 |
 |
Company News:
Beanstalk helps Surrey NanoSystems think big with £4.5m follow-on funding round
Beanstalk corporate finance secures successful sale of Everything Legal
Beanstalk victorious at prestigious Finance Monthly Global Awards 2012 Awards
| "I had a very clear idea of what I needed in a corporate finance advisor. I took the selection process seriously and met with a number of business brokers several times. It was apparent from the outset that Beanstalk was the right corporate finance provider for us." Preview Services |
Heading for the exit?
It has often been said that ‘failing to plan is planning to fail', and this is very much the case with exit planning. To achieve the "best" exit a business should not solely concentrate on growth, but will also need to focus on creating and then adopting an exit strategy. So if you think that you might sell your business in the future, then you should start planning for it now. The aim of a well structured exit strategy is to ensure you receive interest from a variety of potential buyers, you are paid a high price, you have limited liability after exit and the exit process proceeds smoothly.
An exit is the sale of the shares or assets of the business, and looking specifically at the issues surrounding shares, the buyer could be a competitor (a trade sale), the general public (a float) or an individual or corporate entity including wealthy individuals and the private equity funds (a buy-in or buy-out or more generally, a private sale). Each type of buyer has different requirements and this will have a strong influence on your exit planning.
In its most basic form an exit strategy details how the existing shareholders of a business will ultimately sell their shareholding to another party. Plans should focus on what the business needs to do to ensure it represents a highly attractive acquisition prospect in the eyes of the buyer, and thus includes an analysis of the likely nature of the buyer. This can relate to tactical aspects of the business such as ensuring that contracts are in place (and won't be affected by the sale) through to the more strategic areas such as developing new platforms for expansion.
So, what actually triggers an exit?
Common triggers include:
the desire of the sellers to lock in gains arising from market conditions or trading success;
the desire of the sellers to retire, move on or diversify;
illness or disagreement;
the changing fortunes of the business (good and bad); and most commonly
the fact that the business has simply reached the end of a chapter in its development, and, to start a new chapter, would require a fresh injection of capital or talent, a new strategic partnership with a reseller/supplier/distributor etc. or perhaps a move to a new market.
An exit strategy is created around two important factors: the nature of the anticipated buyers and the nature of the business being sold. In its most extreme, a good exit strategy will ensure that weaknesses in a business which may prevent it from selling at all are put right at an early stage. The most common such deficiency is a significant gap in senior supporting management. This is especially acute where much or all of the business's expertise is concentrated in the exiting owner/managers. An effective exit strategy would include the recruitment and training of further senior management who will stay in post after the owner/managers leave and the introduction of an incentive plan to ensure their interests are aligned with those of the exiting managers to prepare the business for sale.
In addition, the knowledge and processes don't need just to be passed down to new staff, but they need to be written down and formalised. Companies with clear and robust processes are easier for external buyers to understand and diligence (hence more buyers will be interested, in turn creating competition and a higher exit price). Also such companies tend to have better processes per se, as the practice of writing them down typically includes an element of review and refinement. You should allow at least three years to undertake these tasks properly; a fact overlooked by many businesses to their detriment.
As a further part of preparing for an exit, the sellers would place themselves in the buyers' shoes and identify, from the buyers' perspective, the key elements to the business. In most cases these will include its employees, supply and customer contracts, licences, leases and intellectual property. In each case the sellers would then seek to ensure that these key assets are at their most robust and attractive to the buyer at the time of the planned sale. Taking customer contracts as an example; the seller should ensure that all such contracts are, so far as possible, long term, with customer tie-ins and with limited or managed levels of risk. One of the greatest concerns for a buyer is that after a sale, the business' customers may terminate or fail to renew their contracts. Long term contracts can address this concern and accordingly, the sellers might choose to sacrifice profit margin for a longer commitment from customers. Of course, this is a sensitive decision as both the profitability of a business and the security of its revenue streams determine the price a buyer will offer.
Ensure that your business is optimised for being valued
Central to any sale is valuation. There are many ways of valuing a business and an exit strategy will need, to the extent possible, to predict which method the buyer will adopt and then the business should be optimised to perform well when valued in accordance with such methodology. Most revenue producing businesses are valued in accordance with an appropriate earnings multiple; with the buyer agreeing to pay several times the annual adjusted profit. In other words, the value of the business to the buyer is its estimate of the likely profit that the business will make. According to Zephyr, which produces a database of SME transactions in the UK, the average multiple 6.5 (i.e. a business with an annual adjusted profit of £1 million, would sell for £6.5 million).
Test the market
As mentioned, an exit plan will identify potential buyers, and it may be appropriate to have some exploratory conversations with them to introduce the business (even if selling is a few years away). This will give you valuable feedback as to what you need to change to create a better valuation and what the likely appetite will be for a business such as yours. In most cases it will tell you when your likely buyers will have the most disposable funds to make an acquisition (which is often of more significance than when you think your business would seem most attractive). In exceptional cases, this might even identify a highly interested party who would be willing to pay in excess of market price to prevent your business ever coming to the market.
Exit planning is not without risk
Difficulties come with the territory. Business owners always have to balance the benefits of exit planning against the distracting effect on management of allocating time to exit planning. The customary response is to keep the exiting planning group very small, but there is inevitably a tension when the needs of exit planning start to affect the business, for example to lengthen customer contracts.
Another risk is the danger of talking to trade buyers as part of exit planning. Trade buyers are, by definition, industry insiders and the news that you may be seeking an exit can be problematic. Very clear confidentiality obligations can be used to address this and this can be supplemented by careful use of an intermediary to keep your identity confidential.
An end has a start
The best piece of advice for anyone serious about exiting, is start with the end in mind - understand who is likely to buy your business and why. Then work back from that point to understand what needs to be done by when to maximise the chances of selling at the best possible terms.
© Beanstalk Management Limited Privacy | Contact Us | Site Map | Site Meta Info | Articles |
 Client
Area |
 Blog |
 RSS |
|