What is Your Business Exit Strategy?
– Part 2 of a 4 Part Series on Exit Strategy
Timeframes
Any owner looking to divest within two to three years should start formulating his exit strategy now. He should assume at least six to nine months of time will be required to complete any sale process. It will then take an additional six to twelve months of time to transition to the acquirer in an orderly and successful manner.
The total time from handshake through closing and final transition should be expected to take between one and two years. Long transition times should not be seen as negative in cases where earnout payments are part of any structured sale. It often allows the seller to be actively involved in making sure the business continues to thrive while profiting from being an incentivized key player.
For any manager considering putting money into an MBO (or MBI) there will normally be a clear view on how an exit would be achieved prior to the deal closing. By necessity this will carry through the life of the MBO, but it is important to know at the inception what the credible exit options are that would be acceptable to both management and their financial backers. For many owners it is the threat that the business performance has peaked and may start to deteriorate that gets them thinking about an exit. If this is the case, then the exit may come too late to get the best price.
The Business
Many businesses often have no real competitive advantage in their market space. They have existed or thrived either through long-term endeavors, personally built relationships, or a degree of price competitiveness linked to hard work and otherwise servicing an established and valued customer base. During the value creation process, you should seek to develop unique selling points that are sustainable. These might include better trained managers who are multi-functional, an increase in product development, re-branding, or even developing a series of partnership relationships that enable a wider, more differentiated market penetration.
When exiting a business it is important to sell some upsides to the new owners, so that they can be given assurances of continued growth once they have control of the business. An important part of the exit strategy; therefore, is to showcase the immediate and medium term prospects of the business, thus selling the key benefits.
These key benefits may include the following:
- Launching a new product line
- Entering new geographical markets
- Establishing strategic partnerships, and alliances
- Joint Ventures with other companies
- Acquiring competitors or complementary businesses
It may be beneficial for a company to have proved some of the upside in these areas by the time first proposal to put some substance behind the sales pitch towards obtaining the greatest possible purchase price. Again this may take time to accomplish which reinforces the need to start the planning process early.
The Threats
It is not only the upsides owners need to think about when planning an exit – possible threats to a business can impact the attractiveness and value of a business. Threats such as the following:
- New and competing technology in a company’s markets
- An adverse change in legislation
- Consolidation or loss of customers
Some threats are indefensible while others are not. A defense strategy may take time to implement (e.g. an acquisition prior to exit to acquire a desirable technology). Where a defense strategy is too risky or too costly, the answer may be to bring the exit forward before the threat becomes more visible to possible acquirers/investors.
Nothing turns a prospective buyer away from a business more than inaccurate or incomplete information, or delays in answering inquiries. Consider the information you would want to see if you were purchasing a business and ensure that this has been recorded for at least two years prior to the sale. This should include: robust monthly financial reporting, customer and product concentration details, margin analysis, etc. The structure of a business should be as organized as possible to prevent complications and additional costs. Areas that can be pitfalls include: minority shareholdings held by potentially problematical parties, overly complicated legal entity structures, tangled inter-company or related party transactions, and underlying results not clearly visible on tax returns or financial reports.