A business exit is the only opportunity you will ever have to convert the underlying value of your business into cash.
Regardless of when you think you might exit, you will exit at some point, and it’s therefore critical to make sure that you make the most of your opportunity. Otherwise, you stand to walk away from the value you have created.
1. It could make your business more profitable
Exit planning will typically involve a review of all aspects of the business, with a view to ensuring it is structured effectively, run efficiently, and able to be operated independently of its owners.
Exit planning is typically conducted with external advisors, including a corporate advisor, a tax specialist and a commercial lawyer. During the planning stage, the role of these advisors is to help you identify areas for improvement. They will look at all aspects of your business, from business structuring through to market opportunities and everything in between. Due to their specialised skills, they will likely identify opportunities that you will never have thought of.
Improving the profitability of your business can only be a good thing, even if you have no active plans to sell.
2. It will help you understand what your company is (or could be) worth
Most business owners do not have any realistic understanding of what their business may be worth.
Typically, business owners think their business is worth more than it actually is. This is because they are not looking at their business from the perspective of a potential buyer.
Most business owners also don’t realise that their business might be worth different amounts to different types of buyers, and therefore don’t spend much (if any) time trying to make their business attractive to the kind of buyer who is likely to pay the highest amount.
On the other hand, corporate advisors who specialise in buying and selling businesses will be able to provide you with very clear insights about what your business is likely to be worth, and ideas about the steps you could take to maximise the value of your business in the eyes of an ideal buyer.
3. It will create shared focus
Strategic plans and corporate goals are one thing, but the possibility of an exit event creates a focus like no other. Particularly if others in your business stand to benefit.
Many business owners will implement an employee share scheme as part of their exit strategy, the purpose of which is to (1) help retain key staff and (2) motivate them to behave in ways that will maximise the value of the business, if and when an exit occurs.
You can read more about creating successful employee share schemes here.
Having an exit strategy in place will help ensure that your company has a focused trajectory towards long term growth and a clear vision for its future. It also means that day to day decision making will be more strategic if there is an end goal in mind.
4. It's good to be ready
Investors, competitors and other potential buyers are always on the lookout for opportunities. (You may already have received approaches from them.)
Unless they are actively looking to sell, most business owners will respond to an unsolicited approach by either (1) rejecting the approach entirely, on the basis that ‘they’re not ready to sell’, or (2) naming a price that is well above any realistic expectation.
However, if you are ‘exit ready’ and even if you’re not actively looking to sell, you will increase the chances of receiving an offer that is too good to refuse. Being ‘exit ready’ may create opportunities that wouldn’t exist if you simply continue to focus on everyday business as usual.
5. It takes years to set up a successful exit
According to a recent report, it can take between 3 and 5 years to set up a business for a successful exit. Of the owners surveyed, although 73% expected to exit their business within the next 10 years, less than half had an exit strategy in place.
That’s not to say that you couldn’t exit your business in a shorter timeframe, if that’s what you’re aiming to achieve. It’s simply to point out that, the more time you invest in planning your exit, the greater your capital return is likely to be. That’s why your exit strategy should receive just as much attention as your growth strategy.
The two main reasons why successful exits take years of planning are that:
- it takes time to identify, plan and implement meaningful improvements, and
- it takes time to capture the data that you will need to demonstrate the value of your business.
A buyer is far more likely to pay a significant premium if there is data to support positive trends over a sustained period of time. A trend that can be shown over two or three years is far more powerful, from a valuation perspective, than simply demonstrating one positive year at the time of sale.
6. It will maximise the chance of a smooth transition
A buyer is far more likely to pay a premium if you can demonstrate that your business can successfully operate independently of you. This means having a strong, stable leadership team in place, as well as the necessary structures to ensure the business can mostly be run autonomously.
A buyer will pay a premium for this kind of business because it increases the likelihood of them making an immediate profit, from day one, without having to make any changes and without having to rely on you.
This kind of transition can only be achieved with early planning, by ensuring you have the right people in the right positions and making certain that they are sufficiently motivated to continue performing at least until an exit occurs. Again, this is another reason why many business owners look to employee share schemes as a way to maximise their potential return on an exit event.