Business Exit Strategies

Having failed to sell, (when I actively tried), been distracted time and time again by people interested in buying my company and then managing to sell I have learnt many lessons I consider priceless in maximizing business exit value.

Most importantly and a benefit I had when exiting Pacific Direct is the timing of an early exit, where there is lots of upside for the new buyer (pay back time) and where also my personal ambitions remained flexible and I did not critically need to sell.

Time does count and the more time from need to exit that anyone plans I suspect the better the exit will be. The alignment to a possible buyer can add value as perhaps you will make different decisions towards an exit than you would for full steam ahead growth.

Think about what makes a business attractive to another business as the buyer will most certainly want proven repeat revenue streams and some kind of uniqueness if you are expecting to gain a valuation higher than a multiple for your sector. You can get paid more from branding / longer term contracts / blue chip names that you supply but ultimately you have to convince the buyer of your company that the product and service you provide has sustainable revenue streams. You won’t do that as a one-man band benevolent dictator approach, you need a solid management team, most particularly if you want to leave at exit.

You should make time in advance for the right set up for tax planning, data room organisations, having professional paper trails and even knowing where the certificate for a fire hydrant is. Property ownership within a company may be an asset worth consideration, and indeed a myriad of other things including picking the right team to help you exit.

A companies owners aspirational value is often wrong (a business is only worth what someone is prepared and able to pay) the golden upside is rarely going to be seen as delivering when someone else is making decisions is a very different ball game. I believe cash at exit is the key figure to focus on. Of course thee may be other benefits such as a good will payment, bonus based on hitting new first year targets, plus a strategic deal value upside within a price but often the multiple and a cash sum at exit agreement is the price paid and the rest may never be achieved. (Indeed I have seen times when founders are sued on a warranty post exit which must be utterly miserable.)

Running up to an exit, I would suggest your management reporting system is critical showing recurring revenue, consistency of performance against budget, over 5 years gives reality of good will, and recurring revenue is a valuable negotiating point but you have to stay on your numbers whilst you are distracted by the sale.

Will your team manage this?

Planning your business exit

The Deal

Stages of a deal are many, and varied and can take a great deal of time. Be prepared. Nothing you have ever done before could compare and all this whilst you are still “running” your company, keeping on the numbers and aiming to grow consistently. To those around you, it is business as usual, to you, this could be the biggest and last major deal of your life. Scary.

Prepare the asset well to maximize your value and the process.

I would very strongly suggest from 2 years out. There is a kind of process time to private equity so, imagine nothing sells in December and lots of deals come to final sell before that start of the next fiscal year April. For many, a process starts to the public in September, deal opportunity rush hour?

I cannot express how much learning I have done regarding language in the process, the features and benefits of how to behave, how to convey and sell yourself. The facets are many.

Positioning the niche fit to demonstrate special additional value – expertise, original methods, a niche positioning and services or innovations might all add value? How though do you gain value if you cannot actually present a sell some of these features?

You will need smart advisors. Ideally one’s who have sold companies in your sector as they will have a priceless advantageous knowledge of the market.

There may be strategic buyers – getting management in place 1+1+1 = 6 economies of scale post acquisition, you have to be realistic as to whether your current team will survive an exit. Perhaps this is their time to buy-in shares. There is a myriad of deal structures so stay focused on cash being king.

Ask yourself well before exit, how well have you have sorted out data records where is the proof of the value of your registration for the company to every contract, every staff agreement, every IP ownership the list is endless. Download a due diligence checklist years out and start building an organised data room in advance.

Business Exit Timescales

The exit process sucks time from your focus on the company. Things take time and the people and controllers of the buying process, advisors are the professionals in the room. They are not very good at timetables and this is all part of the frustrating process.

Business Exit Meeting

Points of the discussion post the beauty parade, having prepared your sale document called and information memorandum may test your patience. Get used to that, and all other endless delays, the pain of the repeated questions and the importance of remaining consistent in your approach and your performance. People who buy want to feel like they look forward to working with you.

The order of events is something like this:

A) Get your business in order, and a data-room mostly organised…

B) Write an Information memorandum, perhaps with a short teaser version and be aware the IM adapts according to whom you will be talking selling and presenting to. You need not fear telling all the trade interest all your secrets but there is a balance to be found

C) A beauty parade to meet the possible buyers who meet your needs. Your needs may not all be about price

D) There will be a bid date – mostly ignored but the prices will come in. I think at this stage you will know whether you are really engaged to sell.

E) Head of terms follow – this is where the legal side comes into play but the more they know about what is of value in your company the better you will be protected

Exclusivity rights are food for thought before this – their area negotiating tool to speed deal …or to test people’s serious intent and can keep trade more honest.

F) Costs of protection of professional costs to be negotiated with all your various parties. Remember what gets rewarded gets done.

G) Realistic timeframes (Ha?) …vary enormously. How well is your house in order, have you tidied up skeletons like nanny fees?

Next in the Process…

Due Diligence begins informational gathering (larger the buyer the more rigour)

Documentation is endless…the questions more so.

Allocation of risk between parties (perceived and to be negotiated) will mean at different stages of the deal consideration you will be releasing more about your business. Stay on budget target numbers throughout or you gift a negotiating stick to the buyer.

Perhaps keep a secondary in the back pocket. Your second favourite bidder in a fallback position. I did.

Completion of the deal

Negotiations happen both at the time you agree heads of terms, then it seems we had a silence for the price point was agreed and I made it very clear any chipping was not going to be accepted right up to exit. Remember though negotiations mean things alter, emotions come massively into play and the only certainty is the process is every changing, arduous, time-consuming and exhausting. At a 39-year-old exit with a lot of energy, this is the toughest thing I have done mentally and I was pretty fit at the time and used to hideous long hours and lots of demands.

Do not forget behind the scenes most bigger deals are financed by a third party. Financial aspects – all sides…buyers with 3rd party money / bank lending

Sales and Purchase agreement is a huge document but much of it standard to the other side!

Dealing with employees is a huge task in itself. You may wish to tie some in, you may wish to have a position where they gain shares as you exit, you may wish to bonus someone to run the paper support and data room so you can focus on the deal meetings. Your books and your knowledge of the financial performance had better be on point or have those around you whom know and are motivated in some way whilst you may be leaving? Think hard and make lots of times to have these discussions before beginning the process.

All this and the deal has to yet begin?

Written by Lara Morgan
Lara Morgan is best known for growing Pacific Direct, from start-up to successful exit, 23 years later. She now invests her time in fast growth companies and represents UKTI as an Export Ambassador, having previously exported to 110 countries. Her vast experience and business knowledge includes specialisms in licensing luxury brands, manufacturing toiletries and selling to the hospitality environment through complex global distribution chains. She's also an expert in leadership and developing talent having learnt through her own experiences of employing 500 employees in an open fast growth sales culture.

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