Exit planning in this context refers to a plan of action undertaken by a business owner to specifically prepare both the business and himself/herself for the sale of a business and this article will discuss some of the areas which an exit plan should address.
Comprehensive exit planning can be measured in years rather than months, especially for larger and more complex businesses, so thinking 2 or 3 years ahead is prudent. However, there are also actions discussed below that can be completed quickly, coincident with a sale process if necessary, that potentially tweak a sale price higher. The common theme of all the actions will be to reduce the risk profile of the purchase from a buyer perspective – the lower the risk, the higher the price a buyer should be prepared to pay.
An initial point to make is that, in our experience, exit planning is a relatively rare occurrence. Very often, by the time a business owner rings us about selling their business, he/she wants to be sold ‘yesterday’ and given that a sale process will typically take 9-12 months and then a handover might take a further 3-12 months, he/she is keener on starting the process rather than preparing the business for sale. To the extent that a sale in these circumstances meets the owner’s needs, that is fine, but the owner may sacrifice achieving a higher sale price as a result of insisting on a quicker exit.
People form a large part of the intangible goodwill that a buyer pays for and is probably the resource most likely to ‘make or break’ an acquisition for the buyer. At the least, prior to a sale, a business owner should ensure that appropriate paperwork is in place – employee contracts, job descriptions, adequate H&S policies etc
Particularly with smaller owner managed businesses, a buyer may be nervous about the degree to which the business depends on the knowledge / client relationships held by the owner. The best scenario from a buyer point of view is that the seller is no longer involved in the day to day running and all the key relationships are now held by 2nd tier management, who intend to stay. Certainly minimising the number of processes that only the owner can carry out, diluting client & supplier relationships beyond the owner and delegating where possible, is helpful.
Sellers of larger businesses may want to consider investing in a general manager ahead of a sale. Business valuations typically assume an appropriate cost of management to replace the owner and a business with a strong general manager who has been in place for a couple of years is likely to be viewed favourably by buyers.
A final point is that sellers might consider briefing senior staff that an exit planning process is to be undertaken. Handled the right way, it can provide confidence to staff that there is ‘life after the current owner’, indeed very often there is additional opportunity and a buyer will be pleased to learn that senior staff are aware and therefore won’t get ‘spooked’ at an announcement sometime in the future.
Regardless of the type of business, intrinsically the buyer is buying a future cash flow and therefore the financials of the business are going to be scrutinised carefully. If the business does not produce monthly management accounts, it is worth investing in a system to ensure they can be accurately generated, with the minimum of fuss. During the due diligence process a buyer will want monthly updates and having a tried and tested system in place gives the impression of a company well run. Getting into the habit of preparing a full year forecast for the current year and even a forecast for the following year will ensure more accurate forecasts are produced at the time of sale, again providing comfort to the buyer.
The sale process requires the generation of a lot of information, particularly in the due diligence phase and therefore a seller should invest time in ensuring that systems are fit for purpose. Has the business outgrown the suite of excel sheets currently used? Are stock reports accurate with an appropriate obsolescence policy in place? Can sales reports by customer by month easily be produced? Is there sufficient management information available to easily explain changes in gross margin? These are examples of questions the systems need to be capable of handling.
Revenue & Clients
There are several ways in which exit planning can be applied to clients and the revenue stream. At a basic level, there should be terms of business in place with every client. Beyond that, anything which helps support the premise that the customer will spend more at a point in the future is useful, whether that is a contract in place, a blanket order, or even just a schedule that demonstrates customer longevity and regular spend.
Another significant issue to monitor and influence is customer concentration – how much of annual turnover is with the top customer / top 5 customers. A business where the owner does not need to lose sleep over losing a particular customer is more attractive than one significantly dependent on 1 or 2 customers. Consciously looking to dilute the importance of top customers where this is an issue, is a helpful step in exit planning. Likewise, dependence on a very narrow product range or a single sales channel can affect the value of a business – diversity nearly always mitigates risk.
Serious exit planning will also address new revenue opportunities to ensure that the business can be presented as one that is growing. Many owners talk of ‘the potential’ of a business if the business marketed properly, or engaged a salesperson. If there really is ‘low-hanging fruit’, sellers should harvest it and have it reflected in an improved financial performance. A buyer will likely give little credence to ‘potential’, but will pay in full for a trained and appropriately rewarded salesperson who is demonstrating a substantial contribution to sales and gross profit.
Overheads of the Business
Exit planning should involve reviewing the company’s fixed cost base and making efficiency savings where possible. Typically trade businesses are bought at between 3 to 5 times the cash flow they generate and therefore saving £1 in fixed costs can add between £3 and £5 to the price paid. There are cost reduction companies very skilled at reducing utility costs, communication costs, commodity costs etc and while you might have to share the savings with them for a couple of years, their share is perceived as a one-off cost and therefore a seller can get full value for the savings achieved, when the business is valued.
The Balance Sheet is an important aspect of a business sale, especially if the owner is selling the shares of the business and hence is also an important part of exit planning. Action should be taken to ensure stock is ‘good stock’, and at appropriate levels (overstocking can be a contentious issue in negotiations). There are tunes to be played on fixed asset funding, which can improve the overall sale result for the owner, in addition to the normal hygiene factors of making sure debtors and creditors are to terms and that working capital is at efficient levels.
If there are freeholds in the Balance Sheet, there needs to be a plan to move them out (with the tax implications understood), since it is unlikely a buyer will want to buy the property with the business.
There is much to be done at a personal level as part of exit planning, particularly around personal taxation and a seller should be maintaining a dialogue with both his/her accountant and IFA. Selling shares versus assets can be very significant from a tax point of view, as can the way surplus cash in the Balance Sheet is extracted or used to make pension payments. Understanding these issues ahead of selling a business is very likely to result in a more tax efficient sale.
Aside from financial issues, a seller needs to be reconciled to what they intend to do after the sale, when the handover is complete, and a non-compete clause is in force. Having a plan of what to do with the sale proceeds ahead of a sale can help determine whether it is the right decision to sell at all.
This is at the tail-end of the process, but it is important to understand the parameters around any existing leases and what terms might be available to a buyer. If the seller owns the freehold that the business occupies, what is the market rate to lease and is the seller happy to become the landlord? And finally, buyers will visit the premises and it makes a difference if the business is well presented, clean and tidy. Selling a house without tidying up would be inadvisable and so it is with the sale of a business!
There are many facets of exit planning and acknowledging and managing them will ultimately result in a better sale. A good first step is to have your business sensibly valued so that you know your starting point. At Anderson Shaw Corporate Finance Ltd, we are always happy to both provide a free preliminary valuation and also work with the business owner through the period of exit planning and then ultimately a sale. This can include assistance with some of the analytical work, including business financial modelling, if that is not the strong suit of the seller.