‘Exit Ready’. What is it, why is it so important?

About a decade ago my business was growing, but I wanted to take it over the elusive ￡10m turnover barrier. I needed to expand my knowledge of how to achieve this. I started attending courses and getting external advice. Some advisors were dreadful, one purely self-serving, others were superb. Overall it worked, and collectively we managed to grow the group to nearly ￡20M turnover.  

Having scaled the business my thoughts turned to exit.  Advisors questioned ‘are we exit ready?’ I came to realise it’s one of the most important questions a business owner can be asked. So, what does exit ready really mean and why is it so important regardless of your size?

Let’s be clear - you will always exit one day.  Whether it’s because you want the cash, the next generation are keen to take over, someone has made you a great offer, you’re not enjoying it anymore, the business has failed, or your health has deteriorated. Whether that day is tomorrow or ten years’ time, you need to be prepared for it. The exit will come sooner than you think. 

The problem is that many people think about it too late and the one chance to do it well passes them by and exit is not on their terms or the valuation they thought they deserved. Alternatively, owners suffer from over-confidence:

·        I think my company is worth ￡XYZ because a similar company sold for that.  

·        I’ve been offered a multiple of my profits, so it must be worth ￡XYZ. 

·        I don’t need to think about exit. I’m in the early phases of my business growth and life.  

·        I’ll prep for exit when I want to sell, in the mean time I need to focus on growth. 

·        I’m never selling the business, I’m passing it on. I don’t need to worry about it.  

·        I’m good at selling. I’ll be able to sell my business for above average price. 

These may all seem like good reasons not to worry. If that’s the case, why do 95% of business owners regret their exit within one year of leaving. They weren’t exit ready. There are critical steps you need to take and, to avoid disappointment, done way before your exit.

Here are three ways to prepare:

1.      Decide your preferred exit strategy in advance.

Being prepared will help you shape your thoughts and make for a smoother departure. There are many options here, but you need to have clear intent, for instance: do you want to scale, flip, grow steadily to sell, hold a public share issue, consider a Management Buyout, evolve from an active board member to a shareholder whose business is managed by the board, or pass the reigns on to the next generation? Your intent may change over time, but at least you’ll have a clear vision of what you want. To leave in a planned, orderly fashion, it pays to have an exit strategy.

2.      Build a business of value before you try and sell.

John Warrilow, author of Built to Sell, articulates eight key areas that will drive the success and value of your business. 

a.      Strong financial performance. 

b.      Growth potential. 

c.      Depth and breadth of customers, staff and suppliers, so you’re not over dependant on any one or small group.

d.      Reduce demand on working capital as this directly reduces your value.  

e.      Strong recurring revenues ideally paid in advance with a strong LTV:CAC ratio. 

f.       Provide a strong product market fit that is better than your competition.

g.      Highly engaged customers who promote your business and products. Ideally, they would be aggrieved if you were to pull your product as they hold you in such high esteem. 

h.      An organisation with high-performance teams that make high performance decisions instead of one that’s overly dependent on you or the founders.  

If you wish to get a benchmark of your current business value you can do a quick Value Builder Scorecard.  

3.      Survive due diligence by constantly doing your own. 

The due diligence stage has been the death bed of many exit attempts. Research says 93% of exits fail. This is largely due to lack of genuine value in the business and failure at the due diligence stage.  

The more prepared you are and the more you’ll understand what an acquirer is looking for, and the better you can present the information. Never underestimate the importance of speed, quality and consistency in this area. Often requests for information come in, followed by weeks of silence as the seller desperately tries to find the information. This spooks acquirers.  

If you’re a large business, you may want to consider vendor due diligence (VDD). This means you’re better prepared prior to going to market and more in control of the due diligence process and timelines.  

By creating a filing system with the right information, you can pull together an actively managed ‘data room’. It could make you millions. Some other areas to consider:

a.      Strong documentation of your business systems, operations and processes. This should be like a manual of how to run your company.  

b.      Strong contracts with your customers, staff, suppliers and protection of intellectual property. 

c.      Share certificates and a demonstration they are properly managed. 

d.      Clear corporate information such as legal entities, statutory books, copies of minutes of board meetings for the last 2 years, financial assistance, dividends, resolutions. 

e.      Acquisitions and disposals. 

These are just some of the pieces of information you should have to hand.

You only get one chance to exit your business, so you need to do it right. 75% of people who sold their business said they felt they didn’t get what they thought it was worth. It doesn’t need to be this way.

The more prepared you are in advance the more you’ll enjoy the process, get the price you expect and the lifestyle you aspire to. 

If you’d like any advice or further explanation of the areas mentioned above, please feel free to contact BGI. We’ll be only too happy to help and give you a free and totally confidential conversation.