Mark Hardwicke of boutique investment bank, Invenio Corporate Finance, writes on the tactics required to make a successful exit.
The word was not even in the dictionary five years ago. Businesses were not making plans for it, the government was refusing to consider it, and almost no-one was predicting it. The ‘it’, of course, is Brexit, a word that now seems to permeate every aspect of national conversation. Added to the equally unpredictable presidency of Donald Trump, the once unthinkable UK referendum result made 2016 a very unpredictable year. The legacy for business is continued uncertainty – something which seems set to continue for the foreseeable future.
If we look ahead, roughly one third of SME owners in the UK are planning to retire, pass on or to sell their businesses within the next five years. Yet despite this relatively short exit horizon, most of them have not yet begun to think about what their available options might be. If there are any lessons that can be learnt from the Brexit vote, they surely must be: plan ahead, adopt a flexible strategy and always be prepared for any eventuality.
To ride the headwinds of future unpredictable events and to attract potential purchasers who are willing to pay a generous multiple of earnings, it is only those sellers who have carefully and thoughtfully anticipated each stage of the exit process from their business who are likely to succeed. By doing so, they can provide themselves with a much greater degree of certainty in achieving a favourable outcome.
The sale of a business comes after many years of struggle and effort for most entrepreneurs. Their decision to sell is distinctly personal – often the most important and life-changing transaction that they will ever experience. But according to our research, like so many who did not see Brexit coming, roughly 70 per cent of business owners have no definite plans either for managing business succession or, more significantly, for preparing a clear route through the exit process. Failure to do this can sharply limit the available options for a business sale or handover, no matter how well-managed it is.
When they lead a sports team out onto the pitch, no captain would ever think of starting a match without having in mind a clearly defined strategy of exactly how to take on the opposition and plan a path to victory. Running a successful business also depends upon the well-thought out execution of a structured plan that quickly responds to events – just like being in charge of a winning team. The same approach should apply when deciding upon a successful exit from a business: have a meticulous and thoughtful plan, underpinned by a clearly defined strategy that is then implemented by every party working together.
There is no quick fix or simple one-line mantra on how you can achieve the best result. But the process can be managed. One step at a time. To help entrepreneurs who want to sell their businesses, each step needs to be carefully targeted towards a single objective: achieving the right price, at the right time, on the right terms.
So how can you make the most of your opportunities to achieve the exit that works for you? It can help to take the following steps:
- Plan ahead. The sooner that you start the process of deciding when you want to sell, the more likely you are to achieve your ultimate ambition as to when and for how much. Ideally, this should start a few years before your planned sale date.
- Investigate and catalogue every different category of potential purchaser. This should include doing your due diligence on the available options: what is being bought, by whom and why? Potential buyers can be identified by their ability to purchase as well as their strategic fit. Doing this can make for much more effective targeting when the time comes.
- Understand exactly what value may be seen by potential buyers in a business like yours. After that, build its value so that they will be interested in buying at the best price.
- Identify every possible issue which could either frustrate the process or adversely impact upon the business value. Try and resolve these issues before starting the sales process.
- Focus on the key drivers of growth in your business while reducing activities and investment that will not enhance its value in the eyes of a potential buyer.
- Keep your options open. Although selling to a direct competitor can often work, this option can rely too much on market conditions. So be flexible about the range of potential buyers: this can frequently be the best way to secure the most profitable exit.
- Sell your business while growth is accelerating, otherwise you are not leaving anything on the table for the potential buyer. A flat revenue or profit forecast is unattractive so ensure that you package your business attractively to increase buyer appeal.
- Carry out proper due diligence on your professional advisers. Ensure that you feel completely confident that they have the relevant professional experience and know how to run a competitive bidding process. The key elements should include: maximising competitive tension, enhancing valuation and delivering the best deal terms.
- Don’t rush your preparation. It’s taken a lot of time and effort to build up and establish your company or business to its present position. So don’t leave your final reward on exit to chance.
There is a lot to think about before you sell your business: setting the right time and finding the right buyer needs careful consideration. It can be a good idea to seek practical, objective advice about how best to do this. It can help focus your thoughts, define your objectives and set your strategy, while at the same time giving you sufficient time to keep running your business. The step-by-step approach really does work: selling a business is much more enjoyable and potentially more rewarding if it is planned in advance.
