EXIT STRATEGIES: Selling your business – a life-changing event

Selling a business is often a life-changing event and if you are going to do it, make sure you walk away with as much as you can. Why spend years building a business to falter at the last hurdle and fail to properly prepare the business so you generate the highest exit value for your time, risk and effort.

For most entrepreneurs, deciding to sell their business is probably the most important decision they will make in their commercial careers. If done successfully, it is the one event which will push them into the cashed up, multi-million dollar, lifestyle class. It will change their lives forever. However, few bother to undertake the same rigorous planning of the harvest which they would devote to purchasing a major piece of equipment or entering a new market. While they feel comfortable planning an expansion of their business, they shy away from taking the hard decisions about how to extract themselves from their business.

For many, it is a difficult decision to face because they have inadequately planned for life after the business. Their business is their life and their life is their business. However, when you talk with cashed up entrepreneurs, you see a very different picture from what you would expect. They are active, involved with numerous activities and still thinking of new ventures. Most start another business or buy out a smaller business. Some spend their time with charities while others become angel investors.

Preparing for the sale and for life after the exit, are really two parts of the same problem. Without seriously planning for what to do when the business is sold, the entrepreneur really doesn’t do a very good job of the preparation for the sale.

Few of us ever get to plan exactly when the business will be sold and thus preparation for the event needs to take place without delay. The vast majority of entrepreneurs don’t plan on selling their business in the near term, however, a business which gets into trouble through external or internal changes or events is often sold to get the entrepreneur out of trouble. A business which is approached by an attractive buyer is usually not for sale, but if the price is right, the sale may well happen. In neither of those circumstances can we say the event was anticipated.

However, extracting the best price at the time of sale will not happen unless the business has been prepared for sale.

As you can see from this book, there are considerable benefits from developing a strategy to prepare the business for sale. Tidying up the business and sorting out the dead wood and stripping the business back to the productive parts will, of itself, make the business more efficient and put some energy into the business. Staff feel good when everything is being done well.

Cleaning up the business and getting it ready for a systematic investigation by a buyer is an essential step in the preparation process. A business ready for due diligence is generally one which is being run effectively and efficiently. The process of getting ready for sale will uncover numerous things which need to be cleaned up or fixed. This will greatly assist the business to operate better. It is also the most important step in preparing the business for sale.

If you are anticipating a financial sale, start a program of continual improvement. Whether this is done through benchmarking, quality improvement or continuous process improvement, the activity of systematically examining the business looking for improvement and involving staff in the activity, will generate numerous ideas for productivity gains.

Then give serious consideration to how the business might start to grow without putting undue pressure on management or the resources of the business. Maybe this is working more with your best customers or taking on minor additions to personnel. Adding a growth component to the business will lift the spirits of those who work for the business as well as provide some incentives for management to look for creative ways to use business resources to expand.

Then it is time to get creative. What can you do to provide a major boost in growth over a short period of time which could be enacted by the buyer shortly after they take control? This is what I have termed the ‘Platform for Growth’ and is a major contribution of this book. It is not just anticipated real growth which impacts valuation; it is also the potential growth which the business is able to generate in the short term after the sale which can seriously lift the valuation. However, that potential business has to be locked down and strongly validated with evidence.

If you have identified strategic value in your business, it will be worth the time and effort to prepare the business for a strategic buyer. This means spending time working out how a potential buyer could effectively exploit the potential within the firm. Once this connection is made, the process of preparing the business, positioning it for sale with prospective buyers and negotiating the sale agreement becomes quite straight forward.

Then give serious consideration to how the strategic value within the business might be enhanced. This might require additional investment in developing assets or competencies further. At the same time, serious consideration needs to be given to what process the buyer will use to replicate and scale the asset or competency being acquired. Key to securing a high value for the firm is to ensure the buyer is able to rapidly exploit the potential acquired with the business, therefore, having a fully documented and reliable process in place for the buyer to rapidly scale the acquired asset or capability is going to be an essential part of positioning the business for sale.

The processes which I have outlined in this book really do work. Apart from my own experience, I have assisted numerous entrepreneurs to sell at a premium. As an example, I recently worked with an entrepreneur to sell a relatively small business which was making a small profit. Over a year, he cleaned up the internal systems, put a succession plan in place for himself and introduced bonuses for staff to stay after the sale. He then identified how the business could be developed through some additional investment by the right buyer. The business was sold at the end of the year’s preparation for 40 times EBIT. We were able to increase the business broker valuation by a factor of ten.

There is no question that significant improvement in sale value can be achieved if the right approach is taken and you are willing to invest in the preparation process. Don’t be passive and let a conventional valuation be imposed on you. Take the initiative to understand how you can influence the valuation and then look for a buyer who understands the value of the work you have undertaken to improve the business and the business prospects.

The difference between selling out with little notice and preparation and putting the time and effort into planning a financial sale can be 2 to 9 times the conventional valuation. In the case of a strategic sale, sale values of 20 to 40 times a conventional valuation are possible. During the preparation process, some owners will discover opportunities which will greatly improve the sales value.

There is no question that a substantial difference can be made with a systematic approach to the problem. Going through the exercise is highly beneficial to the firm as it should uncover numerous ways in which the basic operations of the firm can be made more effective, that alone justifies the effort. But the most important outcome is the amount of cash which the entrepreneur will walk away with and, with the right approach, that can be greatly increased.

Don’t delay – an attractive harvest is well within your reach.