What is your company’s end goal? Business owners often have only a vague idea regarding their exit: they prefer running their business instead of planning an inevitable departure. However, every significant business event, including exit, deserves an efficient strategy to manage it. These strategies comprise a business plan. Your exit strategy is an essential component of an effective business plan.
An exit plan does not mean business closure. It is a plan to scale your business to get the desired amount of exit proceeds to lead a comfortable life after you leave the company.
What Is an Exit Plan?
An exit plan is a complete strategy for exiting a business. It analyzes the financial, legal, and tax options for leaving the company. An effective exit plan helps owners maximize business value during the exit to ensure that they achieve their personal and business goals and minimize their taxes.
Poor exit planning leads to failed business divestitures. It adversely affects owners and businesses during and after the transition.
The exit plan guides company growth and reflects the culmination of goals. It shows angel investors or venture capitalists investing in startups how and when they can get returns and helps them make informed decisions.
When Should I Exit?
Your best exit occurs when you have created enough value to sell.
The current market value (CMV) that the initial business valuation reveals at the start of exit planning is rarely enough for the owners to achieve their desired exit. An exit plan helps you identify the value gap (the difference between the CMV and your exit goals) and points to actions to be taken that will close the gap. So, exit planning is primarily about creating enough value to achieve a comfortable exit.
Before you consider your exit plan “finished,” ensure that:
- Your business has sufficient value drivers
- You have chosen the best possible exit option for your unique business
- You know your industry and the M&A marketplace
- You have considered your competition.
Have Sufficient Value Drivers
Identifying the value drivers in your unique business is critical. The most common value drivers include:
Owner independence. Buyers/investors find owner-dependent businesses risky. Business value increases when the owner prepares for the exit by developing, training, and retaining an efficient management team to take over the business operation after the owner’s exit.
Robust systems. Ensure your company has updated systems and well-documented standard operating procedures. These eliminate key-person dependencies and help in scaling. Buyers find your company competitive and can see your unique value proposition.
Customer diversity. Buyers remain wary of the risk of customer concentration. Ensure that you have a diversified customer base and that no single customer accounts for more than 10 percent of your total sales.
Growth strategy. Buyers want to see a sound growth strategy. They want to know how much and how quickly your company can provide returns on their investment. A thoughtfully developed and implemented growth plan increases business value in the eyes of the buyers.
Recurring revenue. Revenue trends can make or break the business transition deal. Buyers want to ensure that revenues sustain and grow after you leave. Recurring revenue is a powerful value driver that shows your company’s strength. If a vast customer base has subscribed for your products or services and you have advance orders for multiple years ahead, then buyers will pay a premium price for your company.
Good cash flow. The cash flow trend is critical to your exit planning success. Ensure that your cash flows show an upward trend because negative cash flows may deter prospective buyers. If your historical cash flows show a downward trend, take initiatives to reverse this value driver in your exit/value creation plan.
Competitive advantage. Identify what competitive advantage your company enjoys in the marketplace. It may be the reason why you have repeat customers or recurring revenue. Strategize to protect your competitive advantage, as it can earn you a business value premium from prospective buyers.
Easy scalability. Your business should be easily scalable; i.e., profit margins should increase when revenues increase. Your business is not easily scalable if your costs increase as revenue increases. In the absence of easy scalability, ensure your company has other value drivers to help it scale.
Clean books. Sloppy recordkeeping raises a red flag for prospective buyers because it’s perceived as concealing serious underlying business problems. Accurate, orderly, updated financial records build trust. A sound exit plan includes pre-diligence and prepares the company for the inevitable due diligence process that the buyers will conduct before finalizing the deal.
Choose the Most Suitable Exit Option
Your choice of exit plan also influences business development decisions. The most common exit options include:
Initial public offering (IPO). A company that goes public issues an IPO to raise money for expansion and growth. IPOs require sophisticated reporting and thorough preparation. They seldom go smoothly. While the Alibaba IPO made millions, the Facebook IPO took years to gain traction. Not every company can take this exit route because of its complex requirements.
Merger. A merger creates a new business entity by combining two existing companies. Mergers occur for different reasons, such as expanding reach, growing into new segments, gaining market share, etc. Exxon and Mobil merged in 1999 to create a superpower in the energy industry. Together they won approval from the US government to sell over 2,400 gas stations country-wide.
Acquisition. One company acquires another company and attains control by purchasing a majority share (or all shares), absorbing the target company, and paying for it in cash, stock, or both. Acquiring companies usually purchase target companies to acquire their market share, assets, intellectual property, etc. Salesforce acquired Slack in 2021 for $27.7 billion in cash and stock to mutually define the future of enterprise software.
Know Your Industry
In your market niche, keep track of industry trends, changing customer preferences, competitor activities (R & R&D), entry and exit of companies, details of M&A deals, etc. Understand the M&A marketplace before announcing your intention to exit.
Not staying updated with the changing regulations in your industry could expose your business to security issues, or you may fail to comply with them.
The latest industry trends help business owners identify potential growth opportunities in their sector. You may not meet your customers’ expectations and lose out to the competitors if you do not know about or understand changes in buying habits, new technologies, styles, and consumer preferences. Staying informed regarding what your competitors are doing may help you find answers to resolve problems in your business.
Taking guidance from professionals and understanding the M&A marketplace helps you choose the correct time to sell your company. The expansion phase of the business cycle is usually the best time to sell. When the economy grows, valuation multiples are high, and the investors have easy access to capital.
Consider Your Competition
Your competitors may also go to market at the same time you. Get a comparative analysis to understand where your company stands against them. Strategize to outperform the competition and show your competitive advantage to prospective buyers. Identify and showcase why a buyer should choose your company over the competitor.
Now You’re Ready
When your business value is sufficient to fetch a selling price that meets your exit goals, it has accomplished your goals. Preparing thoroughly after considering every possible scenario or roadblock is the key to a smooth business transition. Achieving it without the involvement of exit planning advisors is next to impossible.
Value Scout is an AI-driven value creation platform that can help you connect with the best exit planning and value creation advisors. Get in touch to know more.