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How to make an exit

If you think might sell your business in the future, you should start planning for it now. 

The aim of a well-structured exit strategy is to make sure you receive interest from a variety of potential buyers, you are paid a high price, you have limited liability after exit and the exit process proceeds smoothly.

Your buyer could be a competitor (a trade sale), the general public (a float) or an individual or corporate entity including wealthy individuals and the private equity funds (a buy-in or buy-out or more generally, a private sale).  Each type of buyer has different requirements – and this will have a strong influence on your exit planning.

So, what actually triggers an exit?

* The desire of the sellers to lock in gains arising from market conditions or trading success.

* The desire of the sellers to retire, move on or diversify.

* Illness or disagreement.

* The changing fortunes of the business (good and bad).

* The fact that the business has simply reached the end of a chapter in its development, and, to start a new chapter, would require a fresh injection of capital or talent, a new strategic partnership with a reseller/supplier/distributor etc. or perhaps a move to a new market.

A good exit strategy will make sure that any weaknesses in a business, which may prevent it from selling, are put right at an early stage. The most common deficiency is a significant gap in senior management – this is especially acute where much or all of the business’s expertise is concentrated in the exiting owner/managers. Recruit and train further senior management who will stay in post after you’ve left.

Knowledge and processes shouldn’t just to be passed down to new staff, they need to be written down and formalised. Companies with clear and robust processes are easier for external buyers to understand (hence more buyers will be interested, in turn creating competition and a higher exit price). Allow at least three years to undertake these tasks properly.

Place yourself in the buyers’ shoes and identify, from the buyers’ perspective, the key elements to the business. In most cases, these will include employees, supply and customer contracts, licences, leases and intellectual property. Make sure these key assets are at their most robust and attractive to the buyer at the time of the planned sale. Taking customer contracts as an example; make sure that all such contracts are, so far as possible, long term, with customer tie-ins and with limited or managed levels of risk. One of the greatest concerns for a buyer is that after a sale, the business’ customers may terminate or fail to renew their contracts. 

The valuation

Central to any sale is valuation. There are many ways of valuing a business and an exit strategy will need to predict which method the buyer will adopt. Most revenue-producing businesses are valued in accordance with an appropriate earnings multiple; with the buyer agreeing to pay several times the annual adjusted profit. According to Zephyr, which produces a database of SME transactions in the UK, the average multiple is 6.5 (ie: a business with an annual adjusted profit of £1m would sell for £6.5m).

Test the market

Identify potential buyers, and then have some exploratory conversations with them to introduce the business (even if selling is a few years away). This will give you valuable feedback as to what you need to change to create a better valuation and what the likely appetite will be for a business such as yours. In most cases, it will tell you when your likely buyers will have the most disposable funds to make an acquisition. In exceptional cases, this might even identify a highly interested party who would be willing to pay in excess of market price to prevent your business ever coming to the market. 

Exit planning is not without risk

Business owners always have to balance the benefits of exit planning against the distracting effect on management of allocating time to exit planning. Keep the exiting planning group very small.

Another risk is the danger of talking to trade buyers as part of exit planning. Trade buyers are, by definition, industry insiders and the news that you may be seeking an exit can be problematic. Have very clear confidentiality clauses in place.

An end has a start

The best piece of advice for anyone serious about exiting is to start with the end in mind – understand who is likely to buy your business and why. Then work back from that point to understand what needs to be done, and by when, to maximise the chances of selling at the best possible terms.

Matthew Byatt is the co-founder of corporate financial advisers Beanstalk Management.

For more information on exit strategies, visit The London Funding Conference, which is being held at The British Library Conference Centre on March 9, 2011.

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