As a business owner, there might come a day in the future when you wake up and think that it’s time to sell your company. Maybe you have another business venture that you want to undertake or perhaps you want to take some time off to travel, pursue charitable work or focus on your family life.
Whatever your reasons are, it is important to know that (when that day comes) you can’t simply roll out of bed and sell up that day. An exit isn’t something that happens miraculously. A business sale is a process with a huge number of considerations that need to be thought through and something that will require careful planning in order to ensure you’re making the correct decision and can achieve the best possible sale – both in terms of structure and value.
With that in mind, a sale is something you need to think ahead about, rather than just jumping straight in. In fact, if you’ve decided to sell your business, the minimum period you will need to spend preparing is around three years.
Thirty-six months may sound like an eternity, especially if you’re dead set on selling up, but taking this time will mean the process can be handled properly and you can get a price that reflects the true value of your business and the work you’ve put into it. Ultimately a period of around 5 years would be the ideal timeframe for a well-planned and executed business sale.
Things to consider when planning your exit
Given the significance of deciding to sell your business, there are a wide array of aspects to consider and preparations to make in the build up to a sale. These will enable you, not only to build towards a successful transaction, but also to confirm that it is the right decision and ensure that you are in the best position to pursue what you want to do post-sale.
Here are the main things to bear in mind when planning your business exit.
Have you talked it through with the right people?
As a business owner, running your company is obviously a huge part of your life and, by extension, the lives of those closest to you. When considering selling your business, therefore, a vital first step will be talking through the decision with those who are likely to be most impacted.
You should, of course, undertake regular discussions with your accountant and other specialists to ensure you are receiving professional advice on the business sale process from those in the know. Key figures within your business will also need to be consulted, particularly if they are likely to take on more significant roles once you’ve completed your exit.
Perhaps just as important, however, will be talking it through with your family and other loved ones. During and after a business sale, your family and close friends are likely to be those most affected by the process and what you choose to do afterwards.
Keeping all these people informed of your plans throughout the sale process will be vital, not only to ensure that no-one comes in for any nasty surprises, but also because they can all (in different ways) serve as invaluable sounding boards, helping you through the decision of whether to sell and then the subsequent process.
Are your personal, financial and business goals aligned?
As important as it is to plan and prepare for the legal and administrative sides of a business sale, it will also be crucial (before you make a final decision and begin preparing for a sale) to think about your own goals for the future, which essentially constitute your reasons for wanting to exit your business.
You’ll want to consider your future goals with regards to your personal life and from a business and financial perspective. While these goals are separate from one another, they are also likely to be co-dependent and linked in several ways.
In terms of your personal goals, this is a case of broadly considering what you want to do next with your life. What exactly is it that you want to do once you’ve completed your exit? Are you planning on retiring or taking a sabbatical? Are you looking to do philanthropic work? Or are you moving on in order to start a new business? If you didn’t have to work again and weren’t running your business full-time, what would you ideally want to do?
Personal goals are often the impetus behind an owner exiting a business, so it is of paramount importance that they are clearly defined and thought through ahead of time. Many business sales fail, not over issues with due diligence or on the buyer’s side, but because the selling owner starts to have second thoughts about exiting. Ensuring that you have something post-sale that excites you will help to eliminate this uncertainty from the sale process and mean you aren’t left feeling directionless once you’ve sold.
As far as your financial goals are concerned, the key is to look at your post-sale personal and business aims and consider how much money you’ll need to make these a reality. Speak to a financial adviser or planner to get an overview of your current net worth and the value your business sale is likely to deliver.
It might be the case that a considerable part of your financial value is tied up in your business, so you’ll need to establish whether a sale is going to generate the money required to enable you to live the life you want post-sale. If not, then you will need to look even more closely at ways of building the value of your business in advance of a sale.
From a business point of view, consider the state that your company is in and whether it is transferable in its current state, or requires significant work before you can bring it to market. Establishing whether your business is structurally optimised and running as efficiently as possible will enable you to see areas for improvement that will not only make it more marketable, but also increase its value. This will, in turn, provide you with the business goals you’ll need to aim for ahead of a sale.
Have you formed an advisory team?
A strong advisory team with a breadth of knowledge and experience is a central part of a sales process and something you’ll want to set up in the early stages. At an absolute minimum, you’ll need a core team that you speak to on a regular basis, with a lawyer, accountant, wealth or financial advisor, exit advisor and someone with experience in building value pre-sale.
Beyond this core, consider other significant people you’ll want to bring on board. This could include any business partners you have, relevant family members, a tax specialist, insurance specialist or anyone else with expertise in an area that will be central to helping you make a successful sale and realise your post-exit goals.
Establishing this kind of diverse team will bring a modicum of independence to the process and provide a depth of insight, experience and advice that would otherwise be lost if you planned your exit alone or only worked with a small team of those closest to you or the business.
Do you have a contingency in place?
It is important to acknowledge that sometimes circumstances can slip out of your control and that even the most well-planned and thought-out business sales can go wrong. For that reason, you should come up with a solid contingency plan that you can turn to if things don’t work out.
This is an area in which your advisory team will be important early on and you should look to build a plan that specifies what exactly will happen if something unexpected occurs that could mean you have to abandon your sale plans, aren't able to run the business or are forced to exit earlier than planned.
Have you completed the necessary assessments?
Ahead of a sale, you will need to complete several assessments in order to ascertain a comprehensive overview of the state of your business. Crucially, of course, you’ll need to know how much your business is worth and, for that reason, you’ll need to conduct a thorough business valuation.
There are numerous ways to value a business, with a comparative approach very widely used. Some industries (i.e.nursing homes) have particular rules of thumb but the most common method values a business by multiplying its adjusted earnings (EBITDA) by an appropriate factor. This factor, or 'earnings multiple', is typically determined by sales of similar businesses in the same industry.
Businesses in higher growth sectors will often have higher multiples, while slow-growth businesses tend to have lower figures. An overlaying factor is that larger companies, with higher earnings and a solid management team in place, will command higher multiples than smaller businesses. Talking to your financial adviser and consulting historic multiples for similar businesses in your sector can help you arrive at an appropriate figure for your business.
The DCF (discounted cash flow) method is another common approach to valuing a private company. This essentially looks forward in time, rather than historically. It is calculated by projecting cash flows into the future and using a defined discount rate to value the cost of time, and give a net figure that represents the maximum that ought to be paid for the investment. See this article for a more detailed examination of the DCF method.
Other than the above approaches, you can also use methods such as an asset-based valuation (in which you take the Net Book Value of your business’ assets and then adjust this figure based on factors such as depreciation and outstanding debts) or an entry cost valuation (in which a business is valued by considering how much it would cost to set up a similar company, factoring in things like startup costs and assets). Again, speaking to a financial adviser or looking at how similar businesses have made valuations can help you to arrive at the most appropriate method. Also see: Methods of Business Valuation.
Other than a valuation, you will also need to conduct a strategic analysis and an assessment of your business’ finances. Fully audited financial records covering the last three full years, financial forecasts, and up-to-date HR, legal, tax and customer records will all need to be sorted out in order to enable prospective buyers to carry out a proper due diligence process.
What are your exit options?
There are a wide array of ways to sell a business and before engaging in a sale process, you’ll need to consider the various exit options available to you and what kind of deal structure would best suit your business. Are you selling to an outside buyer - i.e., a private equity firm or strategic buyer – or are you planning on passing the business on to someone already within/close to the company – such as through a management buyout?
You’ll also need to decide whether you are exiting completely (a full sale), or rather taking a step back from your position as owner and taking on a reduced role (partial sale). If it’s the latter, you should clearly define exactly what your future role is going to be ahead of time in order to ensure clarity, both for you, the business and potential buyers. There are many factors that will determine what kind of exit strategy works best for you and for the business.
Have you written up an exit plan?
As we’ve mentioned before, an exit is a process that takes a considerable amount of time and it will be critical to have a detailed plan in place outlining how you envision it happening. A good exit plan should include stated goals and objectives, as well as clearly defined tasks and information on who is accountable for them.
It will also require a definition of the transition team, plan leaders and project managers working on the transition, a timeline for each stage of the exit, a budget and details on your role as owner before, during and after the transition.
The plan should feature multi-year implementation, ranging from getting the plan clearly outlined, to executing its various stages, right up to finally closing the sale and your post-transition plans.
How will you enhance the value of your business pre-sale?
Once you have a clear idea of the current (pre-sale) value of your business, you can begin to look at the ways in which you might enhance this ahead of the sale. As outlined above, the sale value of your company will play a massive part in ensuring you can execute your personal and business goals once you’ve exited.
So, whether you’re selling to an inside or outside buyer, enhancing the value of your business before you exit is key. These methods should be baked into your exit plan, with different stages throughout the multi-year implementation strategy.
Putting in place strategies within set timeframes and conducting regular assessments on these (i.e., every 90 days) will help you to keep track of what your business is worth as you seek to bridge the gap between its pre-sale value and the figure you hope to achieve from your exit.
You might start this process by conducting preliminary due diligence with your advisory team looking at how you could de-risk the business and implement strategies to maximise value. With a tax specialist, you can also explore ways to minimise taxes on your business sale, while an exit strategist can offer insight into how to improve your chances of a smooth, cost-effective ownership transition.
Do you have a management succession programme?
A management succession programme will be key to ensuring that the post-transition leadership team is ready to operate the business once you’ve exited. This will be especially important if the proceeds you get from the sale are in some way tied into the future performance of the business, such as through earn-outs.
Too much owner-reliance is one of the main causes of a business failing post-sale, so having a clearly defined succession programme in place is vital to mitigating this risk. While the transition is obviously at the tail-end of the sale process, it is highly recommended that you and your advisory team work on management succession planning early to ensure that the business is well placed to continue without you and that you are free to pursue your future personal and business goals.
Selling a business is, of course, about the end goal of achieving the life you want post-sale, whether your goals are personal or business-related. While the excitement of this future might make it tempting to rush through a sale process, the best way to achieve your goals is through a properly planned, thought through and well executed sale process, one that begins to take shape years before the transition itself.
Putting in the necessary work through each stage of the process and acknowledging that the right sale won’t happen instantaneously, but is something you need to work hard to achieve, will mean that you come out on the other side with the time, finances and freedom to properly move on to whatever you want to do next.
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