Your Exit Strategy
Sooner or later you will want to sell or exit your business, either in total, or so you
are involved for fewer hours with less risk and responsibility. This could be via a
succession plan with family or employees taking over, via a trade sale to a
competitor, a sale in full (or in part) to an investor.
To ensure maximum return, the sooner you start preparing for this inevitable day,
the better. Any buyer will be looking for the lowest risk and the best possible return
and you need to think about who might be attracted to your business and how you
can “groom” it to make it as appealing as possible, to “de risk” the purchase process
as much as possible.
An issue for many business owning “baby boomers” is that, over the next 10 years,
many of us will want to cash out of our business to fund travel, that new bach,
dream boat, flash car and a happy and deserved retirement. The difficulty looming is
that there are going to be a lot more businesses on the market and those younger,
keen generation X and generation Y buyers who may be interested, are today
burdened by big mortgages, student debt and raising up expensive children. Their
ability to borrow from traditional bank sources may be severely limited.
Les Probert - Mob: +64 21 283 3773 Skype: epromotionz
Mark Collins – Mob: +64 27 534 0860 Skype: thinkingmark
Physical: Level 1, building F, 27-29 William Pickering Ave, Albany
Post: PO Box 302683, North Harbour, Auckland, 0751 NZ
www.toho.co.nz
This means some creative financing and planning will be called for. As an example,
many business owners may prefer ongoing income to lump sum capital. A 1m capital
sum invested in the bank today earns a miserly 4.5% ($45,000) but via a “work out”
or time payment scheme, your 1m may be better coming to you as 150k a year, paid
out over an agreed term, with interest and a staged sell-down of shares and perhaps
some ongoing part-time involvement by you, in the business. This is just one option,
as a straight cash sale and exit may be not be possible
Pre-sale “grooming” steps you can start taking now
1) Make the business less dependant on you, by training staff or changing
procedures Your goal should be to try and effectively make yourself
redundant!
2) Put in place standard systems and processes, and document every stage of
your operation so someone can easily step in and take over.
3) Make sure your lease is up to date and assignable.
4) Make sure all employment contracts are up to date and can be assigned to a
new buyer, without invoking redundancy provisions.
5) Ensure debtors and creditors are kept up to date and current, including PAYE
and GST.
6) Ensure your database of customers and suppliers is up to date and complete.
Les Probert - Mob: +64 21 283 3773 Skype: epromotionz
Mark Collins – Mob: +64 27 534 0860 Skype: thinkingmark
Physical: Level 1, building F, 27-29 William Pickering Ave, Albany
Post: PO Box 302683, North Harbour, Auckland, 0751 NZ
www.toho.co.nz
7) Have all financials up to date, including LYR’s accounts (most buyers will want
to see the previous 3 years of accounts) and YTD P+L and balance sheets,
debtors/creditors all up to date.
8) Get rid of any “cashies” in the business and make sure all sales are processed
legitimately through the business. Don’t take personal expenses or excess
drawings out of the business, unless necessary and justified. Your goal is to
maximise sustainable profitability within the business, and preferably over a
three year period, as your purchase price is likely to be based on a multiple of
fully accounted for earnings.
9) A buyer will be looking for a business that is ideally showing growing sales,
customers and profits with upside as well.
10) Ensure all customer and supplier contracts are up to date and that they are
assignable.
11) Look at your marketing and presentation material, company signage, your
website, brochures and promotional material. Is it all current smart and
attractive?
12) Update your customer testimonials - look for “social proof” that your
business offers great service and has happy customers.
13) Try and resolve any outstanding disputes or legal arguments.
14) Ensure your asset register is up to date and you have clear ownership of
assets, along with depreciation schedules, and that all assets owned by the
business are well documented.
Les Probert - Mob: +64 21 283 3773 Skype: epromotionz
Mark Collins – Mob: +64 27 534 0860 Skype: thinkingmark
Physical: Level 1, building F, 27-29 William Pickering Ave, Albany
Post: PO Box 302683, North Harbour, Auckland, 0751 NZ
www.toho.co.nz
3 questions on any private investor’s mind, when looking at your business
1) Will I lose my money? First make me comfortable… I won't lose my money.
An Investor will look at:
A) the experience of the business owner
B) experience of your advisors and mentors (create credibility through your
advisors), build an advisory board, not just shareholders or directors.
C) Proof of concept, how proven is the proposition e.g. existing customers, or market
research, and pre sales
2) When will I get my money back they want to know... What is the exit strategy, are
the business owners committed to the exit strategy, what are the potential risks that
may delay the exit
3) How much money can I make ? An investor is looking for 2 things...
a) growth potential,
b) strategic value .. Ask: who can make more from this business than I can, and why?
Who might, in the future, buy this business?
Two things need to be done for an investor: Minimize risk & maximize the growth.
1) The number 1 risk is being too dependent on the owner
2) Make the future real… (Evidence, research, customer testimonials)
Les Probert - Mob: +64 21 283 3773 Skype: epromotionz
Mark Collins – Mob: +64 27 534 0860 Skype: thinkingmark
Physical: Level 1, building F, 27-29 William Pickering Ave, Albany
Post: PO Box 302683, North Harbour, Auckland, 0751 NZ
www.toho.co.nz
So what’s my business worth?
The reality is, your business is worth as much as someone is prepared to pay for it!
That said, there are a number of different ways to look at the value of your business.
There are also a range of calculators online if you Google “what’s the value of my
business”
Some of the common ways of arriving at a valuation include
Asset valuation
Your business may have a lot of high value assets, such as plant and equipment, or
an exclusive, patented process, and your business may be worth the value of these
assets less any liabilities.
Cost of entry
Another way of valuing your business is to look at how much it would cost someone
setting up or entering your sector to get to the trading position you are currently at
with the turnover, plant, customer base and trading you currently enjoy.
PE
A very common way of valuing an SME business is to look at the price earnings ratio
and place a multiple on the sustainable and ongoing earnings the business is
generating. In most Australasian SME businesses this is 1 -2 times normalised nett
earnings, however in some high growth sectors and for many public listed
Les Probert - Mob: +64 21 283 3773 Skype: epromotionz
Mark Collins – Mob: +64 27 534 0860 Skype: thinkingmark
Physical: Level 1, building F, 27-29 William Pickering Ave, Albany
Post: PO Box 302683, North Harbour, Auckland, 0751 NZ
www.toho.co.nz
companies, this can be much higher. (you can see the PE ratio of public listed
businesses in your daily newspaper)
Sales multiple
In some sectors (especially when a trade sale is involved to a competitor) the buyer
may pay a %, based solely on your sales volume, as they may be able to add it to
their existing volume and leverage advantage from this.
Summary
Your business is probably your biggest asset and its final valuation on exiting will play
a huge part in you enjoying a comfortable future. The time to start thinking about
selling is the day you buy or start a business. Make sure you put in place, right from
the outset, systems and process that will facilitate a future sale. Work now to ensure
the business isn’t dependant on you.
A great definition of a successful business is ” A Commercial, Profitable Enterprise,
That Works, Without You” …now what do you have to do with your business to get
it into this saleable state?
Les Probert - Mob: +64 21 283 3773 Skype: epromotionz
Mark Collins – Mob: +64 27 534 0860 Skype: thinkingmark
Physical: Level 1, building F, 27-29 William Pickering Ave, Albany
Post: PO Box 302683, North Harbour, Auckland, 0751 NZ
www.toho.co.nz