Common exit strategy examples for people selling their businesses
The awful truth about why your business, in its current shape, looks like a poisoned chalice to a potential buyer. What can you do to overcome that?
The most common business exit strategy I across is owners planning to cash out with a life-changing sum through the sale of the shares or the assets & goodwill of your business to someone else. Only a handful plan to pass it onto a family member.
In this article, I'll share the point of view that the successful entrepreneurs who buy businesses have about the types of small businesses they would want to purchase.
I'll then look at the most common exit strategies most small business owners pursue. Finally, I'll share my thoughts on what a small company needs to do to come up with a business exit plan that can generate a life-changing sum of money.
Is your business really sellable?
Owners put time, energy, passion, and money into founding, growing, and stabilising their small businesses. Many honestly believe that what they've built will be attractive enough to another business owner that they will pay a 7- or 8-figure sum to acquire it.
But is your business worth buying? In most cases, it's not and here's why...
A pain in the arse, not a strategic acquisition
They don't however because what they've built, although impressive, is not a wealth creation vehicle. What they have is a glorified job title with a lot of additional responsibilities for not much extra reward.
As a business owner, you are talented but you lack the skilled employees who could run the business in their stead. Perhaps you never gave them a chance just yet to prove themselves.
How does this look to a purchaser? It looks like you're selling them a job and not a business. The truth is that, to scale up your business, you need to hand over control to your staff.
The "employee buyout" test
Think of this from a purchaser's point of view. If your employees bought out your company from you but you still needed to be there to run it, this is not a company whose team can manage cash flow or generate a profit, let alone a substantial profit, without you.
All the intimate knowledge of processes and procedures required to run your business are tied up in your head. You've kept your staff at such a distance that they would not be capable of coming up with a contingency plan to cope with tough market conditions. If you make a clean break from the business, it would all be over.
If you couldn't sell your business to your employees, private investors and other investors like venture capitalists wouldn't give you a second look, save for some potentially valuable IP your small business had. Any loan-based investment from your bank or a financial institution would be heavily contingent on you putting up enough security
Popular types of exit strategies
The three most common business exit strategies are waiting for someone to come along, working with a business broker or retirement.
For companies still reliant on their owners for day-to-day functioning, you'll almost certainly not get enough to retire on (if that's what you want) unless you have something of particular value in your company that a purchaser could exploit. The final option, retirement, is a damn shame.
Wait for someone to come along
The majority of business sales happen when one person wants to buy the business operations outright of someone in the same industry and makes an out-of-the-blue approach.
Purchasers have an advantage. They've often been through the business sale process before whereas the owner of the company they're buying hasn't. They'll normally send you a letter stating that your company is of strategic interest to them and that they would like to arrange a meeting with you to explore the possibility.
You'll probably come to a final price quite quickly. They'll low-ball you because you probably don't know the value of your business to them.
Over the course of the following weeks, the price they're willing to pay drops when you don't send them the information they want or you're too slow in selling it.
You'll say that the agreed price was reflective of the company's future potential value. They will tell you that they want to buy your business as it is today and not for the value it offers to them either in three years’ time or as part of their wider organisation.
Sellers, especially those without expensive professional representation, are screwed when this happens and often never get all the money they were promised.
Appoint a transfer agent
If you turn over less than £1m, don't waste your time or money relying on a specialist "sell-side M&A firm" (commonly known as business brokers) to come up with a profitable exit strategy.
They know, just like I know, that (again save some valuable IP or business process) your company is going to be difficult to sell except to, perhaps, lifestyle purchasers who have just cashed out with a big redundancy cheque or downsized their property and want something to do with the profit. The problem with selling to people like these is that their money is finite and they'll probably screw you harder on the price than a seasoned investor.
Business brokers generally charge an upfront fee and a percentage of the sale value on completion.
There are only a handful of really talented sell-side M&A people in the UK and they'll always want you to come up with an exit strategy business plan before taking you to market. I'll cover what one of those business plans includes later in this article.
Retire and liquidate
I rarely hear of a successful transition to a family member taking place when an owner is ready to walk away from the business venture they've ploughed so much into over decades.
Succession planning used to mean handing a business from one generation to the next. Now, in M&A circles, succession planning means an owner handing over the reigns of their business to their senior managements when they sell it.
Many children and grandchildren see a successful future for themselves away from the family business, much to the disappointment of many entrepreneurs. Putting themselves under the same pressure as they saw you go through is not an attractive option to them. They don't want or consider family succession as the right strategy for them.
So, all that potential future value in the business that could be developed by creating a succession team is squandered. Assets are sold and they choose an MVO to release the cash remaining in the business as tax-efficiently as possible.
Why you need an exit strategy business plan
An exit strategy business plan (sometimes known as an "acquisition exit strategy") is when you plan for planning for exit.
This is far more powerful and rewarding than a straightforward sale. You'll get 3-5 years' excitement from it, create and achieve brand new business goals, and you'll be able to plan ahead with much more certainty than the three options listed above.
Get your business into shape first
Other than selling up, the most significant change owners experience is handing over responsibility to their colleagues for certain tasks and training them on what they need to do.
Business owners, by their nature, are independent and more likely to trust themselves to perform a task well than anyone else. Particularly at the early stage, your employees will make mistakes and require help but, eventually, they get it and that's one less thing you have to do to keep your business running.
As well as offloading tasks onto others, you need to get your business into shape by looking for efficiencies, be careful with cash and looking after yourself more. You need to do the last in particular because you're going to need your focus and your drive for what comes next.
Purchase your rivals
If you've never run a business that you've sold in the past, you might not realise that, for a buyer, it can cost £100,000 or more in legal, accounting and professional fees to purchase a company. It's ferociously expensive and it costs pretty much the same whether a buyer is going after a business with a 6-figure turnover or an 8-figure turnover.
But they do this for a reason. The larger a group of company's turnover and profit, the higher the multiple a company can be sold for. A multiple is a multiplication of the profits made by a business each year after tax.
So while a 6-figure business might get a multiple of 3, an 8-figure business can achieve a multiple of 10 or more. So the money they've sunk into buying other businesses is returned in spades on a buy-out.
Smaller businesses don't think that there is a specific SME capital transaction and investor scene. There is. There are hundreds of millions of pounds/dollars available every year for SMEs but very few of them access it because most M&A advisors are chasing the bigger deals.
You can grow your company by acquiring similar businesses. You can borrow credit, access seller financing and attract investors to help you do this.
Private equity or Initial Public Offering (IPO)?
When you have reached the 8-figure stage, not only do the multiples go up but so do your options.
You retain control over your company through initial public offerings - selling shares of your business on a recognised stock exchange - and are rewarded with millions of pounds worth of shares.
Or you can discretely offer your business for sale direct to investors saving the time-consuming aspects of selling a business on the open market or taking your business public.
If a purchaser had to choose between two businesses...
...they would choose the one that required less of their personal time and attention. Their first goal is to ensure that cash is still generated from your business after they buy it and the second is to change the way it operates in the hope of increasing profit and market share.
Some purchasers might as you to remain involved for a while during handover but, ideally, they want you out of the door as quickly as possible in most cases because you're a reminder of the past and the way things used to be done.
Work with me to start to plan your exit planning with an exit strategy business plan. Let's find how we get to that certain point where your business and the people you employ don't rely on you for everything anymore. Not only will this make running your business more attractive to a buyer, but it'll also make running it in the meantime a lot less stressful for you. You won't be working til 9 at night doing the little jobs no one else does because you haven't assigned those tasks to them yet.
To find out more, click on the "Contact Me" button in the footer and let me know where you are now and where you'd like to be.
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