Is there a ‘right time’ and a ‘right way’ to deliver an exit strategy?
May 11, 2016
That is the question, to paraphrase Shakespeare. Or, to be exact those are the two questions.
We have just had a very interesting morning at the Moore & Smalley – Forbes – Natwest SME Forum at Samlesbury Hall exploring ‘Planning for Exit’. In previous breakfast sessions we have covered the commercial, financial, funding and legal aspects relevant to growth strategies and this morning, in response to several requests we considered planning for exit.
Exiting is often thought of as a ‘one shot’ opportunity. Whilst that is not strictly true it is certainly the case that to maximise the chances of a successful exit these two aspects need to be carefully considered:
1) When is the right time and
2) How to approach it in the way most likely to be successful
A glib answer to the first is “Do it before you are thoroughly fed up.” But it’s only partly glib.
Actually, the answers to both of these principally rest upon the concept of preparedness – that of both the business and the owners.
It is not unusual for business owners to, literally sometimes, wake up one morning and decide that they have simply ‘had enough’ and they want to get out. Employees also occasionally….
Although, by ‘getting out’ owners often think that selling to a third party is the only way to do this. They may be right – but not always.
We have mentioned this idea of being prepared in previous blogs and it resonates with the idea that the most successful growth strategies are both clear but flexible and able to react and accommodate developments – both good and bad.
Simply put, business owners need to have a plan for an exit. Exit usually isn’t something which can be achieved overnight – or within 12 months of deciding to sell. In fact, it really should be on your mental agenda from day one. Because grooming and preparing your business for eventual sale is really about making sure it is in the strongest position it can be.
What do we mean by this? Well, often it can be about investing in the overhead cost base in the form of staff. The right people in post in plenty of time to help the business grow and, crucially, that the business is not and is not seen to be dependent upon the owners. That is often the biggest challenge.
Accountants are very good at identifying costs which should be cut. That may not be the best mantra to adopt when preparing your business for sale. The most successful business people I have come across have recognised that whilst there may be a time and a place for cost cutting, it is rarely a magic wand. Sometimes you have to spend money as Edmund Burke, the great 19th century political philosopher, regarded as the father of modern conservatism noted: “Mere parsimony is not economy. Expense, and great expense, may be an essential part in true economy.”
Overdependence upon the owners a concern for most third party buyers. Whether such buyers are trade or financial institutions.
But it is also a concern for external funders if it is a Management Buy Out which is being pursued.
Because an ‘Exit’ can take several potential forms: A sale of the shares to trade / financial buyer. A sale in whole or in part to Management. Floating on a listed market or exiting from the day to day running of the business but retaining majority or complete ownership.
Some of these exit routes are more theoretical than others – it depends upon the specific business and its situation. For most businesses the likely exit route is a sale to a third party or management. These usually have different risk profiles.
It is a bit of a stereotype but usually a trade sale will deliver more cash on completion than an MBO and the former is usually a complete exit whilst an MBO may have the option – or the requirement! – for the seller to retain a minority equity stake.
Probably not relevant to most businesses if the floatation option. But if you intend floating, overdependence upon the owners will also be an issue for you. Businesses which are suitable for listing are made more so by not being dependent upon their owners – it is poor risk management otherwise.
But back to the question of timing…..
Of course, you may not actually control the timing. You may be approached off market. We have been doing most of our acquisition work on this basis for quite some time. Buyers know what type of business they are interested in. Whether it is actively being marketed for sale or not is, in a sense irrelevant.
If you have made the decision to go to market then better to sell after a period (usually 12m +) of financial growth. Just don’t rely on cost cutting alone to drive the profit growth. Ideally it should also be clear that there is still some ‘low hanging fruit’ for the new owner to grasp.
Some businesses have set out on a path to ‘look’ a particular way or to have particular characteristics because that makes them a good fit for potential buyer A or B in a few years time.
Such an approach sounds sensible but is not without some dangers:
1) Do you really know what potential buyer A or B is after?
2) If they are after it now, will they be in 18m or 2yrs time?
To the extent that there is a ‘bottom line’ to the question of how to best prepare yourself for sale I think it boils down to the following:
1) There will always be a market for businesses which enjoy profitable growth.
2) Are operating in sectors which have easily understood and communicated future growth prospects
3) Have not shirked necessary investment in the past.
4) Have a good name in their sector. Are recognised for their quality – in the little things aswell as the big; and
5) As we said at the start are not owner dependent.
We haven’t mentioned this yet, but luck can also play a part. I have never found arguments that you make your own luck in this world to be particularly persuasive. But, as we have mentioned previously, I think that the 1st century Roman statesman Seneca hit the nail on the head when he said that “Good fortune is what happens when preparedness meets opportunity.” You can’t control when opportunity may come knocking – but you can influence how prepared you will be when and if it happens.
Or, if you are of a more artistic bent, then recall Picasso’s words of wisdom: “Good fortune exists; but it has to find us working”.