Exit planning is all about timing

Exit planning involves either a succession plan to pass the business on to family or employees, or a plan to sell the business.  This article examines the latter.

Set out your aims and aspirations clearly

Exit planning for your business is the culmination of a lifetime’s work and it is emotional and time consuming.  However, it is often the payday that funds your retirement, so it is vital to get it right.

Set out your aims and aspirations clearly

Set out a timeline and a target exit date

Even if cashing out is far in the future, think of your business life as a journey to success.  Cashing out on your exit is the destination and you want to maximise the value at that point.

Developing this way of thinking automatically creates a logical framework to guide your decision making.  You can now make every decision on your journey, through the lens of maximising the business valuation at exit.

Maximising the exit valuation is only part of the story and you also need to include a target time for your exit.  The greater the time before your target exit date, the greater are the opportunities to groom the business to maximise its value, the greater the opportunities to find a buyer and the greater will be your negotiating power.

Exit planning – which exit?

Consider what exit routes may exist.  For SMEs’ the following there are the following popular exit routes.

A trade sale, selling to a customer, supplier, competitor, or some other business looking to diversify
Selling to the remaining management team / shareholders i.e. a management buyout (MBO)
Selling to an outside management team i.e. a management buy-in (MBI)
Sell to a financial investor such as a private equity fund or to a financial investor working in tandem with an MBO or MBI team
Sell your shares to your company (share buyback) leaving the remaining shareholders in control
Closing the business down and liquidating your investment

Exit planning – get the timing is right

The best time to begin your exit planning process is when you start your business and if you have not started yet, do so now.  It will pay dividends.

A common mistake is to sell your business too early.  Your exit strategy should try to maximise the sale value.  Do this by building a track-record of stability, with consistent growth and profitability.  You need time to groom the business.

This means fixing anything that might detract from its valuation and investing in things that add value.  You are polishing the reputation of the business, presenting it in the best light.

If you get an unprompted offer, remember you may not have completed the grooming process or researched the market for potential buyers.  Failure to do so will usually result in selling too cheaply and leaving money on the table.

Exit planning – what makes good timing?

Good timing will fit your aspirations and lifestyle choices.  The business may have had a good run.  The credit markets may be favourable for buyers to borrow.  You may wish to invest in a new business, or technology shifts may threaten your business.  Good timing allows plenty of time for marketing to the widest audience possible.

Exit planning – setting aims and expectations again

It is important to be clear about your aims and expectations.  Clarity here will improve your exit planning.

It will also give you an objective framework with which to evaluate offers.  Use it to decide your red lines in the negotiation process.