What is a business exit strategy?
In simple terms it’s a plan by a business owner to get out of that business at the best possible price. In reality there are a number of hurdles to negotiate, and whilst there will be a list of options required in order to exit the business, a fully workable exit strategy plan (in document form) is only part of the process.
There are many other steps to bear in mind before, and even after, an owner exits the business.
For example, increasing the business valuation has obvious financial benefits, whilst it’s also hugely important to maintain control of the exit process.
Maximising the likelihood of achieving a sale or transfer of ownership and getting the outcome you want on your terms are other things to bear in mind when making the decision to exit the business.
What are the core elements of an exit strategy plan?
An exit strategy plan should have seven core elements:
A detailed breakdown of the exitee’s objectives in terms of minimum requirements, expected dates, price and deal breaker terms.
A (preferably detailed) assessment of the true value of the business.
Readiness for sale.
Opportunities to increase the business valuation.
Exit strategy options.
A qualified buyers list.
A clear idea of the actions required to achieve your objectives.
It’s entirely possible that your exit strategy could be 2-3 years away, dependant on the nature of the business. That shouldn’t stop you from making a start on the plan even if, at the outset, you’ve take a broad brush approach to some sections meaning that they’ll initially lack detail.
By reviewing and updating regularly, with new detail added as it becomes relevant and available, it will ensure that the plan remains robust throughout the process.
It’s also worth remembering that an exit strategy doesn’t work in the same way as doing a corporate deal. The skills involved in conducting a successful negotiation and implementing the transaction are very different to getting to this point.
However, the transaction becomes even more difficult if effective and detailed preparation hasn’t been undertaken for the planning phase of the exit strategy.
For example, a business may be ready for sale in terms of its financial performance, the systems that it has in place and an effective reporting structure, but legal structures may need to be altered, there could be documents not ready for due diligence and there are likely to be other deal factors that would need to be checked.
Again, it is vitally important to understand that having an exit strategy plan is very different to actually doing a deal.
When should I create an exit strategy plan?
Theoretically as early as possible.
For startups in particular, an exit strategy plan is vital in order to manage a dynamic environment where plans change overnight. The key elements in an exit strategy plan will also assist in creating an effective startup plan.
In most cases an effective exit strategy will take 1-2 years to implement, longer in some cases. Where significant changes in the business are required an exit strategy plan should be considered as much as 5 years out.
It is often advisable to have at least two years of financial statements prior to seeking any buyer that are performing at the level that justifies the price you expect. For this reason a 2-3 year window is often an optimal time to plan for an exit strategy.
What advice is required for an effective exit strategy plan?
An exit strategy spans several key elements that often require very specific advice from experienced and qualified advisers. These include
Accountant – advising on supporting documentation, due diligence issues and tax implications.
Financial Planner – advising on investment of sale proceeds.
Solicitor – advising on sale terms, negotiation options, contract issues and executing a deal.
Broker or M&A Adviser – advising on buyer identification, discussions, negotiations, deal structure.
Business valuer – advising on business valuation and preparation of the business.
In some cases other specific advice is required, and an effective exit strategy can be made easier and more successful when all the information is available to make timely and effective decisions.
What makes an exit strategy plan successful?
There are two key features that make any exit strategy successful:
Early and detailed preparation.
When a business owner is forced into an exit strategy, rarely can they get the deal they want. It is always harder to negotiate the date of exit, the price and key terms of an exit when the buyer knows you really need to exit on a specific timeline. Buyers rarely need to make an acquisition by a set date. So if you’re not ready to sell your business and you need to get out within a certain time period, you will not get the terms and the price you want.
Having options in any negotiation is power. If you can confidently decline an offer and walk out of negotiations, knowing you have other options then you control the process – not the buyer.
The key actions that maximise your options include starting the exit strategy planning process early and to seek sufficient advice from different advisers. Often an advisory team will include multiple advisers, which ensures you have the best options available.
Do I need an exit strategy valuation?
A business valuation will typically include an assessment of the business to determine the strengths and weaknesses that impact the attractiveness or risk of the business. However an exit strategy valuation is a business valuation undertaken specifically to identify all the opportunities that can increase the value of the business prior to the exit strategy being implemented.
It will highlight the changes that will result in increased earnings, in order to maximise the value of the business well before the exit strategy is implemented. An exit strategy valuation will identify the key value drivers and the opportunities to increase the value of the business based on adjusting the key value drivers.
We have seen businesses adopt key strategies in their business plans that result in a significant increase in business valuation. These strategies include:
Use of technology to automate processes and increase capacity.
Document procedures to provide confidence in transferring to owners.
Pursuing key market strategies to attract the right types of buyers.
Without a detailed business valuation as part of the exit strategy plan, then improvement strategies often lack sufficient detail in order to see an increase in the sale price. An exit strategy valuation becomes the basis for valuation improvement action plans and can increase the price you can achieve by more than 100% – 200%.