Most business owners don't think about their eventual exit from their business until it's too late.
As a business owner, it's vital to have an exit strategy if you think you will ever need or want to sell your business. An exit strategy means a plan for how you will sell your business. It doesn't have to be complex, but it should identify what you expect to get from the sale and the expected timeline and conditions.
You might want to sell for many reasons, such as retirement, illness, or simply wanting to move on to something new. Exit planning gives you the ability to control the sale of your business and get the best possible price for it. It also allows you to plan for the future of your employees and customers. Without an exit strategy, you could sell your business for less than it's worth. So if you think that you might sell your business one day, be sure to put an exit strategy in place now.
Above all, an exit strategy puts you as a business owner in greater control because you've planned for it. It allows you to maximise your business valuation.
Here are a few reasons why all business owners should have an exit strategy.
To minimise disruption
If selling your business is a future possibility, it is essential to have a business exit strategy to minimise disruption. An exit strategy can help to ensure that the company is sold for the highest possible price and that key employees are retained. It can also help to de-risk the transition for customers and suppliers. By having an exit strategy in place, you can focus on maximising the value of the business and minimising the disruption to its operations.
A successful exit strategy minimises business disruption by outlining when and what pre-requisite conditions need to be met for an exit event to occur, which may include:
A market event
Time-based events (e.g. management retirement plans)
Business valuation threshold
Defining these conditions/trigger events minimises business disruption because business owners will know how far off these events are. Additionally, it allows business owners to quickly close down unexpected offers to buy your business until those conditions are met.
Work out which exit strategy is best for my company.
There are several types of exit strategies available to entrepreneurs, each with advantages and disadvantages.
A very common exit strategy is to sell the business to a third party. This can be an attractive option for entrepreneurs as it provides a clean break and a financial return on the investment that has been made in the business. Other sales include passing the business on to family members or employees (management buy-outs).
A further exit strategy is to take the company public through an initial public offering (IPO). One of the biggest advantages of initial public offerings is that it can give you/your company a major influx of cash. This can be used to generate a return, finance new projects, expand into new markets, or simply shore up your balance sheet. In addition, an IPO may allow a business owner to transition to a non-executive director and pass the day to day running to management. Additionally, an IPO can also help raise your company's profile, making it easier to attract top talent and partners. However, there are also some risks to consider. One is that going public can make your company subject to greater scrutiny from investors and the media. Additionally, an IPO can also be a complex and time-consuming process, which can take away from your focus on running the business.
A final, more drastic option is to shut down the business and liquidate its assets. This is often seen as a last resort and usually is only for companies that are no longer profitable and in severe distress.
Making an exit plan early will give you the best chance of success in achieving your desired goals.
To maximise your business valuation.
In our experience, the most common reason owners look to exit is that they want value back. They've put in the hard work, and now they want something in return.
First, Get a business valuation.
We've seen many business owners get shocked when they learn the actual valuation of their company. The press only reports on the largest multi-billion pound mergers, representing <1% of all deals completed each year, setting a false benchmark.
A business valuation helps you understand your business's fair value, the key drivers of the business's valuation and insight into how much work needs to happen to bridge the gap between your desired and actual valuation.
A business valuation is an essential part of any exit strategy. By understanding the valuation of your business and the key valuation drivers, you can make informed decisions about your business strategy to maximise your return when the time comes.
What your company is worth depends on several factors, including how profitable it is, its financial history, the nature of its products or services, the strength of its customer base, and macroeconomic factors.
Even if selling your business is a long time away, understand what your company is worth and what impacts the valuation. It will help inform both your business strategy and exit strategy.
A business exit strategy can help you achieve a higher valuation by ensuring that your company is ready to be sold or merged with another company. Here are some of the ways that an exit plan can help you maximise your business valuation:
a) Preparation is key
When it comes time to sell or merge your business, the potential buyers will want to see a well-prepared and organised company. Working to an exit timetable allows you to prepare your business for the sale or merger by outlining the steps you need to improve its performance.
This includes things like:
It's essential to get your business's finances in good order.
Tidying up messy commercial agreements
Remedying any issues within the business, e.g. unpaid taxes, disputes and litigation.
Improving the drivers of your business's valuation. These will vary by business type, but example drivers include:
Maximising EBITDA (earnings before interest, tax, depreciation and amortisation).
Maximising Annual Recurring Revenues (ARR)
Contract renewals.
b) Increased marketability
You can make your business more marketable by showing that you have a clear plan for the future of your business. As a result, you can make it more appealing to buyers looking for a solid investment.
Don't just offer potential buyers ideas. If your exit timetable allows, explore your future growth opportunities.
Prove overseas expansion ideas by gaining a new overseas customer.
Test the appeal for your products in new markets
Test new go-to-market ideas strategies
In summary
Putting a for sale sign up outside your company with no exit plan or preparation will result in lost value for you. Instead, understand what you want to achieve from an exit and plan to accomplish this.
An exit strategy will help you maximise your business valuation by preparing your business for sale, increasing its marketability, and demonstrating its value to potential buyers. By following these simple tips above, you can ensure that you get the most out.
The more you do, the more attractive and valuable you make your business.
Lighthouse Advisory Partners: Leaders in tech M&A and strategy consulting.
We provide business and corporate strategy services to Executive teams as part of our strategic development process. Lighthouse supports entrepreneurs, leadership teams, investors, and Private Equity firms in developing a clear vision and growth strategies which create alpha. Our process involves conducting due diligence (a business x-ray) on the target business so we can identify its current position.
We provide customer referencing services to help our clients better understand and gain feedback about their products, services, or overall customer experience. As part of this process, we calculate the Net Promoter Score (NPS), the overall likelihood that a customer will recommend a business, product, or service to a friend or colleague.
Our process involves competitive analysis, including talking to customers to understand each target market's market dynamics fully. We work with key business stakeholders to facilitate strategy development and growth planning.
We understand technology businesses, and we know what good looks like. So for more information or help with your exit strategy, don't hesitate to contact us today.