To some business owners, talking about exit strategies might be something that’s left to the Venture capital backed technology startups of Silicon Valley.
But it should be something that everyone considers regardless of the type or size of your business. As the saying goes, ‘You can’t take it with you’, and the same holds true for your business. If you’ve built your business to the level of employing full time staff, then you’ve also built up quite a few relationships. It’s not just about providing you with a job anymore, it’s about fulfilling a purpose. It’s about leaving your legacy.
But someday you’ll have to exit from this world. How good would it make you feel, to know that someone else is continuing your legacy, continuing to help your customers, and continuing to provide jobs to the staff you’ve worked alongside for many years. This is why it’s important to consider what your exit options are, and then put a plan in place to achieve them.
The first step in planning your exit strategy, is to determine the vision for your life in 5, 10, 15 & perhaps even 25 years time. What does your day look like, 5 years from now. Where will you be, what will you be doing. Perhaps you’ve always thought about retiring to the Spanish coast, or maybe you’d like to spend more time with your family. Take on new projects. Volunteer in your local community. Or just take some well deserved rest. The key is to start with this end vision for your life, and work backward.
Planning to sell the business
If you’re planning to sell the business, you’ll need to take some very specific actions, particularly in identifying the weak points in the business, and putting an action plan in place to strengthen those areas. Key areas to consider include how you’ll maximize value in the business for any potential buyer. A buyer doesn’t want to run your business. A buyer isn’t looking at buying themselves a job. You’ll need a management team in place, and if you don’t have this already, it’ll take time, and perhaps additional growth in the business to achieve it. If this be the case, it might be strongly recommended that you put someone in the business to drive growth, whilst you focus on managing the day-to-day operations of the business. Of course, all of this needs the cash flow to support it. Again that needs to be factored in.
You’ll need to factor in the buyers perceived’ risk in the business. Most buyers perceive any business that’s under £5m turnover to carry a high level of risk. This perceived risk can be reduced by systemising the business and having external verification of systems such as ISO 9000, but other strategies to reduce risk can be through client diversification, where none of your clients make up more than 10% of your total sales.
By stepping into the shoes of a potential buyer, you can view the business objectively, and identify the weak areas. It’s then just a case of putting action plans in place, taking you from where you are now, to reaching that end objective of selling the business.
Another option, considered more with family businesses, is where an existing family member or employee continues to run the business. The problem with this, is that other family members or employees haven’t been through the same journey as you. They don’t have the same experiences, and sometimes skillset that’s needed to operate the business when times get tough. Records show that 80% of businesses taken over by a family member or employee, have failed within 3 years. Another factor to consider with this route, is that the majority of family members or employees, don’t have access to the level of funds that professional buyers do. This means sadly, you’ll probably not get paid for your business through this route.
How much is the business worth?
The common route for a business owner to value their business, is to ask either a Business Broker, or an Accountant. Both valuations will be wildly different from each other, and from the actual market value. The business is worth, what someone is willing to pay for it. That’s the truth. There are lots of factors that influence a company valuation, such as profitability, risk, liquidity, intellectual property, and of course supply & demand. How many other businesses are also for sale in the market. With limited supply, values will be higher, but likewise, if the market floods, you’ll hardly be able to give most businesses away. Essentially it’s a buyers market.
A business broker could be seen as slightly biased in producing their valuation, because their fee structure is based on their valuation of the business. That’s why you’ll always see businesses listed for sale at ridiculous valuations in comparison to their levels of profit.
An Accountant will use many methods to value a business, but most of the time, it will be closely linked to the balance sheet value.
The method used by buyers, is basically a multiple of profit. The thing that matters most to a buyer, is return on their investment, indeed how quickly they can reduce their own exposure to risk. In many industries the formula to calculate valuation is ‘(EBITDA x2.5) + Net Asset Value’. Basically your pre-tax profit, multiplied by 2.5, then add your Net assets minus liabilities. It’s important that anyone that wants to sell their business, understands how a buyer calculates a valuation. Failing to understand this, could mean that your expectations might not meet theirs, hence everybodies time & effort will have been wasted.
We hope you’ve received some value from this article, and some information that you can use to move forward toward your vision.
If you’re confident that selling your business is the way to go, or perhaps you’re undecided, it’s important to consider the significant amount of effort and resource you’ll need to make it happen. It’s a full time job. - The time investment alone is enough to put anyone off. So imagine for just a minute, that you didn’t need to do all of this work. What if this could be done over the next 3 - 5 years (by someone else). Everything we’ve listed in this article, is what you’d need to do, if you were selling through a business broker, or direct to a buyer.
Unlike other private equity firms, our focus is on growing businesses at the smaller end of the market. We’ve worked in, and grown our own businesses in the exact same fields you work today. We’ve spent years coaching and supporting small businesses just like yours, developing their teams, and helping them to grow, but now, we’d like to help you.
We have a solution for business owners that need to sell their business immediately, or for those who want to stick around for a few years.
If you’re considering the options to grow or sell over the next five years, read more about how we're helping others just like you. Click here to read about our unique approach to helping you get what you want with the YokeFormula™ for your business.
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