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30 August 2022

Exit strategy 101: How to plan a successful business exit

A business exit provides a unique opportunity to realise the capital value that you have created in your business. Unfortunately, many business owners 'leave money on the table' when they exit their business, mainly due to a lack of planning. Regardless of how far away you think your exit might be, there are things that you can (and should) be doing now to make the most of this opportunity.  


1. Define your objectives

The very first step in planning an exit involves thinking about what your ideal exit might look like. For example, in an ideal world:

  1. When would you like to exit?
  2. Would you like to continue owning any part of the business after the exit event, or is your preference to exit completely?
  3. Would you like to continue working for the business after the exit, whether as an employee, consultant or otherwise? Would you like to be a director or advisor?
  4. Are there particular types of people you would like (or not like) to own the business after you exit?
  5. What capital return would you like to aim for?
  6. Do you have any concerns about what might happen to the business, or its people, after you have gone?

Being clear on your goals will not only help you create more effective plans for your exit, it will also keep you motivated throughout the process.

2. Identify your ideal type(s) of buyer

There will be a range of people who could potentially be interested in buying your business, including:

  • your current management team,
  • a competitor,
  • a supplier,
  • a client,
  • a similar type of business based elsewhere (overseas, in another state),
  • a related business in your own geography, looking to increase their range of services, or
  • a private equity firm.

There may be others.

Your ideal type of buyer is the one who is most likely to be capable of delivering your objectives.  Although you don't need to limit yourself to a single category of buyer, the more targeted you are, the more focused you can be with the further steps below.

3. Find out what your ideal type of buyer is looking for

Although all buyers will be looking for similar things (for example, evidence of sustainable performance), some types of buyer will be willing to pay a premium for particular things.  Examples could include:

  • a foothold in a particular market,
  • specific expertise or knowhow,
  • relationships with certain types of client (or even specific clients),
  • possession of hard-to-acquire assets,
  • industry reputation or brand recognition,
  • industry leading systems and processes.

Similarly, some types of buyer may not be prepared to pay as much if your business is lacking in areas that are important to them. The same examples above are also relevant here, as well as:

  • a strong, stable management team who can operate independently of the owners,
  • a loyal and/or diversified customer base,
  • strong cashflow,
  • a sensible corporate structure, 
  • low exposure to trading and/or contractual risks,
  • no hidden skeletons (eg exposure to tax risk, litigation risk etc).

Ensuring that your business has all the features your ideal buyer is looking for, and that it has none of the features they are trying to avoid, will be critical to ensuring you exit for maximum value.

The process of finding out what a buyer might want should not be a speculative exercise. You can gain valuable insights by speaking with people - such as people who might fall within a category of an ideal buyer, or others who regularly deal with them. Corporate advisors are an example. 

4. Identify what you need to do to make your business as attractive as possible to your ideal buyer

Having defined what your business should look like to attract the ideal buyer, you can then start identifying:

  • the changes that need to be made, and
  • what data you will be able to collect, prior to going to market, to prove the value of what you have created.

Making meaningful changes and collecting the relevant data won't happen in a matter of months, and that's why it's so important to start the planning early.

For example, your ideal client might be willing to pay a premium if you can demonstrate (say) a strong track record in delivering a particular type of product or service. Providing a handful of case studies is one thing, but providing at least 2-3 years of specific experience, backed by financial data, repeat business, consistently high customer satisfaction surveys,  and other relevant metrics will paint a completely different picture and potentially elevate the value of your business to a different level.

5. Have the right advisors on board early

You will already know that you are going to need the support of a variety of professionals to exit your business. The types of people most commonly involved are:

  • Your accountant. Even though you might engage the services of other, more specialist advisors to assist in the transaction, your accountant will play a vital role throughout. 
  • A specialist tax advisor. Your accountant might have specialist tax knowledge, but they might not. (Ask if you're not sure.) Some structures will be more tax effective than others, and there may be things you can do (or should be aiming for) in order to achieve the best after-tax outcome on your exit.
  • A corporate advisor. Corporate advisors specialise in the process of buying and selling businesses. They possess a skillset that is quite different to accountants and tax advisors. From helping you get your business 'sale ready', to sourcing potential buyers and negotiating a deal, a good corporate advisor is often an absolutely vital member of the team.
  • A commercial/M&A lawyer. Your regular lawyer or law firm (if you have one) might have the capabilities required to plan for and implement an exit, but they might not. A good commercial lawyer will not only be able to help you with the transaction itself, but they will also be able to help you identify improvements you can make in the period prior to the sale, alongside your other advisors.

The sooner you assemble your advisory team, the better. Because they will have been through the process many times previously they will be able to provide insights, help you set realistic expectations, make connections with other advisors (or potential buyers), and generally help you through the process.  Try to find advisors with experience in exit transactions that are likely to be similar to yours, and who understand the market. 


6.Incentivise and align your team

If you are serious about maximising your potential return on an exit, you are going to need the support of your team. Consider whether your current remuneration practices are driving behaviours that are likely to enhance the capital value of your business.

If you don't already have one in place, perhaps consider an employee share scheme (whether a share scheme, option scheme or phantom scheme). Equity incentives can be an important tool, not just for team retention, but also to ensure the team is aligned in achieving your ultimate business objectives.

 

7. Execute your strategy

Once you have your strategies in place, it's time to execute them.

As should now be apparent from the discussion above, a successful exit strategy is a lot more than just announcing that you are for sale. 

For most businesses, there are always a number of improvements that can (and should) be made if the intention is to extract the most value on your exit. This is why a good exit strategy is executed over years (not months), and why you should really start working on your exit strategy now, regardless of when you think your exit might be.

About the Author

Bridgit Masson | Senior Associate

Bridgit is a commercial lawyer who helps privately owned companies and investors execute business-changing transactions, including capital raising, business acquisitions, employee share schemes and business sales. She also assists companies streamline their everyday transactions through the development of standardised contracts and related documents, as well as advising on commercial transactions that fall outside of ‘business as usual’.


bridgit.masson@turtons.com | (02) 9229 2903

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in the construction and technology sectors.

We specialise in helping businesses:

  • improve their everyday contracting processes,
  • negotiate large commercial contracts and other deals that fall outside of "business as usual", and
  • undertake strategic initiatives, such as raising capital, buying businesses, implementing employee share schemes, designing and implementing exit strategies and selling businesses.
Bridgit Masson | Senior Associate

Author

Bridgit Masson | Senior Associate

bridgit.masson@turtons.com

Bridgit is a commercial lawyer who helps privately owned companies and investors execute business-changing transactions, including capital raising, business acquisitions, employee share schemes and business sales. She also assists companies streamline their everyday transactions through the development of standardised contracts and related documents, as well as advising on commercial transactions that fall outside of ‘business as usual’.


bridgit.masson@turtons.com | (02) 9229 2903

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