Services:
Acquisitions and Disposals
Setting up, running and growing a business is a huge undertaking – and something that takes real determination and passion. However, at some point in the life of any company, the question of exiting the business will come up, and that’s when having a thorough and detailed exit plan can become truly invaluable.
Here we explain why setting your exit goals is just as important as setting your other goals for the business, and why the devil really is in the detail.
The last piece in the entrepreneurial business puzzle
In my experience, owners are very good at setting strategic goals for a business, but not so good at thinking about their exit plan – and that can have a serious impact on both the end value of the business, and the return that you (as the owner) get from any sale. Having an effective business plan is essential, as most business valuations will be based on a historic weighted averaged multiple of your company’s normalised EBITDA or EBIT (i.e. profits).
Although the last financial year will be the most important profit for value determination. This weighted average will normally be based on the previous three years’ performance, so there’s a need to groom a business for sale from anywhere between three to five years prior to your preferred sale date. The same level of planning is also required if your business is valued on a net assets basis.
An early focus on your exit plan is essential. Selling your business is likely to be the biggest deal you ever make, and a transaction that should set you up for life, repaying all the blood, sweat and tears you’ve put into building up your empire. In a way, the sale of a business is the last piece of the entrepreneurial puzzle and will define the legacy you leave behind – so it’s important to get it right! Having a solid and robust exit plan:
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Provides you with control – the plan gives you confidence in the exit process and in the company’s value, helping you to understand when (and when not) to sell.
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Makes you better prepared - a well-devised plan will help to prepare you for the upcoming negotiations and puts you in a better position to capitalise in the marketplace.
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Helps you to protect your loyal employees – having a clear plan for the next stage of the business allows you to protect and reward the employees who’ve been a key element of your business success.
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Preserves your own wellbeing – with a productive plan in place, you can reduce your stress levels and protect your own mental health and wellbeing – an important factor in your ability to lead the business.
Defining and reviewing your strategic plan
It’s never too early to plan for your exit. When you’re in the early stages of founding a startup, you may be better off concentrating your efforts on building the business and driving growth. However, it’s still beneficial to understand that an exit plan will be required at some point in the future, that the plan needs to be implemented 3-5 years before your exit and what’s generally involved in the process.
If you leave it until you’re ready to leave, you’ve left it too late. An exit strategy needs commitment, appetite and hard graft in order to maximise your consideration. The same level of commitment you’ve invested in growing your business will be needed once you’re preparing the business for sale, so timing is vital. With this in mind, everyone reaches that point at different stages of their life, so you really need to understand your own motivations, life goals and what makes you tick.
If you have business partners, you also need to establish an aligned strategy, incorporating your partners’ different desires. I always recommend that my business clients have a 5-year strategic plan in place, which all business owners and stakeholders can buy into. This allows you to look five years down the line and define your aims – one of which may (or may not) be an exit plan.
Take a high-level look at this plan every year. Having an annual reassessment ensures your plan is still the correct direction for the business and that everyone is still on the same page. Having a monthly strategy day also helps, setting out tasks for the month ahead to ensure progress is made against the plan.
Key elements to include in your business exit plan
So, how do you go about starting your exit plan? First of all, you need to establish if this is the right time, and the right stage of your life, for you to sell the company. What are the pros and cons of selling? If you conclude that selling the business is more favourable than not, then you move to the next step. Again, outside of the exit plan you need to speak to a financial adviser and establish the kind of lifestyle you’re looking to achieve, post-sale.
They’ll look at your current assets, income streams and your exit goals and will establish what sale price is needed to meet that lifestyle aspiration. Don’t underestimate the significance of finding the right adviser for you. In my experience, most owner-managers are highly entrepreneurial and very strong-willed, so you need an adviser who’s strong enough to challenge you and tell you when you’re on the wrong path. A good adviser can also get you back on track when your motivation is low.
Selling your business is such an influential moment in your life, making the relationship with your adviser an extremely personal and important connection in the exit process. To create an exit plan that’s practical, robust and workable, there are multiple elements to consider. From experience, the plan should include:
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Your target sale price for the business.
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A professional valuation as per today (which can be monitored as you progress with your plan).
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Your exit strategy: is this a sale, MBO, merger, liquidation etc.?
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An overview of your business and market sector.
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A list of potential buyers/investors including an overview of private equity (PE) houses in your sector that may be interested.
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Cleaning up the financials and eliminating any unnecessary costs and overheads over the next three years.
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Closing all existing litigation and claims, so all potentially negative issues are resolved prior to the sale (mitigating your risks).
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Putting a timeframe together for the sale/exit.
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Brainstorming and putting together a document that outlines all the attractive elements of your business.
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Industry analysis and benchmarking.
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Retaining your existing customers and, ideally, signing them into long-term contracts, if possible.
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Increasing your order values and average order frequency.
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Changing your mindset and focusing on keeping money in the business and raising the overall value of the company.
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Working on an information memorandum.
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Preparing forecasts and monitoring forecasts against your actuals.
Understanding the timescales for your business exit
A common question I’m asked is ‘How long is this exit going to take?’ and, unfortunately, there’s no hard and fast answer to this question. There are multiple factors and circumstances that can impact the timescale of your exit. It can depend on the type of deal you’re aiming for, the sorts of investors you’re working with and any unexpected events or complications in your own life.
There are also external factors that can have a significant impact, such as the state of the economy, changes in your sector or even something as unexpected and wide-ranging as the Covid-19 pandemic. And the speed of the deal can be equally affected by how pedantic the lawyers and advisers are, the size of the deal and the level of public interest in the sale itself.
However, there is a rough ‘rule of thumb’ that can be applied. From my experience of the deal process, a reasonable gauge would be between 6 to 12 months to complete the deal.
Helping with the exit planning process
Having a great adviser on your team can make a huge difference to the outcome (and the stress levels) of exiting a business. At Haines Watts, our partners own and run the business, so we understand your entrepreneurial mindset.
We implement our own 5-year plans, work on them monthly and have immeasurable experience of acquisitions, buy-outs and finding the right buyers. Having been on the business owner’s side of the table, we know how challenging an exit can be. We’ve assisted thousands of companies to:
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Implement their exit plans – providing expert advice on what to include in these plans.
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Groom the business for sale – helping to cut costs, add value to the company and maximise sale prices.
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Shift the owner’s mindset – so owners are less focused on minimising tax exposure and extracting dividends, and more focused on keeping profits and value in the business.
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Project-manage the process – by being there to support you at every point of the deal and exit process, from start to sale.
If you want a joined-up relationship with a huge network of finance and business specialists, please do come and talk to us about your exit goals and strategy .
For a step by step guide to walk you through your exit strategy, download our free Exit Planning Handbook
