How to Put in Place an Exit Strategy To Maximise Value


Formulating and executing an exit strategy is one of the most difficult challenges the entrepreneur faces in creating and then subsequently realising value in the business venture. Here's an in depth guide to how to put in place an exit strategy to maximise value:

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The exit challenge requires a choice to be made between the two fundamentally different exit objectives:

  1. The business as a vehicle for creating wealth for many generations to come or in other words for ‘family succession' or
  2. The business ready for ‘value realisation' within a planned period of time via an exit mechanism such as a Trade Sale.

There are four stages in the exit challenge:

  1. At the business start up stage it's about selecting one of the two exit objectives.
  2. Stage two is then about building the business value having regard to and with a total focus on the exit objective chosen.
  3. Stage three involves marketing and communication in advance of executing the exit objective.
  4. Finally stage four is about execution and implementation of the exit for maximum value realisation.

Recommended reading: Tips on Positioning Your Business for Sale

Stage One - Starting Out is the Time to Select the Business Exit Objective

At the start up stage, the entrepreneur needs to decide and know the ultimate exit objective. This doesn't have to be hugely detailed at this point, rather it's like a target posted up on the wall - a daily reminder on the direction the business is headed for. As the business progresses beyond start up, however, the exit objective will become a formal and increasingly detailed part of the Annual Business Plan.

At start up stage, a useful way to consider and decide on the ultimate business exit objective is to think about it and discuss it in the context of devising your business Mission Statement.

For example, the Mission Statement is a key input into the decision making process on the new company's corporate name. A ‘family' corporate name, for example is well suited to a business with a business exit objective of ‘family succession'. Such a ‘family name' may not however be best suited for the business aiming for ‘value realisation'.

Seek and consider family input into this, as well as the input of any founding partners and employees.

Here is a checklist of questions for you, your family and employees to consider about exit objective as the business Mission Statement is being defined.

  1. Why are you in this business? What do you want for yourself, your family and your customers? Think about the spark that ignited your decision to start the business. What will keep it burning?
  2. Who are your customers? What can you do for them that will enrich their lives and contribute to their success - now and in the future?
  3. What image of your business do you want to convey? Customers, suppliers, employees and the public will all have perceptions of your company. How will you create the desired picture?
  4. What is the nature of your products and services? What factors determine pricing and quality? Consider how these relate to the reasons for your business's existence. How will this change over time?
  5. What level of service do you provide? Most companies believe they offer the "best service available", but do your customers agree? Do not be vague; define what makes your service so extraordinary.
  6. What roles do you and your employees play? Wise captains develop a leadership style that organises, challenges and recognises employees.
  7. What kind of relationships will you maintain with suppliers? Every business is in partnership with its suppliers - when you succeed, so do they.
  8. How do you differ from competitors? Many entrepreneurs forget they are pursuing the same dollars as their competitors. What do you do better, cheaper or faster than other competitors do? How can you use competitors' weaknesses to your advantage?
  9. How will you use technology, capital, processes products and services to reach your goals? A description of your strategy will keep your energies focused on your goals.
  10. What underlying philosophies or values guided your responses to the previous questions? Some businesses choose to list these separately. Writing them down clarifies the "why" behind your mission.

Another useful tool is to think about how you will define success, in both financial and non-financial ways and about what that success will be for the company and for you - it may well become apparent from these insights, just which exit objective is right for you.

In summary therefore it is advisable to decide your business exit objective - value realisation or family succession - at the start up. Enshrine it in your business Mission Statement as a daily reminder and guidance on the future direction of the business.

Stage 2 - Identifying Buyers

If you are going for the ‘value realisation' exit objective, then your business decisions and the way you operate the business is going to be singularly focussed on attaining the best price that a target buyer will pay, when the time is right. You'll be considering and learning about why a potential buyer would want the business? Just who are the prospective buyers to target? - becomes a key business issue.

Building to sell is different to building to operate over the long term. Knowing who and what the target buyer wants has important operational and strategic implications. For example, it can be the case that the buyer is not interested in the real estate, buildings and assets of the business. It makes financial sense therefore to strip these out of the company and then concentrate on what the buyer would be interested in - customer base. Potential buyers may have a critical customer base size criteria, which then becomes a driver for your business to perhaps acquire smaller competitors in your space to speed up attainment of that customer base size.

If you are building the company to leave to your children, real estate does become relevant - as a source of wealth for future generations. Children will need to be involved in the operation long before you are ready to hand it over- to ensure they have the passion and ability to run it and that staff have the confidence and respect for them as the future leadership of the business.

The role of incoming children will have to be carefully planned and measured versus the key need to build a professional, recruited or internally promoted management team. The four stages of succession - selection, initiation, education and transition - will have to be factored into each years business planning, at least 3 to 6 years out from the target retirement date.

Stage Three - Key Marketing and Communications In The Pre-Exit Run Up

For the venture with a ‘value realisation' objective, the business has to be positioned to the two markets - the capital markets and the prospective buyer markets.

In terms of marketing to the capital markets, it is important to develop and nurture relationships with your industry's investment bankers and advisors. They not only take companies public, but also act as intermediaries between the two parties involved in an acquisition. Building these relationships involves personal meetings & contacts and participating in investment conferences sponsored and hosted by the bankers and advisors. In order to get on the radar of prospective buyers, attendance and exhibition at key shows and conferences is critical as are carefully targeted one2one presentations to prospective buyers.

Marketing and communication in the context of a business focussed on family succession is somewhat different- but equally critical to a successful execution. To make succession work, you must communicate and do it early and clearly. Use family meetings and a specially convened ‘family retreat' to educate and develop the family members input into the following ‘agenda for succession'

  • A family mission statement for the business
  • Management succession
  • Estate planning
  • Strategic business planning
  • Reward system
  • Performance evaluation
  • Communication within the family
  • Preparing adult children to enter the business
  • Transition timing
  • Exit and entry policies

A facilitator is often used to help identify issues for discussion before the retreat and to keep the retreat non-confrontational during the retreat. When a consensus is reached, over successive retreats, policies should be set, courses of action planned and responsibility assigned.

Stage Four - Then the Successful Exit Execution... Via Family Succession

For many entrepreneurs this is the most common aspiration. But it is an aspiration that like all others - requires planning. Keeping the business in the family is an exceptional way to create wealth for many generations to come. Succession is a process that may extend from 3 years to 6 years or longer depending on the entrepreneur/successor ages.

It occurs in phases. Over a period of time you initiate and educate the children to the business. When there is more than one child, it makes sense to expose each of them to the business and to let them demonstrate their interest, involvement and commitment - and thereby who will be most prepared to take over. After determining the successor, you develop a plan to transfer leadership of the business.

When they are old enough, prepare them to think about the technical aspects of the business and to consider the type of schooling and further education needed for this. Education is also important for building leadership qualities - a requirement to keep employees engaged and committed after your exit. On the job training is also critical from an early stage. Understanding the business from all key perspectives is important in its own right, but it is also an excellent way to grow their empathy for employees and for employees to come to respect your successor as the future boss.

Planning Checklist

  • The Family must make a determined effort to communicate
  • A strategic business plan must be prepared
  • A family strategic plan must be prepared, including a unified vision of the family’s role in the business, a code of conduct for family members and joint operating policies that serve the family and the business
  • A succession plan including arrangements for successor training and entrepreneur retirement date
  • An estate plan
  • A championing of the successor by the retiring entrepreneur

Through a Sale /Being Acquired

To get the best price, your business is going to have to be at its maximum value to any buyer. This means planning strategically for the optimum time of sale to the most likely buyers- not about when is the best time for you to sell it.

There are two basic types of buyers, financial and strategic. Financial buyers look for businesses they can buy to then subsequently sell. Many look for niche companies with strong managers who want to remain with the company after the closing. They may not acquire 100% of the business. Their objective is to take the business to the next level and sell for maximum value. This ‘gradual exit', with a further share of new value realised at sale time, is an attractive option for many entrepreneurs.

Strategic buyers typically operate in allied industries and acquire because of expected operational benefits or strategic advantages when the two companies come together. This is also known as a ‘trade sale'. Strategic buyers will acquire 100% of the business.

Selling to either type of buyer means the entrepreneur will have to stay on for a ‘transition period'. An unwillingness to do this will result in sacrificing value, as the buyer discounts the added risk of an abrupt departure.

A Trade Sale - Purchaser's Objectives

A potential trade purchaser will have specific reasons for targeting your company for acquisition. It is important to understand where the purchaser perceives value to be and the motivation for acquisition. Most of the reasons will be related to leadership brand positioning, such as:

  • Market Share /Entry - objective may be to increase market share or establishing a presence for existing products in new markets
  • Vertical Integration - motivation may be to secure sources of supply or distribution outlets for the purchaser's goods or services.
  • Diversification - objective may be to broaden product range or enter new markets.
  • Strengthening - purchaser may be interested in acquiring specific resources such as management team, production capabilities, distribution channels.

The key criteria which any potential purchaser will consider include:

  • Turnover
  • Profitability
  • Employee Numbers
  • Ownership
  • Location
  • Main Products or services
  • Customer base
  • Suppliers
  • Distribution arrangements

When a prospective buyer comes along, the likelihood of the deal being done , at a price that maximises the entrepreneurs exit value , is influenced by the degree to which the ‘brand' and ‘business' has their ‘ducks in a row'.

Getting the ‘ducks in a row'

Brand Admiration

Nothing protects a seller's position better than having a competitive buyer in the wings. Make sure your brand is admired by your target buyer audience.

Focus on increasing the business's recurring profits

Most purchasers will place most value on the core business of the company - its brand position- they will look for this to evidence continuing profits and discount any exceptional gains or profits form peripheral activities. Focus should be on ensuring that the core business has been fully developed i.e. all products and markets exploited. Eliminate weak product lines to increase overall profit margins and improve return on assets. Buyers don't want diversified businesses- they want resources concentrated in the activities that underpin a leadership brand position.

Enhance the quality of earnings by developing relationships with key customers

Evidence of satisfied and committed customers/clients will greatly enhance the value of the company.This, again is a dimension of a leadership brand position. Efforts should be made to develop close relationships with key customers to the extent that they can be used as reference points for the business and that they are willing to nominate the business as first choice supplier.

Business Plan

A business plan focussed on a leadership brand position, with a Non Disclosure Agreement (NDA) is the best way to show your company to prospective buyers - without signalling an intense desire on your behalf to sell soon.

Transfer key owner-knowledge to management and staff

New owners will need comfort that the business can operate without the seller. In the absence of a brand platform to sustain delivery of the leadership brand position, other measures will have to be taken. Management depth adds value. Appointing a deputy and department heads alleviates buyer risk It will be important that any knowledge or contacts which are currently exclusive to you are passed on to appropriate management and staff.

Ensure suppliers and customers can be used as reference points for the company

Interested parties will often approach suppliers and customers for independent opinions of your company. It is important to recognise this in advance and resolve any issues or practices which may result in an unfavourable reference.

Resolve tax issues

Any tax issues requiring agreement with Revenue Commissioners should be resolved and liabilities agreed. Any unresolved tax issues will lead to uncertainty on part of purchaser and their advisor will insist on taking worst case scenario into any valuation calculations. Furthermore the appearance of a company with ‘tidy' and up to date affairs will lend to attraction whereas the existence of one unresolved issue leads a purchaser to question whether there are any other impending issues.

Clarify Responsibilities

The sale of an organisation is time-consuming, complicated and stressful. It would be easy to allow day to day business to suffer whilst the sale is being pursued thereby damaging the company's value. Get your advisory team in place to represent you in dealings with prospective buyers and their representatives and ensure staff are unaffected by the process.

Up to Date Management Information

Audited financial statements are reassuring to a buyer (and their banker) and are the best indicator of future performance of the business Prospective purchasers will look at most recent audited accounts for financial data however comprehensive and timely management accounts will allow them to get a better understanding of the company's operations and its performance since last financial year end. This is particularly important where the company is on significant growth path and value has increased since last year end. Also the availability of management data will give confidence to purchaser that the company is well managed and controlled.

Define Accounting Policies

Management should ensure that accounting policies in use are relevant and practical. The use of any contentious policies for valuation purposes or income recognition will lead to protracted dialogue with interested purchasers and may result in confusion over company value.

Protect Intellectual Property

Any IP within the company should be thoroughly protected. This will assist potential purchasers in assessing the worth of the company and will prevent other parties from exploiting information obtained from sale process.

Business Valuation

A professional business valuation for gauging buyer offers, but don't disclose it, until you get the offers.

Value any property or significant assets

Independent market valuations of any assets such as land or property will assist pricing process.

Consider sale (and leaseback) of any non-essential assets

Remove other assets (such as land) that are not contributing to earning power. Your proceeds will probably be higher and you will improve your financial ratios if you strip away such assets. Many purchasers will not wish to outlay capital for non-essential assets, if any of these can be used on a leased basis consideration should be given to putting appropriate leases in place.

Adopt corporate governance standards applicable to a public company

Owner-managed businesses can cut out some elements of corporate governance as they are not accountable to external shareholders. However prior to sale it will be necessary to start viewing the company from the eyes of prospective purchasers. Implementing corporate governance procedures will assist in this process, management should prepare board papers, document decision making process etc.

Conclusion and recap

When it comes to ‘exit' - an inevitable outcome for all entrepreneurs and the crystallization of all of the sweat-equity invested - the two most important things to get right at the very earliest stage of the venture, is to decide on which of the two exit objectives you are targeting and how you are going to build the leadership brand position and platform needed to maximise the value realisation or family wealth transfer on exit.

Brand fosters customer loyalty, which in turn generates more reliable earnings and income for a business. Sustainable wealth generation - beyond the time and stewardship of any one CEO, Management Team or Board of Directors - is essential for the prospective buyer of the business. It is also key to the transfer of wealth across generations in family succession.

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