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Planning your exit strategy
lvis Presley’s manager, “Colonel” Tom Parker, used to say that Elvis spent more time preparing his entrance and exit for a concert than any other part of the show. Maybe your entrance into your business
was a bit happenstance. However, you should take a cue from the King and spend some time planning your exit.
As an owner you inevitably think about retiring.
You either pass your business to a family member or perhaps sell it outright. Keeping your business in the family follows a strategy where the next generation gradually takes over the executive operations and management of the company. Often the next generation has grown up in the business. Emphasis is on continuity. Selling your business to an outsider is a different kettle of fish. Planning to sell your business is often an emotional process. This is your baby that you’ve nurtured for years. You hate to see it go. There lies the first challenge. Many owners wait too long to sell their businesses. This leaves them at a disadvantage when they finally decide to make their move. However, with some forethought you can improve your odds of completing a successful transaction at a favourable price.
Plan ahead
When you plan to sell, think about the proposition from the buyer’s perspective. Typically a buyer will want to see three years of financial and marketing reports. This means that you should start your planning at least five years in advance of your desired exit date. Many small- business consultants recommend starting even earlier than this timeframe.
Buyers look for steady growth and steady income. Allowing yourself a broad timeframe for when you’d be willing to sell gives you an advantage. For example, if you’re coming off three years of 10 percent growth and you’re within your exit window, you may want to sell sooner rather than later. If you think about a buyer wanting to see three years of steady growth, this implies that you sell your business before it has reached a plateau. Your buyer wants to see the business still growing because he’s buying the business’s future, not its past. On the other hand, if you’ve had a few soft years, such as most businesses are experiencing in the current economy, the longer planning window allows your business time to recover.
Review your
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financial statements First, clean up your balance sheet. Old inventory,
miscellaneous real estate and unused equipment are just a few of the items that clutter balance sheets. Liquidate excessively aged inventory and sell unused capital assets. At best they only lead to a devaluation of the business by a potential buyer. At worst they make the business unappealing. It’s usually better for you to get the cash from selling your odd assets rather than losing money from their devaluing your business. If your balance sheet is easy to understand, your business is easier to sell.
Next, examine your profit and loss statement (P&L). Buyers are looking for healthy returns in order to pay back their investment. Depending on your industry niche, this usually means that you’ll want your EBITDA (earnings before interest, taxes, depreciation and amortisation) to be in the 7 percent to 12 percent range.
If you’re lower than this range, you’ll want to revisit your benchmarks to determine where you can pick up the slack to improve your bottom line. Going into the details of how to bring your business into an acceptable EBITDA range is beyond the scope of this article. However, the usual suspects are marketing and overheads. Fortunately, if you begin preparing to sell during a five-year window, you have time to bring these expenses in line with industry averages.
Value your business Let’s assume that you’re at the start of your five-year
window. You’ll want to get a reasonable estimate of what your business is worth now. This way you can better plan what you’ll need to do to get the selling price that you want. There are three primary ways to value your business. Typically a prospective buyer will run two, or all three, of these valuations before homing in on his offer. For now, we’ll give a quick overview of the three most commonly used methods and focus a bit on the dominant approach. After all, to be forewarned is to be forearmed.
The discounted cash-flow method projects the difference between the future revenue and expenses of your business and then discounts it by the interest rate. There are no fixed rules for setting this projection period, though you’ll often see them run from between five to seven years for a small to midsize company.
The liquidation method, sometimes called the bricks-and-mortar valuation, takes the current value of the business’s hard assets, such as real estate
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