Successful businesses should chart an exit strategy as well

MANY successful business owners often fail to chart an exit strategy for their business.
Often overlooked, this important element of strategic planning can lead to major setbacks or harm the long-term future for both the business and the owner if it is not identified and addressed accordingly.
In fact, a well-defined exit strategy should be clearly laid out during the planning, or preoperational stages, of the business. And, most notably, it requires a different approach or solution to different owners.
All too often, business owners find themselves too preoccupied with the day-to-day running and operations of the firm that they fail to make time to plan for it and let rigid personal plans drive their exit strategies.
For example, a person may plan to sell a business when he or she reaches 60, but that objective may be out of sync with the goal of maximising the selling price if, for instance, they become ill or incapacitated in some way at 58.
But should this happen without a plan in place, what would come about? Well, what ensues may be a forced sale at a sharp discount to make a quick exit.
Some even cling to a mistaken belief that someone will one day arrive to make an offer they can’t refuse for their business. This unfortunately, does not apply to most businesses.
However, with flexible and well-conceived exit strategies in place, options for next generation succession planning or intention to list the said business on the stock exchange, for example, can be clearly laid out before retirement.
A known fact is that a lack of careful sale preparation will prevent many business owners from maximising their opportunity.
The most common exit methods include:
·Selling to an outside buyer: This approach typically involves a straightforward sale and transfer of control from a business owner to a third party. The process starts with preparation of a short write-up on your business and prospects, usually called a teaser document. With interest received more information is released after confidentialities are acknowledged. Use of advisors to guide through the process and have a clear dataroom of information can help owners to streamline the process of selling their business.
·Launching an IPO: While an initial public offering (IPO) offers the highest potential payout to a business owner who is seeking to move on, the approach is not a simple one as it is time consuming and requires substantial investment. Furthermore, success largely depends on how well a company can communicate its story and growth prospects to potential investors.
The cost versus benefit of an IPO can also change one’s decision as funds raised from the IPO will require to be nett of fund raising and advisory expenses of the IPO which can be anywhere from RM1.5mil to RM3mil alone.
However, further funding requirements of the company will be easier to be raised once listed by tapping on the liquidity of the market. It is worth taking into account the recent changes to the listing rules and requirements as the regulators are making it easier to list businesses whilst making sure corporate governance is stepped up.
·Selling to current management: This succession plan is a stock ownership roadmap under which certain members of the management can assume partial ownership in the firm. Depending on how the planned exit is timetabled, this approach can allow the business owners to maintain a majority interest in the company or allow other members of the management team to gain full or majority stake in the business upon close of sale.
Options here includes terms like MBO and LBOs, where management buys over stakes from existing shareholders using their own funds or borrowed funds from external funders. This type of takeover is common in the West and growing more apparent in Asia also especially in recent times.
·Transferring control within the family: Similarly, this succession plan can take the form of a structured buyout, or a stock ownership plan as stated above – under which control can transfer immediately, or on a defined schedule. In addition to determining the financial makeup of these kinds of transactions, a sound exit strategy will include an analysis of all potential succession candidates and a recommended choice.
The problems usually faced by inter-family transfers are that key management team members who are not family may be left out in succession planning. Alternatively, the family members chosen to run the business may not necessarily be qualified to manage the complexities of business management.
And, correspondingly, establishing an accurate valuation of the business is important in preparation for all of the aforementioned exit strategies.
What is your business worth?
Answering this question is critical and is deemed as the most complex component of the selling process. It is not just number crunching, nor is it similar to real estate or equipment appraisals. It is an art of understanding an industry or business issues which may affect fair market and investment valuations.
The former is simply determining what a buyer would pay a willing seller while the latter employs a more specialised approach and considers “special benefits” that make the firm worth more than fair market value.
In arriving at an investment value, a variety of approaches are considered and used, including balance sheet analysis and market comparisons against similar businesses.
It also values tangible and intangible assets that can affect a company’s future prospect.
Here, examples of intangible assets considered for valuation include business synergies due to strategic advantages of an acquisition and strong brand awareness, to name a few.
Get your books in order
A related aspect of valuation – reasons why buyers purchase exiting businesses include expanding market share, leveraging on economies of scale and to reduce their risks – and the only way to verify the fair value of the business is to look at your books.
As such, all records such as the profit and loss statements, balance sheets, tax returns, contracts, leases, etc. need to be in order.
Having audited accounts are not only important but a necessity. Many small business owners do not have accounts and will face problems when exiting as due diligence will be difficult to ascertain true value.
Ultimately, it works back to having a good and solid business plan since having a well structured and well-conceived plan, paves a clear roadmap to bring you to your destination.
Furthermore, the business plan remains the cornerstone in determining whether you can attract potential investors to your business in the long run as it outlines your vision and how the business is to be managed in achieving its objectives.
It needs to be built with such strategies in place and should cover what you sell, your market, your company background, financial projections and specific milestones of activities. As such, planning ahead is key and exit strategies work back to the basics.
Conclusion
To sum it up, you have to be prepared. Be sure you have an exit strategy for your business, even if a sale may be years down the road. By following a sound strategy, you can get the best possible price for your business and put it in the strongest possible position to thrive after you leave.
It must be highlighted that a lack of careful preparation will prevent many business owners from maximising the opportunity due to the fact that an exit strategy, or preparation to sell your business, is not something you can do well in 12 months, but takes a few years to play out.


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