It's Time to Cash Out: Are You Prepared?

It’s a no-brainer that entrepreneurs have a keen sense of business savvy before embarking on a new venture. But what happens when either planned or unforeseen circumstances compel the relinquishing of the company?

Experts from Grant Thornton and Pitcher Partners offer tips on how to maximize the value of your company before converting it to cash.

EXIT STRATEGY- A NECESSITY

A calculated, adjustable exit strategy puts business owners in the ideal position to face the unexpected, whether the event is fortuitous, from a disagreement to a death or divorce, or providential such as an off market offer for the business.

An exit strategy enables business owners to take control of the selling process and ensure superfluous problems or delays are not encountered, which can reduce the price of a business can fetch.

Joseph Bridger, Partner Corporate Transactions of Pitcher Partners says, “A well developed exit strategy also allows you to maximize the value of the business by enabling you to address the drivers that impact the price of the sale and can manage the expectations of partners, colleagues and family.”

BEGIN WITH THE END IN MIND

First thing’s first. An exit strategy needs to be established in a business plan from day one.

“If a business is not being developed for an ultimate exit, whether that is to advance through to an IPO, a sale to a third party, or to devolve control to family or management, starting the business may in reality represent buying a job. Given the costs, stresses and risks involved in most businesses, that is a strange way to keep oneself employed,” says Paul Banister, Director of Tax for Grant Thornton Australia.

Once an exit strategy is implemented into a business plan, the owner of the company needs to adopt a self-managed business style in order to maximize enterprise value. According to Banister, “A business that operates successfully and profitably without relying on the day-to-day efforts of the owner is something worth paying for.” This process could take years and involves many components.

Banister said those facets can include:

1. The establishment of the right systems, processes and equipment to drive operations.
2.  Investing in the right people and creating the culture that supports the business and where it is headed.
3. Paying strong attention to financial matters in an attempt to drive strong and predictable financial outcomes.
4. Building a strong brand that the market values.

According to Bridger, “It is important, too, that just as a business can change, from its product mix to management, so too can an exit strategy. It needs to be reviewed and amended as often as possible.”

TIME TO CASH OUT- WHAT’S NEXT?

Advisors should be appointed into the sale process as soon as possible to reduce costs and get ahead of the sale.  “Conversely, in my view it is imperative the owners of a business develop, and discuss with their advisors, a good summary of the business and reason for selling.  Despite the presence and participation of advisors it is your business we are selling and you know it better than anyone else,” Bridger says.

Bridger suggests:

a) A vendor’s due diligence should be executed. “It shows you’re serious and committed to the sale as well as identifying areas that can decrease potential sale price, such as unpaid entitlements taxes.”

b)  Determine the vendor’s ultimate exit strategy, which can also uncover potential increases to value such as unregistered IP.

The bottom line is that a business needs to be prepared for the sale or other exit options at all times, which involves the guarantee that all aspects are appealing to a buyer. 

“Keeping your head in the sand will do nothing for your business.  If a business owner does not put themselves in potential buyer’s shoes in critically examining their own business, they risk not obtaining the best outcome,” Banister explains. 

Taking time to understand the drivers inherent in a potential buyer’s business can help position the business for a better sale outcome. 

Measuring your profitability according to the methods adopted in a buyer’s financial statements will provide an insight into how they will assess the potential value that your business can add.  “This may even lead you to taking your business off the market for a while so that you can better align your business with potential buyers and then add value quickly,” Banister says.