Many business owners reach the decision to sell their business due to age, health, economic environment, boredom or a variety of other factors and then commence with the process hoping that they will achieve a top of the market price. The process often proves to be more complicated, more time consuming and less rewarding than desired.
Since before the Pandemic, there have been significant changes in the value and structure of transactions that make it all the more important that shareholders plan their exits in advance. The two most influential factors to address are the reduction in value achieved and the transfer of risk from the buyer to the seller through the extensive use of earnouts or deferred payments. Implementing an exit strategy can reduce the impact of both these factors.
An exit plan should address the key areas of risk that a buyer will identify in the business. This may include dependency on key customers, a narrow range of products or services, dependency on key staff in particular the shareholders, fluctuation in margins, limited second tier management, lack of development for the future, etc. Addressing such risk factors can take a significant period of time.
For example introducing a new senior management team, by recruitment or promotion, has the benefits of reducing the dependency on the current shareholders and possibly creates the option for a management buy out. It will take at least six months to assess the new team and if it doesn’t work out, you will have to start again. Similarly introducing new products or services, to broaden the company’s appeal, will take a considerable length of time to prove its viability. The upside of a well executed exit plan is that the vendors should achieve the best price available and reduce the period of an earnout.
Another feature an exit plan should address is due diligence. By compiling, in advance, financial and legal data files over a period of time rather than during a short period of exclusivity when it can be very stressful and consequentially difficult to keep confidential. Preparing due diligence information in your own time scale should make the sale process less time consuming and reduce the likelihood of staff becoming suspicious that a transaction is underway.
If you would like to learn more about our structured exit planning process or receive our exit planning brochure contact us: