An exit plan is a comprehensive yet actionable plan of the strategies and steps that a business owner should take to add value to their business and enable a successful exit.
As the number of people entering retirement age grows, business owners and entrepreneurs are increasingly looking to exit their business. Given this, it is becoming more important for business owners to look at ways in which they can set their business up for a successful exit that maximises the value they will realise. An exit plan is designed to do just that!
Important Factors to Consider
Business exit plans are designed to prepare business for sale and succession. As part of this they often consider a variety of factors and what impact they have. Below we discuss some of the most important factors:
Reliance on Owners
Businesses that have a high day to day reliance on their owners are generally valued at a discount to businesses that can operate autonomously with minimal dependence on their owners. A perceived risk to potential buyers is operating the business without the knowledge and relationships of the prior owner. For this reason, the firm’s key operations should be allocated over to the management team through handing them greater responsibility over a period of time allowing them to gain knowledge on the operations and build relationships with key customers and suppliers. This ensures business goodwill and knowledge is transferrable post exit.
Companies with a higher market share generally have stronger brand power and are valued at a premium to those companies with lower market share. Prior to exiting, businesses should look to focus strongly on markets where they can grow their market share without significantly reducing profit margins. Identifying key markets, competitive advantages and strategies to increase market share are crucial in executing this strategy effectively and accordingly increasing the value of a business in preparation for exit.
Customer and Supplier Contracts
When undertaking due diligence to acquire a firm, a purchaser will always assess customer and supplier contracts as key indicators to the risk of the business. in preparation for exit, business owners should maximise the number of contracts in place with key customers and suppliers and strengthen the terms of each contract to attract numerous buyers and minimise the discount rate applied by potential acquirers in their valuations it is important to note that contracts are normally assessed on the basis of their materiality, the term remaining and the strength of exit penalties.
Profit Margin Trends
Benchmarking a business’ margins and profit trends to industry standards can highlight areas where a business could take simple steps to improve its profitability, sustainability and accordingly its value. Having better trends than current industry benchmarks can mean that a business is less risky than others in the industry, which can assist with generating a better outcome as part of an exit.
Various Methods of Exit
Most business owners consider selling their business to be the most logical way of exiting their business. However, there are many other ways to exit a business, with some methods more suited to some businesses than others. As part of an exit plan, consideration is given to what method(s) of exit will generate the best result in consideration of your business and the market. Some of the options available to business owners are outlined below.
Management buyouts can be a very effective way of completing an exit. Generally, it involves owners selling their shares to a group of key management staff. This can be an effective way of completing an exit, as management staff already understand the business and selling to numerous management team members can reduce the capital outlay by individuals making the purchase more accessible.
Sale to Strategic Buyer
Strategic buyers are business advisors that will gain additional advantages from acquiring your business beyond the regular cash flow generated by your business. these buyers may be direct competitors looking for horizontal expansion to increase their market share or to enter new markets. Strategic buyers often pay a premium as they are able to generate synergies and economies of scale which in turn generate better results in consideration for your business.
Find Out More
Having a well planned exit strategy can assist an owner in guaranteeing the best possible outcome when going through the exit process
Quinn M&A’s expert team of M&A advisors can assist you to with all aspects of the exit planning process. Contact Quinn M&A today on +612 9223 9166 or submit an Express Enquiry to arrange a confidential no cost consultation with one of our Senior Advisors.