In an earlier blog, I talked about considerations for valuing a business including determining an appropriate multiplier. This is only one facet associated with determining an exit strategy, although some would perhaps argue it is the most important one!
Unless you simply want to close the doors and walk away – which is certainly an option for any business and sometimes the only option for a business depending on the market it is in and its underlying value – the sooner you start devising an appropriate exit strategy for your business the better. Certainly, better than facing the need to exit quickly and take a “fire-sale” price for your business because you have run out of time (for whatever reason).
Valuation aside, there are a series of factors to consider in planning for succession and/or exit that will ultimately determine the configuration of the strategy adopted:
1. Are you the only owner or are there several of you and, if so, do your plans for a business exit/disposal align?
If they don’t align, then perhaps there are some pathways that will have to be trodden first.
As an example, two partners (50:50) in a business we have been involved with had very different ideas about succession and timeframes for exiting the business. Ultimately this led to them splitting the business and going their separate ways. One has since sold his business to a multinational and is working out a contractual employment period, whilst the other has created an employee share scheme and is gradually selling down his stake in the business. The first part of this journey – the demerging from their original company – was by no means a straightforward process and took time to facilitate but produced the best outcome for each partner in terms of their differing exit strategies.
2. What are your estimated timeframes for exit? How does this align with other partners?
There may be the need for one (or more) partners to buy others out if these timeframes are materially different. The valuation component then comes into play.
3. Have you already determined how best to sell down your business?
• Sell to existing staff/family?
• Sell to a third party interested in taking over the business and running it?
• Sell to a competitor looking for greater market penetration and size?
• Close the doors and walk away?
Depending on which of these options is seen as the best path to go down, this then triggers a subset of further questions.
For example, if you sell the business to existing employees what will be the necessary rules around this (embedded in a Shareholders Agreement, Sale and Purchase Agreement, Dividend policy and so on). Legal advice for all parties will be required. Will money be left in the business to be repaid from future dividend streams or paid upfront by new shareholders using third party funding? What is the Board of Directors going to look like to reflect this change – or perhaps an Advisory Board will be utilised.
There may be challenges with individuals wearing multiple hats and struggling to handle the (sometimes conflicting) demands between Employee, Shareholder and Director. Not to mention fiduciary obligations.
Selling a business outright might seem a better option (if there are any interested parties). But then there will be an initial Terms of Agreement (conditional), a Confidentiality Agreement, a formal Due Diligence process, a Sale and Purchase Agreement with conditions which could ultimately impact on the final settlement price. This in turn could take years to be finalised and paid. Also, what about the culture of the organization and how this could change after the sale, or is this not important?
Closing the door and walking away from the business is perhaps an easier option but financially not very attractive unless this is the only option.
4. Are you interested in leaving a legacy with the business continuing after your departure or are you simply looking to maximize the extraction of value from the disposal of the business?
If you want to leave a legacy, to what extent do you want to sacrifice value to achieve this? Realistically, how long could that legacy last before it is lost in the inevitable cycle of change and transformation.
Summary:
Drilling down on these broad questions, exposes the “fishhooks” as well as the benefits possible, but as illustrated this really is only the start of the journey.
If you sell down your shares to existing staff:
• Is cash up front or do you leave money in the business?
• What is the dividend policy going to be?
• At what point do you lose control of the business?
• What are the likely agreements you need to have in place?
• What is the governance structure going to look like?
• How are new shareholders going to be able to sell their shares when they need to?
• How do you transition away from personal guarantees with your bank/funders?; and so on…
If you sell to a third party:
• What do the conditions look like?
• How long will due diligence take and how can it disrupt or distract your business?
• How long before you realise your money?
• What warranties are provided?
• How can the final figure change (normally downwards)?
• What are the risks around sharing confidential information?
• How are your key assets going to be locked in? and so forth….
At Management Response we work with business Owners to help develop and implement the strategy around their succession plan and ultimate exit from the business. In some instances, the process of determining a succession and exit strategy and successfully implementing it could take years.
Management Response does not provide professional business valuations. Our expertise and focus is on working with the Owner to develop the optimal succession and exit strategy for them.
What I have been talking about here are the series of factors other than valuation (and value multipliers) which need to be considered when planning for succession and/or exit before determining the pathway to follow which will optimise your objectives. We would be happy to discuss this process further with you. Give Management Response Limited a call for a free, no obligation discussion.
