Do you have an exit strategy? Do you need one? How do you create realistic and achievable exit strategy? How do you communicate it? Who should it be shared with? What about due diligence? What’s a data room and do you need to build one?
Difficult questions, but the answers are right here.
Everything you could need to know about exiting your business was shared at a recent Focus Dinner, chaired by Gerry Docherty of New Media Partners with speakers Nelson Gray of Firth Ventures and David Carrick of Memex.
The key answers were around being prepared in advance and ensuring all the relevant paperwork and processes are in place in advance of any exit activity, and knowing how to strategically value your business. Get it right and you could add 50% to the final value of the business.
Gerry warned that a lot of time and money can be wasted building a data room when an acquirer comes on the scene. There’s no reason why standard processes shouldn’t already be in place on a day-to-day basis to keep electronic records of financial, legal, contractual, and board documents. Then, if and when a data room is required, it’s a simple matter of transferring the key documents.
And acquisition discussions can be dangerously time-consuming, so Gerry suggested cutting them short if they’re not going to lead to an offer. If a potential acquirer starts a discussion, investigate them. Do they really have the money? Have they done this before? If they have, talk to some of the people they’ve acquired? Do they have credible advisers? If you’re not convinced, cut the conversation.
“The value of your company is less to do with the current turnover and profit levels, and much more to do with the strategic value to the potential purchaser,” said Gerry. “And these will be different for different purchasers – they might perceive your value to be in be your people, your product, your customer base, your brand, or some combination of the above.
“You need to work out what your strategic value is for an acquirer, and maximise it.”
Nelson Gray believes everyone needs an exit strategy even if you’re not planning to sell soon. At some point, he says, you will want to retire, do something else, spend more time with the family, realise this isn’t fun anymore, just want to sleep better knowing that you could exit if you wanted to, or die.
“I believe that a good exit plan and strategy, properly implemented, can add 50% or more to the final value of a business. Think about that. You run your business for 15 or 20 years yet have the final value could come from what you do or do not do effectively in the last few months,” said Nelson.
Timing is crucial. This is partially personal timing: when is it right for you personally to get out? You have the opportunity to plan, but as with making a will many people put it off because they really don’t want to think about what happens next. Better to be prepared to exit at any time, and not have to do it (or to say no to an offer), then have to do it in a panic.
And timing can be simply opportunistic, if an unexpected offer comes. Because it’s unexpected, you’re not prepared, and you don’t get the optimum outcome.
Nelson said the first basic misunderstanding is that value is related to turnover or profit. In reality, no exit he has been involved with has been related to either of these. Indeed several exits in the past, and some anticipated, will be of companies with no turnover and only losses.
Optimum exit value relates to selling something of strategic value, not financial value, to the acquirer. And knowing the difference is key.
“You need to start thinking of the business itself as a product, a product that you are building for specific customers, those are the customers for the business, people who will purchase you,” explained Nelson.
“By doing this – shifting the way many think of their business – you really start to create potential entrepreneurial wealth.”
But to do this effectively means having a really deep understanding of who those potential acquirers are, where they are, what it is they are looking for and where you have to be to be acquired.
And this, said Nelson, is why you need to start thinking about it now, and plan for it possibly over a number of years, and not simply when you wake up one morning and can’t be bothered going into the office.
Strategically planning an exit needs real attention to detail. Nelson recommends the following steps.
· Name the five most likely acquirers of your business for cash.
· Describe what it is you have to achieve in order to be of interest to those five acquirers.
· Know how much cash, and what you have to achieve that?
· Do you think you have the cash, skills and other resources needed to achieve that objective within the time necessary (i.e. before what you do becomes irrelevant to those acquirers).
“Chances are you will not be bought by one of those five, but at least you’ll be moving in the right direction,” said Nelson. “Chances are you’ll actually be bought by somebody who wants to compete with one of those five and who you have no idea even exists today. But it least you’ll be moving into the right pond.
“Too often I have been given examples of supposed potential acquirers, who are simply not. They have never bought a company, don’t have the resources to buy a company, have never bought a company in this country, or don’t buy companies for as little or for as much as the target exit value being looked for.”
Finally, he offered the following points for consideration:
• Think about your personal goals and ambitions and what you want to do with your life. How much is enough? Are you on the deferred life plan?
• Become visible in the market within which you wish to be purchased. Both personally and as a business.
• You need to become unimportant to the business.
• Structure of the deal – what you get on day one may be all that you get so don’t bank on the deferred payments.