Successful exit strategies
Article Date: Jun 03 2005
While over 50 per cent of owners believe that management is the single most difficult issue to address when selling their business, over 33 per cent have no succession strategy in place. GrowthBusiness reveals the results of our unique exit survey.
Exiting a business is a complex transaction involving intricate procedures and processes that need careful consideration.
There are many different players involved (the buyer, the seller, investors, professional advisers, management, employees and family) and a wealth of financing options to weigh up. On top of that there are an array of competing interpretations on how the business should be run in future, what its growth prospects are and - crucially - what it is really worth.
What is clear from all of the aforementioned is that it’s often difficult for entrepreneurs to exit their businesses on their own terms. What is equally clear though is that it’s never too early to start thinking about the exit - and the professional help and assistance needed to maximize the value you can extract from the process.
In light of this, Business XL, in association with leading lawyers Nabarro Nathanson, The Royal Bank of Scotland and private banking group Coutts, has conducted research amongst its readership to determine when leading entrepreneurs start to plan their exits, what they feel is important to get ready before they exit, and the advisers they are most likely to turn to for help.
Knowing when to exit
Getting the best price for your business at exit (or partial exit) is all about selling at the right time. While this seems obvious enough, experts have pointed out that many vendors wait until the business has stopped growing before they attempt to exit, or have this option forced upon them by personal and/or business circumstances.
The results of our survey seem to bear these traits out. No less than 36 per cent of respondents said the reason that would most influence their decision to exit their business would be retirement. A further four per cent cited personal reasons or shareholder pressure would most influence their decision, while four per cent said not having a family succession plan in place would be most important. Only 22 per cent of respondents said the reason that would most influence their decision to exit would be that the business had reached premium value.
Another interesting outcome was that, despite the strong appetite for flotations on the Alternative Investment Market (AIM) â“ the first quarter of 2005 welcoming a staggering 130 companies to the market â“ flotation is the least favoured exit route among our sample CEOs. This is perhaps explained by the fact that the majority of survey respondents expect to retire or to move on to other businesses. Moreover, completing a flotation is also deemed the most expensive and time-consuming option. Trade sales, on the other hand, are the most preferred exit route and also deemed the least expensive and quickest option.
Succession struggles
For those considering an exit, the strength of their management team is considered to be by far a business’ most valuable asset (36 per cent), followed by reputation and brand (25 per cent).
Having a strong management team in place can be advantageous as it is a good selling point if the venture capital (or other) buyer does not have a management buy-in team waiting in the wings or an investment in a similar sector in its portfolio, which it will use as a buy-and-build platform. Conversely, if the buyer does have these arrangements in place, a strong management team in the company being sold can be a disadvantage, as the reorganisation of the business post-deal may prove to be highly disruptive.
Getting on a buyer’s radar
Surprisingly, less than two per cent of those surveyed believed that they should address the market’s perception of their business ahead of an exit.
Ignoring the market, however, is never a good idea. ‘It’s really important when you are looking to exit to keep the good news machine cranking along. You need to make sure potential buyers don’t assume you are just getting excited about the fact you are selling, otherwise they will think you have taken your eye off the ball,’ warns Charles Hoult of brand communications agency Loewy.
Interestingly, 34.5 per cent cited targeting the competition as their preferred route to finding a buyer.
The benefits of approaching a trade buyer in your sector are that the deal will often be an excellent strategic fit and they should understand your business â“ all of this could lead to the transaction being completed faster.
However, there are several inherent dangers in opening up your books to a competitor and passing on crucial information about your business model and approach. If the deal collapses, a rival will get valuable insights into how you operate for the price of a confidentiality agreement and a due diligence exercise. If you do approach a competitor, ensure you employ advisers that are able to produce watertight confidentiality agreements (or as watertight as they can be).
