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Five-minute money masterclass: engineering an exit

Written by Ryan McChrystal on Tuesday, 13 January 2015. Posted in Financial management, Finance

Making your business irresistible may be the key to executing a smooth exit plan

Five-minute money masterclass: engineering an exit

All journeys have a beginning, a middle and an end. While reams of pages have been dedicated to starting and managing a business, exiting is too often neglected. Entrepreneurs could pay a heavy price for complacency so planning early can make for a much stronger, more resilient company with a larger market value, which has a direct effect on whether you leave your business feeling satisfied or not.

 Plan up to four years in advance

If you want to get the most of your exit, you’d better get a headstart. Stuart Lucas, co-CEO and founder of Asset Match, advises that businesses plan well ahead; at least two to four years before the move, which means getting it into tip-top shape now. “To sell your company successfully, ensure that it is looking professional from a governance and financial reporting perspective,” says Lucas. He suggests speaking to a non-executive director, perhaps with some City-related experience. “Their advice could be invaluable when it comes to attracting buyers and ensuring the business is presented in the right way to get the best price,” he explains.

Planning also means knowing how much your company is worth. “Business valuation is partly an art form but make sure you understand the underlying metrics your business is valued on – EBITDA, PE multiples, growth prospects, sales, forward earnings, or whatever it may be – and focus on that.”

Keep one eye on the market at all times

Jane Gomez, MD of the Supper Club, has learnt that when it comes to selling, it is vital to stay in tune with industry movements and not to take your eye off the wider market. “As with many decisions an entrepreneur takes, planning will only take you so far and a decision about exit may well come down to gut-feeling or taking advantage of an unforeseen opportunity.” When observing a market it is always worth knowing what the competition is doing. 

It’s also a good idea to keep an eye out for private equity investors. “At any one time, private equity firms will have their spotlight on a particular sector, which means there’s a period in which they will pay a premium. When that happens you want to have the chance to sell and have first mover advantage so be ready just in case,” says Gomez. “What you can and must control is how ready your business is for sale. A salable business is a growing business, so don’t let the idea of exit take your eye off the ball.”

Create a market

Markets are capable of taking on a life of their own and you are much more likely to sell well if you’ve got a great position and you’ve made sure possible buyers know it. “The more of them that know it, the merrier you will be,” says Pete Wild, senior lecturer in accounting and finance at Manchester Metropolitan University, who has worked with hundreds of SMEs through the Goldman Sachs 10,000 Small Businesses Programme. Wild has found that creating a market for your company can really get the ball rolling. “Get a bidding war going and you’ll sell quicker and for more,” he says. In order to do this you must be bold. “You need to make a noise, raise a flag and carve out a position in your markets that makes you irresistible.”

Target a specific buyer

When creating your exit strategy, it is important to establish who your business is aimed at. “Targetting a specific buyer or two can help owners sell well,” says Wild. “It makes the process feel a little realer, gives a focus to boring exit planning activities and encourages owners to really consider what matters to a possible buyer.” Your marketing strategy could ultimately fail if you do find the right people to aim at, regardless of how much preparation you have done. Once you know the type of people you are aiming at, you can look to conduct further research to see if there are any types of customer with more specific needs than others.

Look closer to home

“Many companies that are sold outright don’t go on to perform well because employees do not feel the same allegiance towards the new management,” says Lucas. So it might be a good idea to look a little closer to home. One option is to consider your own staff. “Look to the people who helped build the business and plan your succession. Offer a share incentive scheme (perhaps EMI or SIP) to create loyalty and when the time is right outline your exit plans and you may find they will want to undertake an MBO.”

It may take your staff a while to find the funds and develop the right skills but at least there is a chance to see your business continue to thrive. Alternatively, you could consider hanging on to part of the company. “Rather than doing a full exit you could take out some of your cash by selling shares in the business. Companies don’t have to go public to do this anymore; new online marketplaces, such as Asset Match, allow investors to buy and sell shares in private businesses on a regular basis, creating liquidity,” Lucas adds. “By selling shares gradually and keeping a position on the board you can keep an interest in the business.”  

About the Author

Ryan McChrystal

Ryan McChrystal

In a previous life McChrystal wrote about asset management in the Middle East. A history and politics graduate from the north of Ireland, he now focuses his efforts a little closer to home. 

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