executive team together. It is a live, fluid concept that needs to be documented, refreshed and shared within an enterprise to provide wider meaning and clear direction. It’s vital at key times, such as in M&A transactions or a fundraising, where you want management to be able to articulate a coherent, unified message that they all believe in to a buyer or a funder. We have found that some management teams cannot articulate the strategy, have a different view about strategy, or have just not considered it important, and the first role of the adviser is to agree a common message that will be the gel for any transaction. Strategy is therefore key to any enterprise, and without it many SMEs will lack real purpose and energy holding back potential growth. A key part of pre-sale planning is to ensure the strategy is clear with the executive team, and to define the roadmap or building blocks that lie behind it. With this structure in place, a good corporate finance adviser will be able to drive real value in a sale process.
0191 255 7772
Imperium Corporate Finance
A business sale is unquestionably a significant event. For private sellers, in particular, it may be the culmination of years or even decades of work. Given its importance, a planned and proactive approach to selling a business is critical to ensuring the outcome meets or exceeds expectations. And as soon as an exit is even contemplated, some degree of exit planning should begin. Transaction strategy does not only concern the sale process itself, but also the preparation for sale, which can begin years in advance of the final transaction. Planning might, for example, involve shaping the management team to maximise your exit options – trade sale versus MBO? But even with a more pressing timetable, a carefully conceived and thoroughly executed sale strategy should add considerable value – even if “value” is not viewed exclusively in financial terms. Great outcomes rarely happen by accident. Taking advice from experienced specialist advisers, at an early stage if possible, is a sensible place to start.
+44 (0)7973 908330
The question here should be: “When should owners make an exit plan?” Management needs to stay focused on running the business. Distraction can reduce both profits and the value of the company. You’d be upset if you employed an MD to run your business but he spent his time planning how you’re going to sell your shares. The business owner’s personal objectives can get overlooked when planning. Do you want to continue to work for the business? Do you care about its continued success after it is sold? Do you worry that the highest bid will come from a competitor who would close the factory, move the trade and make staff redundant? Most advisers assume that your objective is the highest price, ignoring risk and people. For most owners there is more to it. Make sure you have a corporate finance adviser that really listens to your wishes and offers a success-only fee structure, so you know he is motivated to deliver for you.
+44 (0)1604 660 511