Exit Planning your Business Successfully!........
Colin Thompson
Managing Partner Cavendish/Author/International Speaker/Mentor/Partner
Exit planning is perhaps the most difficult yet most important period in the life cycle of Small & Medium Enterprises (SME's). It is an event that probably only happens once, yet has a profound effect on the future life, particularly in retirement, of the owners. Research clearly shows that many owner-managers fail to achieve a full or fair value for their businesses during the exit process. The key reasons for this failure are:
? Unrealistic value expectations and time scales
? Poor preparation within the business before the sale
? Unwillingness to use professional advisors
? Inadequate resources allied to the exit process
Planning Your Exit
Developing a strategy to maximise the value of your business on sale requires careful advance planning. You should start considering the issues several years before you plan to sell. The actual exit process will take 6 to 12 months and may require varying degrees of preparation of up to several years.
Exit Routes
There are several different types of exit routes open to owner managers:
Trade Sale - This is selling the business to another company.
Management Buy Out (MBO) -
Here, existing management within the business acquires the company. The MBO team often has difficulty in raising the funding required to complete the transaction.
Management Buy In (MBI) -
Outside investors acquire the company and place their own management into the business.
Buy In Management Buy Out
(BIMBO)
This is where the Management Buy Out team (MBO) is unable to either raise the equity or debt funding package and seeks an outside investor to strengthen the credibility of the debt lending proposition.
Partial MBO/MBI
Here the shareholders agree to sell their shareholding in the company in stages.
Valuation
The valuation of your company is not a science, but is driven by market forces and your ability to present your business as a significant investment opportunity. There are a number of principles that can be applied to valuing your business:
Earnings Multiples
These are normally based on historic and possibly forward projections for earnings, measured before depreciation, interest and tax, but adjusted for average directors' drawings.
Net Asset Value
The book value of the company as declared in the balance sheet. In many cases owners may expect to achieve a premium when using this approach to valuation.
Cash Flow
This is normally based on historic and possibly forward projections for cash flow. Debt funders will focus on historic performance, whereas investors may include forward projections, discounted to reflect timings and risk.
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Sale and Purchase Agreement (SPA)
The SPA is normally prepared in draft form by the purchaser's lawyers. This is the legal document, which covers all aspects relating to the sale and purchase of your company. The SPA will set out the basis under which the assets of your company are being purchased. The SPA will also include any management handover, which is normal in this kind of transaction and possible restrictive covenants, preventing you from competing against your company after completion.
Completion
This is the formal signing of the SPA and other legal documents and the point at which the purchaser will transfer the funds agreed on completion to your lawyer's bank account.
Do
? Prepare the business for sale
? Appoint specialist advisors
? Ensure accounting and legal entity records are accurate and current
? Be conservative with financial forecasts
? Protect IPR
? Remember cash is king
? Maintain your competitive bidding position
Premium valuations are achieved where the business can demonstrate one or more of the following attributes:
Size - Larger businesses attract higher valuations than smaller businesses. Strong historical financial performance and projections always attract higher valuations. Intellectual property rights and technology that are protected by patents or copyright, etc, will enhance the valuation. A business operating in a growing market will attract a higher valuation than a similar business in a market that is flat or declining.
Information Memorandum (IM)
The IM is a document that you and your advisors produce, which will set out for interested parties all the salient financial, operational, legal entity and other legal issues that a potential bidder will need, in order to
make an indicative offer for your company, subject to due diligence and contract.
Deal team
You will need to appoint a deal team to include:
? Specialist corporate lawyer
? Tax accountant
? Corporate financial advisor
The fees relating to these advisors will normally be paid from the proceeds on completion and cannot be charged to the company.
Do Not
? Have an unrealistic view on value and timescales
? Hide skeletons or bad news
? Incur or invest in non-productive costs or assets before the sale process starts
? Over sell your business
? Agree to large earn-outs or deferred consideration
Deal Structure
When you come to negotiate the deal structure, remember the following principles:
? Competitive negotiations - retain a competitive bidding environment. Your business will always be worth more when two or more parties are actively involved in the process.
? Cash is king - maximise the cash on completion as part of the deal structure. Earn-outs or deferred considerations are always a risk.
? Short timescales - keep any period of preferred bidder exclusivity to no more than 2 to 3 months.
Heads of Terms
Confirm the deal structure in a heads of terms, normally prepared by the purchaser. This document is non-binding, but nevertheless should be reviewed by your lawyer. Due Diligence.
`Selling Your Business Successfully`
So which is it:
Time for a sharp exit – you need time for your exit strategy to kick-in
Time for a sharp exit - you need to plan the timing of your exit?
Time for a sharp exit – your exit needs to be swift?
Time for a sharp exit – you need to start thinking about how you are going to exit the business…
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About the Author Colin Thompson
Colin is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor - RFU Leadership Academy, Mentor - Coventry University, Mentor - The Chartered Institute of Personnel and Development, Business Advisor NHS Deanery, author/writer Business Advice Section for IPEX, Graphic Display World, News USA, Graphic Start, plus many others globally, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, presentations, business and educational models on CD-ROM/Software/PDF and over 4000 articles/reports and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.
Strategist | Mentor | Speaker | Author
DDL: + 44 (0) 121 247 4589
Skype:colin.thompson384
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