Or ‘swimming with great whites from within a cage’ …. build your own protection by building a strong plan!
The default exit is structured around when the owner wants to exit. Failure to evaluate if the business is ready for an exit typically ends in the equivalent of pulling the tracks out from under a moving train. Costly, tragic and catastrophic. Timing is everything. If the goal is to exit at a certain stage of life, there needs to be preparation for that moment. Goals need to be identified. Systems need to be established. Leadership needs to be trained. Depending on the type of business, desired goals and price point, businesses can take 1-3 years to develop and implement an exit strategy.
Here’s a few suggestions to help you structure your thoughts and processes when it comes time to exit your business:
1. Consider the tax consequences – as a broker, we are not registered to provide tax advice, and I will freely disclaim this to all of my vendors when I advise them early on in the conversation about bringing a business to market. There is a large discrepancy between sale price and after-tax cash in the bank. The difference is the ATO. The majority of business owners don’t understand the massive tax consequences they are signing themselves up for when they structure their terms. It is essential that all business sales be set up to minimize tax hits. Pls always discuss whether a business sale of assets (goodwill, plant and equipment as well as any stock at value) is the way to sell your business or whether there might be capital gains tax (CGT) benefits in undertaking a share sale or company sale of your business; whereby you might elect to sell 100% of the shares to the new buyer. This might be an ideal scenario for a range of issues, including but not limited to ease of lease transfer, assigning of contracts (clients and staff/contractors), acceptance of Dept of Immigration nomination/sponsorship rights, not to mention agreements with facilities to name a few.
Not cleaning up bothersome contingencies – potential buyers of businesses hate two things more than anything: surprises and unknowns. As a potential seller, you should do your best to clean up as many “loose ends” inside your business (or company) as possible before you consider selling. Think potential lawsuits, liabilities, employee claims, ATO issues, etc. At the very least be prepared to disclose any of these issues to a seller ahead of time.
Many small business books are structured to mitigate taxes. Owners have a system that gets the job done. It’s not the tidiest arrangement, but it gives enough structure to submit to a CPA. A buyer has very different interests than the ATO. If the books reflect that the business took a near loss, what value does it have? Even if buyers can see beyond the “reduce my tax burden” strategy, the financing department at the bank won’t have the same leniency. There is an option for an accountant to create a special purpose financial statement; which is not used for any other purpose except to give comfort to your buyer that your business is trading well. This will not be shown to the ATO, and the creation of the document is tax deductable.
To showcase the value of a business, accounting and records need to be polished. Remember, the books are the main selling point. If they are a mess, a potential buyer has no reason to further inquire about a purchase. Think about what you are selling…if your car is owned by the company and you don’t clean this up before the settlement of the company, then those keys belong to the new company owner.
2. Understand the value drivers – The principle driver of the value of your business is the “predictability of the future cash flow the business will generate.” The more predictable those cash flows are going forward, the more valuable your business becomes. This use to be referred to as ’Future maintainable earnings’ or FME, and are now just called ‘maintainable earnings’ as the word ‘future’ is superfluous.
Many business owners underestimate the value of their business by relying too heavily on conventional valuation methodologies and failing to take into consideration the motivations of potential purchasers and potential synergies that could be achieved through a business combination. Make sure you understand the value of your business before coming to market
Equally, many business owners overestimate the value of their business/company. Have your business appraised or valued by an experienced broker or valuation professional before bringing your business to market.
3. Work on the business, not in it – business owners need to start planning at least three to five years ahead of time for a sale to best position the business for their potential exit. If your business would fail without you there leading the team and driving the day to day operations, then any value the business has leaves with the owner at settlement. A buyer will only be purchasing a job, not a thriving enterprise. Most businesses are built around the business owners as a keystone, with staff hired to support them. When thinking of exiting your business; think about who will lead the team in your absence. Do you need to recruit a ‘2-I-C’ who will be able take on your duties, leaving you able to take more holidays leading up to the sale and take over the leadership duties post settlement? I often tell me vendors to ‘sack yourself before someone else does’! Again, this can be a successful strategy in growing a business.
4. Appointing a deal team to avoid overwhelm – get help from a qualified team (specialist lawyer, specialist accountant, specialist business broker) to help you create your plan. If you don’t have any of these qualifications, then please don’t try to do the role yourself. I once helped a GP to sell his business; he’s been taught how to create his own financial statements and was doing them correctly, however, the banks would’ accept his version of the year’s trading and he had to engage an accountant at the 11th hour to undertake the financial statements for the last 3 years before the bank would approve the loan.
Confidentiality: Choosing your deal team wisely, managing the transaction externally and pre-qualifying potential purchasers will limit the risk of confidentiality breaches during the sale process. However, the biggest risk to the success of the deal is often the most overlooked. It is critical that you have an action plan that includes the appropriate timing and content of communications to employees, suppliers and customers. Confidentiality is critical, as misinformation and rumours can have a disastrous effect on business operations and can result in termination of the transaction.
Release of information: It is important not to release too much information too soon in the process, particularly if competitors are among the bidding group. Certain proprietary information—such as customer lists, supplier terms and product formulations—should be released only when you’re certain you have a deal.
Exclusivity rights: Most business owners grant exclusivity far too early in the sale process. This weakens their negotiating leverage and increases the risk of falling victim to potential bidding tactics (e.g., a high initial bid that is subject to due diligence, followed by a low final offer after due diligence is completed).
Negotiations: In many cases involving the sale of a midsized private or family-run business, the balance of power lies with the purchaser, usually a much larger company with greater resources and experience in negotiating transactions. Having an experienced negotiator at the table can increase your chance of receiving favourable terms. It is also critical to maintain deal momentum. Many transactions fail in the final stages owing to prolonged negotiations and delayed closing. Deal fatigue is real and time kills all deals. When you engage your team, ask each of them if they have capacity to assist you in this transaction and whether there is anything that they have already planned/booked that might negatively impact your desired time line WRT the settlement date.
5. Failing to present the business to multiple purchasers – Because of time or resource constraints, confidentiality concerns or other factors, business owners often find themselves negotiating with one purchaser at a time and do not typically solicit and manage competing bids. In any typical day-to-day operation, a knowledgeable businessperson is likely to compare quotes when making a major purchase or contracting for services. Yet when it comes to the most important transaction of all, very few take the same approach.
Competition provides negotiating leverage for the seller and is the key to achieving premium pricing and favourable terms on a transaction. It also gives the seller additional options for a timely and cost-effective completion of a sale in the event that negotiations deteriorate with the initial purchaser. The best approach is to offer the business to a limited number of pre-qualified buyers in a controlled process.
Ideally you should take your company to the market when it is ready for sale and retain control over the sales process. When you react to a single unsolicited offer from a buyer you inevitably give control of the sale process to the buyer reducing the strength of your negotiating position. An unanticipated sale might expose certain weaknesses in your business that you have not had an opportunity to rectify and these may be used against you to reduce the selling price.
6. Failing to focus on the business – Managing an effective sale process is a full-time job that involves not only coordination of the marketing process, bidding process and information flow, but also coordination of all the other advisers who must work together to close the transaction (accountants, legal advisers, wealth managers etc). A business owner seldom has the time or resources to effectively manage a transaction process; as a result, operating results tend to suffer as focus shifts from managing the business to managing the sale process. This can decrease the value of the business, not to mention the added strain it puts on family and personal relationships. A specialist business broker can guide an owner through this lengthy and complex process.
In conclusion, the good news is that there are business owners who have triumphantly exited their business. They employed the use of qualified counsel who manoeuvred them through the exit, avoiding the many downfalls waiting transitioning business owners. If you want a roadmap to successfully navigating a profitable business exit, contact me today.
