Ensure your business exit strategy extracts the maximum value from your business when selling!


Ensure your business exit strategy extracts the maximum value from your business when selling!

There comes a day when a business owner decides it’s time to sell all or part of their business. It may be for one of many reasons including bringing in investors, providing a buy in mechanism for management, selling to purchase a new business or for retirement purposes. It is often disappointing for business owners to discover that failing to plan ahead – by not having a properly crafted business exit strategy – often results in a reduction of the value of the asset that is their business or that they find it very difficult to sell at all.

This is where preparing for the transaction can increase the enterprise asset value and maximise the return to the business owner. All business owners will need to do this at some stage when they ultimately decide to step down from the business, so why not start early and include this in your business exit strategy, ensuring that the maximum value is extracted from the business.

Having a succession plan can also give you more options and this will allow you to select the option that is in the best interest for you and your business.

Different options:

There are a number of ways that the sale of your business can be structured with different risks and considerations associated with each of them:

Trade Sale – selling your business on the open market is the most common exit option. The list of potential buyers could include investors, competitors as well as suppliers and other aligned businesses wishing to expand their operations. The sale of your business to an external party can also be an excellent way of allowing an owner to completely separate themselves from their operations in the cleanest and quickest way possible.

The key challenges that are associated with a trade sale is that there is a high risk placed on the purchaser around the reliance of the business on the current owner for both the day to day tasks as well as customer and supplier relationships. This risk can influence their decision as to whether or not to purchase the business. Often a purchaser may want to minimise this reliance risk by contracting the current owner into the business as an employee for a period as well as structuring the sale so that a portion is paid immediately and a second portion is paid out at a later date and is subject to the ongoing performance of the business.

Family or internal succession – keeping the business within the family is a source of pride for some owners. As part of this succession option, the owner gets to leave a legacy behind by handing over an asset that continues in their name, as well as providing jobs, income and opportunities for generations to come.

However, when succession planning and family relationships intersect, tension can emerge. While you might want your family members to take over, is the next generation interested? If they feel that they are obligated to take over the business, they may not have what it takes to ensure its continuing success.

Determining whether family members are interested in taking over the business early on is important in being able to properly plan for what will happen to the business when the owner is ready to move on. Another key consideration is that the younger generation will rarely have the funds to purchase the business outright or the personal assets to secure a loan to payout the original owners. The way this is usually circumvented is by the old owner providing vendor finance to the related party which places a lot of risk back on the original owner. If the business doesn’t perform and they lose control, they may never get paid for the sale, which is then an issue particularly if the sale proceeds are needed to fund their retirement.

Management buy-out – it may not just be family members that are keen to take control of your operations. Your management, employees or a mixture of both may be eager to take over the reins. In this case, you may be able to sell your business to a group of individuals within the business.

In this option, those purchasing your business will largely be known to you, the owner. They have spent time watching the business grow, working together to overcome challenges and have an extensive knowledge of the product, market and customer. This can be a useful factor in ensuring business continuity during the sale or transaction process.

This option however may be a lengthier process as there are multiple stages before the business is sold and the owner can step away. It requires additional legal documentation such as shareholder agreements and/or buy sell agreements and potentially vendor finance.

The ability of the purchasers to fund the transaction can again be an issue with a reliance on vendor financing. Having multiple purchasers also adds to the complexity of ownership and management during any transition period.

It should be noted that this method can be made safer for the owners if staged over a longer period of time and by using a structure whereby bonuses are used to gradually (and at least partially) fund the purchase over a period of time. This ensures the purchaser can afford the transaction and the owners can extract the value from the business whilst maintaining a level of control.

Do nothing – many owners may not consciously choose this option, but if there is no business exit plan for succession in place, owners are in fact doing nothing and unfortunately this is all too common. By the time the owner is no longer able or willing to run the business, the only option available may be to shut the business down if no one is interested in buying.

As can be seen, there are a number of different ways a business can be sold Choosing the best option involves the consideration of a number of factors. It is also essential to be flexible and have an open mind about your preferred succession options, as potential purchasers’ circumstances may change and having a plan B is always advised. For example, don’t hold out for your children to buy you out, as more often than not, they won’t be interested!

The ability to sell your business will become increasingly important for small and medium enterprises as there are still a large number of business owners from the baby boomer generation, which may mean a glut of business for sale and a shortage of like for like potential new owners to replace them. Unfortunately, this may see many businesses either being shut down or rolled up into a larger competitor.

Key considerations when preparing  your business for sale:

  1. Separating the owner from the business i.e. can the business operate without the owner? A good litmus test for this is …. can the owner take an extended holiday without receiving any calls from the business? If the answer is no, then the investor will be reluctant to buy your business as they will likely need to replace your skills with expensive management which reduces their return on investment. This leaves the owner with internal succession or having to find a like for like owner with the right skills set willing to step in and take over the business.
  2. Preparing the business accounts to show maximum profits whereas a business will typically present the accounts to minimise tax. The more profit you show the more you can ask for the sale and the more a purchaser will be willing to pay or a bank be willing to fund a new purchaser.
  3. Being able to emotionally let go and/or step back allowing someone else to take over or step up to the role. Many business owners underestimate the emotional connection they have with their business especially if they founded the business.
  4. Finding other things to do, especially if retiring. Stopping work altogether may not always be a good option as it may cause business owners to become bored and this may lead to both physical and mental health issues.

Life gets busy when you are running a business and planning for a business’s future, particularly one that may seem quite distant, can sometimes be neglected. Good strategic planning should incorporate preparing a business for the eventual business sale to improve the return generated and to increase the chance of selling it in the first place.

At dVT Strategy we have successfully assisted and prepared succession plans and business exit strategy plans for our clients and are happy to initiate discussions to help you prepare for the future.

If you would like to discuss the best succession options for you and your business, speak to Brendan Ryan at dVT Strategy today on 02 9633 3333.