There’s no doubt that selling your business is an important event in the life of your business, and your life as a business owner too. While it might be something that seems far off in the future or you find it hard to think about getting out of a business that you have worked so hard on, having a clear exit strategy is an important part of selling your business to help facilitate a smooth transition when the time comes.
For any business owner, having a clear exit strategy is an important part of your business plan. A business plan maps out the various components that contribute to the future direction of the business, and all parts of your business plan, including the exit strategy, should constantly be revised and worked on to improve the business position now, and into the future.
What is an Exit Strategy and Why do You Need One?
Business exit plans, termed ‘exit strategies’ are a useful business strategy that can help to prepare the business for succession or transition of ownership. Possible exit strategies include keeping the business in the family, employee or management buyout or selling your business via the open market. Regardless of who or how the business will transition, it is inevitable that a transition will occur at some point and so an exit plan ensures that there are strategies and processes in place to facilitate a smooth transition.
You should always be looking for ways to prepare and place your business in the best possible position for the future. Having an exit strategy means looking out for this future and ensuring there is a future viability and opportunity for your business. It should not be something that you hurriedly consider once you have decided that it is time to sell you business, rather something that is underpinning a large majority of your business operations and decisions.
An exit strategy enables you to do many things; from helping you to get into the right headspace to sell your business to planning what your life will look like after you’ve sold it. Having an exit strategy allows you to set goals and expectations from your business’ sales process. It also allows you to employ strategies for increasing the saleability and sale price of your business. Without a clear strategy or plan for your business’ sale, it can be difficult to remain level-headed and on task regarding your business and what lies ahead in the sales process.
Exit Strategy Considerations when Selling Your Business
There are certainly a lot of components to consider as you develop your exit strategy. When preparing and executing your exit strategy with the intention of selling your business, there are particular strategies that you can employ to improve your business’ sale potential and maximise your exit plan.
Reliance on Owners
When preparing your exit strategy, it is important to ensure that business goodwill and knowledge is transferable to the new business owners post exit. Notably, 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. For this reason, your business’ key operations should be allocated over to your management team prior to selling. This can be done through handing them greater responsibility over a period of time and allowing them to gain knowledge on the operations and build relationships with key customers and suppliers.
Businesses with a higher market share generally have stronger brand power and are valued at a premium compared to those with a lower market share. As part of your business plan and exit strategy, look to focus strongly on markets where you can grow your 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 your business in preparation for exit.
Customer and Supplier Contracts
When undertaking due diligence to acquire a business, a purchaser will always assess customer and supplier contracts as key indicators to the risk of your business. In preparation for exit, you should therefore maximise the number of contracts in place with key customers and suppliers. It is important to note that contracts are normally assessed on the basis of their materiality, (their concreteness and existence), the term remaining and the strength of exit penalties, i.e penalties imposed for exiting business.
Profit Margin Trends
Benchmarking your business’ margins and profit trends to industry standards can highlight areas where your 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 you with generating a better outcome as part of a business sale or exit strategy.
Good Exit Strategy = Good Exit Outcome
As we have discussed, having an exit strategy when selling your business is an integral part of achieving the best outcome. Having an exit strategy in place, and constantly working towards it, rather than hoping and trying to make it all happen once you have already decided to sell will likely result in avoidable stress and less than optimal outcomes. You work hard to build and grow your business in the present moment and so you should work hard to secure its future and maximise the rewards for your hard work too.
The good news is, that it is never too late to start working on your exit strategy. The team of professional business advisors at Quinn M&A have the knowledge and expertise to set you, and your business, up for the next chapter.
For personalised advice to create an exit strategy for your business, or for help with selling, or preparing to sell, your business contact our team of experienced business advisors by submitting an online enquiry form, calling us on 1300 QUINNS or alternatively, +61 2 9223 9166 to arrange a teleconference or appointment.