When your client’s business is doing well, it’s unlikely she’ll put much stock in creating an exit strategy. But as a savvy business advisor, you know that market conditions fluctuate, your client’s life circumstances may change, or she may decide to retire. Having a plan in place now is part of a comprehensive business strategy.
The advice you give your client will be as varied as your clients themselves; there is no one-size-fits-all template. The correct path should reflect your client’s goals and business objectives.
To begin with, your client has several options to exit her business. These include the following:
Closing-up shop. We don’t know many entrepreneurs who choose this exit strategy because any assets must be sold to repay creditors. It doesn’t involve any negotiations or loss of control, but your client risks her reputation, and customers and suppliers may not want to do business with her again.
Dissolving when profits dry up. For smaller companies with stable revenue, this exit strategy is sometimes called a “lifestyle exit.” Expenses are kept deliberately low, and most profits are directed to the owner instead of investing in the business. When gains diminish, the company dissolves.
Selling the business. This is the most successful exit strategy. If handled correctly, the sale will net your client a profit—perhaps even an ongoing revenue stream. If your client chooses to sell, profitability becomes the critical measure and establishing the metrics that will trigger her exit becomes the next step. These financial milestones will combine revenue with your client’s expectations, realistically adjusted to reflect in-market trends.
Now is the time for your client to meet with an advisor who can assess the value, market potential, and readiness of the business prior to making any decision in listing the business for sale. Second Wind’s approach will show your client how to maximize the value of the business and then lay out a plan to prepare her for the transaction.
How to Prepare
When determining when to list her business for sale, it is important your client understands what the market value current market value of the business is and how that could be improved over time with strategic initiatives. A financial review from Second Wind will weigh the historical financial performance against Key Performance Indicators within a given industry. Armed with this information, Second Wind can inform your client of the value of her business as-is and provide strategic recommendations for how to improve financial performance that will enhance the company’s value.
Throughout this process your client must maintain a robust operational plan including the following:
Detailed bookkeeping. This means having an up-to-date balance sheet, profit and loss statement and accounts receivable/payable records, so your client can demonstrate the financial health of her business to potential buyers.
Minimal debts. Borrowing is occasionally needed to spur growth and maintain cash flow, but loans need to be well-managed to keep profits healthy.
Well-maintained equipment. Old or obsolete equipment is not exciting to potential buyers. If your client can’t afford to purchase new equipment, suggest she consider leasing machinery, equipment and vehicles instead of buying. Giving potential buyers the option to renew leases or buy new material on their terms is an added-value.
Well-documented processes and systems. Encourage your client to keep a record of how her business operates. Every aspect of the business should be documented, so a buyer knows everything they need about how to run it.
Potential buyers also want to know what your client’s business does best. Whether its customer service, logistics, manufacturing, etc., being able to clearly identify what your client does better than anyone else will both drive the value of an eventual transaction and keep potential buyers invested throughout the due diligence process. Second Wind’s operational audit will identify these strengths and make the business owner aware of how to identify key employees, core competencies and other sources of value.
A succession plan. Your client must comprehensively train her team on various aspects of the business so they can continue in their roles, generating sales and profits for the next owner.
A diverse client base. Having few customers makes your client’s business a risky proposition for a new buyer. She needs a broad, sustainable client base to deliver ongoing revenue.
When to Exit
Second Wind will conduct an operational audit to assess the ideal timing for your client’s exit. The duration of that timeline will vary based on the financial condition, historical performance and the market forces of the business. While some businesses need to eliminate expenses and allow time to show potential buyers a growing bottom line, others need to get to market quickly in order to take advantage of surplus demand or other market forces. In the end, timing preparedness will most greatly affect the end transaction price.
Preparing a Due Diligence Package
Most deals that fail to close do so during the due diligence process. Second Wind prepares all traditionally-viewed due diligence items into a package before even listing the business for sale. Being able to provide all relevant information immediately after signing confidentiality agreements with potential buyers is what leads to good selling prices and motivated purchasers. If a buyer sees a seller is responsive and fully transparent, they will be much more likely to seek out that acquisition and feel comfortable going to closing.
After preparing for a sale, Second Wind will list the business and bring it to market. We believe in an approach that doesn’t just blast a listing out to the world, but rather identifies potential strategic purchasers and tailors the presentation of the business for sale to those purchasers. Creating demand requires market research, market share analysis, understanding of the competitive landscape, and the review of potential vertical integration.