Exit Planning – the Buyers Perspective
The best way of preparing your business for succession or exit is to look at it from the perspective of the new owner. Exit Planning means putting yourself in their shoes for a while and look at your business with a fresh set of eyes. Here’s 5 ways new owners will view your business:
#1: View your business as an asset
It may come as a shock, but potential buyers of a privately owned business don’t give a hoot about the late nights, second mortgages, stomach ulcers, blood, sweat and tears its owner has suffered whilst building it.
What buyers do care about are things like sustainability, risk, return on investment and growth potential. When deciding to invest capital, buyers have many options available to them, from fixed-interest securities to equities, commodities, businesses and property. For a buyer to plough money into the purchase of a privately held business, the underlying asset has to stack up objectively against the plethora of alternatives.
So, sever your emotional connection. Look at your business objectively, as a buyer would. If you can’t see it as a valuable asset worth investing capital into, nobody else will.
#2: Understand how buyers will value your business
To coin a phrase, value is in the eye of the beholder. There are many commonly used methods for valuing businesses of all shapes and sizes. These include asset value, capitalisation of earnings and discounted cash flow. Most industries have rules of thumb that apply. It is useful in the context of planning your exit to understand what will apply to yours.
Keep in mind though that, even within a specific industry, the valuation of an individual business may well vary widely. It will depend on who the likely buyer is. For example, a competitor looking for a bolt-on may value a business lower than an interstate or international player seeking strategic expansion.
Suggestion: Have your business professionally valued every twelve months so that you possess clear expectations of what is likely when the time comes to pull the trigger on your exit plans.
#3: Put yourself in a buyer’s shoes
Would you buy your business? Truly?
If not, then why not? What aspects of your business would represent too great a risk compared with the potential return? These are the same factors that will make buyers run a mile.
If the shoe was on the other foot, if you would buy your business, what aspects most appeal? Where lies its growth potential? Which areas or characteristics would cause you the greatest concern? How would you want to structure a purchase transaction to mitigate any risks?
If you can successfully see your business from a buyer’s perspective, this will provide valuable insights into how to best prepare for your own exit.
#4: Understand how an exit transaction might be structured
Management buyouts, earn-outs, staged buyouts, joint ventures, buy/sell agreements, options, public listings (with founder’s equity held in escrow)… The potential transaction structures are many and varied. Each has its own advantages and disadvantages. Knowing which model is most likely and appropriate for your exit is helpful to determine the right time to sell.
For example, if you have decided you have another five years in you and that it is highly likely that you will be locked into a two-year earn-out period post-sale, then you know that you have three years to prepare and complete a transaction. Likewise, if a management buyout is your preferred option and it will take five years to complete, you can plan accordingly.
Some professional advice here would not go astray.
#5: Keep an eye on the market
Picking the top of the market – that is, trying to sell at the point where buyers are paying over the odds to secure businesses – is a lofty objective. Notwithstanding the global economic malaise, which is likely to affect us all for the decade to come. What is more important is to understand when conditions are optimal to achieve your personal objectives.
Keep an eye on the press, industry association news and the grapevine for news of transactions happening in your sector. If you see an increase in M&A (merger and acquisition) activity or if reported valuations are trending above your expectations, consider ramping up your exit schedule to fast-track your plans.
Perhaps some sectors are more appealing at certain times than others. For example, mining & resources-related businesses were highly sought after in 2012/13. Fashion retail was of less interest to buyers then. Similarly, being the best option in any sector at any time increases your probability of achieving a successful outcome.
It’s still worth pointing out the flipside. You may want to simply consider recalibrating your exit timetable if the market for business sales in your sector appears a tad gloomy.