As counter-intuitive as this may appear, developing an exit strategy right along side the business plan is the most effective and rewarding method of preparing a business for sale.
An exit strategy
An exit strategy is akin to a financial plan. The earlier a financial plan is put in place, the longer the money has to do its work. So too with a business. If a business is built for ultimate sale then all the factors that mitigate against a business owner receiving the best outcome, such as lack of preparation of financials, poor quality of business information and a dearth of potential buyers, can be addressed.
Business owners will achieve maximum price for a business when a ‘strategic’ buyer is interested in buying the business. This strategic buyer will see the value of the business not just as an opportunity to buy a ‘job’ but an opportunity to perhaps fit the business into an existing business thus producing potential synergistic benefits. Alternatively, a strategic buyer has some special knowledge of the industry which could, when applied, add value to the existing business.
Starting the exit strategy early
Moreover a business built for sale will have considered the primary factors that can discount the ultimate sale price: the role of the business owner in the business and an uneven sales or profit history. An exit strategy will demand that a business owner builds a business of systems and procedures ensuring that a potential buyer does not perceive that the role of the business owner is critical to its ongoing success. That would be seriously distracting to a prospective buyer.
As far as sales and earnings history, it is just good business to present a business track record that demonstrates a business on the ascendancy. A business with a profit history of at least three years (five is better) of increasing revenue and profits will achieve many, many thousands more in sale price than a business with an erratic track record.
Building the turn key system
Systems and procedures are critical to the successful sale of a business. These answer the ‘how things are done around here’ question in the form of documentation such as manuals or flow charts. A business owner need look no further than the golden arches and mimic the McDonald’s model, which is, in effect a ‘turn-key’ system. Here the systems and procedures are in place for a new owner to come in and simple turn the key. Easier said than done of course but an exit plan will have years to achieve this outcome, rather than months. At the very least, it remains the best model for running a business.
But how do you put a price on the goodwill component of an existing business? Valuations can be obtained from people who make it their business to appraise business value but even they cannot readily assess the optimal value of a business that may be achieved when a buyer has a strong strategic reason for acquiring your business. This buyer may be willing to pay a premium over and above the standard valuation.
An exit strategy will consider a number of methodologies for valuing your business – well in advance of an offer for sale. Whereas an ‘immediate’ seller will tend to receive what a business valuer will call “sale price as a going concern”, which would roughly reflect the market price for similar businesses, a strategic sale price would consider other factors. These factors are the ones that a considered exit strategy would be focussing on, in particular reliable and (reasonably) predictable earnings.
The best exit price is, more often than not (and excluding at this time the IPO route) is by finding a strategic buyer as distinct from a ‘financial’ buyer. A strategic buyer will have some experience in the industry and may be in a competing or complimentary business which can extract synergies form the combined enterprise.
A strategic buyer will be prepared to look at earnings projected into the future if the financials and supporting information (eg sales reports) are available and apply a multiple to this. This is how companies listed on the stock exchange are valued, a Method commonly referred to as the P/E (price to earnings) ratio method. If you are in business to get maximum reward then write your exit strategy early.
Some final thoughts
For most small businesses a multiple of EBIT (Earnings Before Interest and Taxes) is applied to value the business for sale. Each industry will have a prevailing multiple that is common for the industry. For example a specialised furniture retailer may attract a multiple of 3X EBIT as the value. Then stock and fixtures would be added as the multiple would generally apply to the Goodwill component.