The importance of exit planning
As a business owner, you’ve poured your heart and soul into building your company from the ground up. But have you thought about how you’ll eventually exit when it’s time to move on? Whether aiming to sell your business for a nice nest egg or transitioning ownership to a family member or employee, having an exit strategy is crucial. Proper planning can maximise your proceeds and ensure a smooth handover.
Common exit strategies
There are several potential exit paths: outright sale to a third party, passing the torch via succession, taking the company public through an IPO, or winding operations down. Each route requires meticulous preparation years in advance to command top dollar and protect your legacy.
Preparing Your Business Financially
Financial statements and documentation
Prospective buyers or successors will want to examine your financial records with a fine-tooth comb. Having organized, up-to-date financial statements and supporting documentation is non-negotiable. Be sure to work with your accountant to rectify any holes or inconsistencies.
Increasing profitability and cash flow
A business with strong, trending profits and healthy cash flow is far more appealing than one struggling to get into the black. Look for opportunities to boost revenue, cut costs, and improve cash management practices well before pursuing an exit.
Debt management
While some debt may be perceived as potentially leveraging growth, excessive debt is a red flag that can severely hamper valuations and deal prospects. Work on paring down debt levels or renegotiating terms to strengthen your exit positioning.
Building a Solid Management Team
Developing a second-in-command
Don’t be the stereotypical founder who tries to do everything yourself. Identify and start grooming a potential heir apparent who can step into operational leadership for a smooth transition post-exit. This second-in-command role is vital for instilling buyer confidence.
Cross-training and succession planning
Beyond just your right-hand person, implement a succession plan that develops multiple employees’ abilities to take on greater responsibilities. Cross-training helps institutionalise tribal knowledge and reduce key-person risk that can spook buyers.
Incentivising key employees
Once you have a strong bench of leadership talent, make sure to incentivise them to stick around through the transition and beyond. Equity compensation, bonuses, and tailored benefits can go a long way toward retaining your all-stars.
Operational Optimisation
Process documentation
You may have all the operational workflows locked in your brain, but buyers want to see them formalised through rigorous documentation. Having these playbooks creates a streamlined turnkey business and knowledge repository.
Systems and technology upgrades
Antiquated systems and tech can be a major area of risk in the eyes of buyers. Take time pre-exit to evaluate modernising things like your ERP, CRM, security, cloud migration, etc. The cost is an investment in a higher valuation.
Customer acquisition and retention
Can your business demonstrate a steady stream of new customer acquisition and high retention rates for existing customers? If not, implement strategies to cultivate longer-lasting customer relationships and reduce churn before exiting.
Protecting Intellectual Property
Trademarks, patents and copyrights
Your company’s IP is a key asset that must be shielded. Work with attorneys to formally register trademarks, file patents, and certify copyrights for your unique products, services, creatives, and branded assets.
Non-disclosure and non-compete agreements.
Similar preventative measures like NDAs and non-competes can help safeguard your trade secrets, client lists, and other sensitive data from walking out the door while also deterring key employees from becoming future competitors.
Grooming a Buyer
Identifying potential buyers
Well before going to market, start mapping out the potential universe of buyers who may have strategic interest in acquiring your business. Vet their motivations, capital resources, cultural fit, and more.
Building relationships
Don’t just cold call when it’s time to sell. Begin cultivating relationships with high-potential individual buyers or firms’ years in advance. Strong existing relationships will make for a far smoother sale process.
Seller financing options
Offering seller financing, where you provide part of the sale amount via a loan, can help pre-qualify more buyers and garner higher bids. Just be sure the terms are structured correctly for tax efficiency and repayment certainty.
Due Diligence Preparation
Common due diligence requests
Talk to advisors about better understanding the extensive informational requests buyers will make during due diligence. Having materials prepped in advance ensures no deal hurdles or delays down the road.
Virtual data room setup
Housing key operational, financial, legal, and employee data securely in a virtual data room makes due diligence more seamless. Getting this room organised early communicates sell-side professionalism.
Valuation and Deal Structures
Business valuation methods
There are various business evaluation methods – from asset and income-based approaches to more subjective rules of thumb based on revenue or profit multiples. Pursue professional guidance on the right valuation approach(es) for your situation.
Asset vs. equity sale
Similarly, explore the pros and cons of two common deal structures: asset sale (selling individual assets) or equity sale (selling ownership interests). Tax and legal implications can differ significantly based on the structure.
Earnouts and rollover equity
An earnout lets a seller capture additional sale proceeds if the business hits post-sale performance targets. Rollovers also allow exiting owners to maintain a minority equity stake moving forward.
Transitioning Out Gracefully
Training the new owner/leadership
Once a buyer is lined up, budget ample time to thoroughly train the incoming owner and transition your operational knowledge, customer/vendor relationships, and other key institutional insights. A well-executed handoff prevents future turbulence.
Employee and customer communications
Prepare clear, thoughtful messaging to notify employees and customers about the upcoming change in ownership and leadership. Transparency helps soothe concerns and retain these critical stakeholders.
Your next steps
With the successful transition complete, take time to unwind, celebrate your accomplishments, and flesh out your plans and goals for this new chapter. You’ve more than earned it!
FAQs
- How far in advance should I start preparing my business for sale or succession?
There’s no definitive timeframe, but most experts recommend beginning 2-5 years out to ensure all the prep work gets done right. The earlier you start planning, the smoother the eventual transition will be.
- Is selling my business outright always better than slowly transitioning ownership?
Not necessarily – there are good reasons someone may prefer an outright sale vs. gradual succession. It depends on your specific goals and situation. But whichever route you take requires diligent preparation.
- Do I really need to incentivise key employees? Isn’t ownership transition enough?
You can’t afford to risk key talent jumping ship during this sensitive transition period. Incentives like retention bonuses and equity are well worth it to keep your all-stars motivated and loyal to the firm.