Advivo Managing Partner, Leon Stephan shares some of the common exit strategies for businesses including Selling, Acquisitions and Floating the Business on the ASX.
From the very day we think about starting our business we should also be thinking ‘what is our exit strategy?’ As Steven Covey said, ‘start with the end in mind’. If this is not front of mind how will our strategies align and ensure an exit in the best possible way and at the best price at some future date? This is not to say that the strategies may evolve and change over time as circumstances change. Many entrepreneurs make more money from the exit of their business rather than they do from the operating profits, but this only happens when you have a clear strategy and you align all short-term goals to the master exit strategy.
So, what are some of the options available to consider?
We have previously published articles on how to approach a sale but I will briefly summarise a few imperatives.
- Have your financial information up to date?
- Remove all personal assets and expenses from the business.
- Ensure Intellectual property, if any, is owned outright and free from any claims, from past employees, partners, contractors etc.
- Ensure employment agreements, premises leases and any other ongoing commitments are subject to legally binding contracts.
- Prepare an information pack, be prepared and have all relevant information about the business available at your fingertips.
- Have the business valued and know what it is worth.
- Transition yourself out of the business so there is little to no reliance on you personally, known as personal goodwill.
As we progress down the list below the nature of the exit strategies and size of the transaction grows, becomes more complex and more costly, as does generally, the size of the business. The better prepared, the better the price will generally be, and I have seen some businesses take up to three years to be truly ready to go to market, so don’t leave it until the last minute.
The most common exit strategy for small businesses is a sale however there are many variations on this as well, such as:
- Sale to an Independent Third Party
This type of sale is not only the most common, but it is the default when all other options discussed below are not available.
This is generally done through a business broker or a private tender. The latter is more often employed when the most likely acquirer is a competitor looking to grow their business, is known in the market, and the vendor wants to keep the sale confidential.
- Sale to Management team – Management Buyout (MBO)
Often over time businesses evolve, and a valuable and cohesive team emerges to run the business. This team may well be the next owner of the business. They possess all the necessary skills and expertise and should not be overlooked. The most common reason this option does not present itself is the management team may not have the financial resources to purchase the business. However, that said, a large percentage of business sales these days involve vendor finance. Granting vendor finance to people you know is more palatable than unknowns.
- Internal – Generational Transfer to Family
Family succession is a common ideal – but not always from the younger members of the family’s perspective. However, if family members are involved in the business this is often the preferred option to continue the family heritage. Generally, the retiring family members would transition out over time, gradually handing over greater degrees of control to the next generation. The retiring members would want financial consideration for their many years of hard work in growing the business, but a sale is generally discounted to the family.
For larger businesses there are two other options.
- Sale to a Private Equity/Venture Capital Firm
This option is generally suited to well established businesses, that still have the opportunity to grow and scale up further, long history of profits, established risk management, policies and procedures and senior management running the business to a large degree and more often than not involved in international trade, at least national. Generally, these transactions are going to be in the starting range of $5-10M and up.
- At the top of the scale in complexity and cost and size of the business is generally Listed on an Exchange such as the Australian Stock Exchange.
Listing on an exchange has very prescriptive criteria and requirements and is generally suited to businesses with turnover greater than $50M. A senior management team will be in place, audited accounts for a minimum of three years with growth potential will be available and a strong profit history or a very clear and foreseeable path to achieving their profitability goals. Listing on an exchange takes a huge effort and will cost in the order of $1M. It is not an easy task, not for the faint hearted.
There are other iterations of the above, but this is a good overview of the more basic options.
All of the listed options require planning and adherence to the objectives. Having your business structure right from the outset is another key imperative and all of the above will need an accountant and lawyer involvement to be successful.
At Advivo Business Advisors and Accountants, we have considerable experience in these matters and are available to assist and guide you. Our team of professionals have extensive knowledge in providing tailored advice on business planning and succession planning. Don’t hesitate to get in touch with our friendly staff to enquire about our services today.
