Your ultimate business exit strategy action plan

Exit strategy action plan

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This article was originally posted on 10th of June 2015.

You’re in business but what is your exit strategy plan? The ultimate dream for many entrepreneurs is to create a product or service that captures the imagination of the world to become a household name.

There are plenty of examples around. Amazon, Virgin, Microsoft. Even Lord Sugar’s estimated £900 million fortune began with £100 start-up idea which became Amstrad.

Less known but no less important is Dame Stephanie Shirley who, with £6 of capital, founded Freelance Programmers. Their work included programming the black box flight recorders on Concorde. The company was later to float under the name FI and then became Xansa. Unlike some, Dame Shirley donated a large proportion of her wealth to her staff and set up The Shirley Foundation. (worth Googling her TED talk)

These are fine examples of rags to riches stories we all dream of. The reality is that very few businesses make it this big.

Those that don’t are failures, far from it, but it is important to define what success means to you. This is a great starting point for your exit strategy.


What is a business exit strategy?

You will almost certainly have heard the adage “Business is like a road map. If you don’t know the destination, how can tell you’re navigating in the right direction?” – or something similar.

Some people treat it as just a cliche but the astute know it to be true.

So your business exist strategy should be a strategic plan that you set out as early as possible. On startup, at purchase or when you invest is the time you should be setting out your strategy. The earlier the better. If you don’t have an exit strategy yet, start now.

Your exit strategy should be detailed and include at least these 5 elements;

  • Define what business success means to you
  • How your business needs to operate
  • What exit structures are open to me?
  • What will a buyers opinion of my business be?
  • How long will it take to sell my business?
planning a business sale strategy


Define what business success means to you

In reality, the definition of success changes with the growth of the business and with your changing personal circumstances. Shakespeare had his 7 stages of man. That’s a few too many for our purpose, but here are 3 which should be familiar. There are be more.

1st stage of success

You might define this at start-up and it is likely to be monetarily focused. When sales hit a certain level you will plan to sell to a bigger competitor for a lump sum of cash.

This allows you to go and invent your next business idea. It’s almost like your business is a stepping stone to the next level of success and it is common amongst the younger generation of business owners.

2nd stage of success

This begins to be more long term focused. You are older and looking towards early retirement rather than the stress of launching another project.

Your exit strategy at this point focuses on how much money you need to live a comfortable life in retirement. How many holidays could you afford to take? How often can you trade in the car? Can you support your kids through university if you’re retired?

The answers to these questions set the point at which your business sale will provide you with what you need. Or you might have to work at things for a few more years.

Define success for your exit strategy


3rd stage of success

This rather focuses on the size of the business you’ve created. It’s been large enough for you to achieve a well off standard of living. It has allowed you to max out your pension pot already and you are set for a comfortable retirement.

In this scenario you begin to take a more philanthropic approach to life in general. You care less about the cash (because you have that secured) and care more about your lasting legacy. You want to be remembered alongside the likes of Andrew Carnegie, Howard Hughes, John Hopkins, Joseph Rowntree and many more.

As your definition of success changes, so you must review your business exit strategy. Your plan or roadmap needs re-aligning if it is to deliver. Let’s face it, your destination may have started out as the fast living pace of a city and could now be the quiet contemplation of a National Park.

How your business needs to operate

There is one piece of critical thinking that most business owners fail to grasp.

You do not need to learn how to sell your business.

Run your business in a way which makes it attractive to buyers and they may start approaching you.

So how does your business need to operate in order to attract buyers.
In no particular order, you should be focussing on these 9 attributes.

  1. can you take a holiday without the business falling apart
  2. document your processes
  3. pass on customer relationships to your team
  4. build new supplier relationships
  5. build recurring revenue income
  6. review your lease and key contracts
  7. review your customer contracts
  8. measure your net promoter score
  9. benchmark your value.


Let’s take each one in detail.


1. Can you take a holiday?

This is a great measure of independence. You may like to work in your business, but do you have to. Being able to take a holiday without the business grinding to a halt whilst you’re gone is a great way to test things.

Have you equipped your team with the training to fulfil your role, and do they have the autonomy to make board level decisions in your absence?

And when we talk about taking a holiday, that means leaving the laptop and phone switched to silent for at least a fortnight. You’re available if The Queen decides to visit but you’re not available to authorise a return of faulty stock.

And when you do return to your desk, what awaits you? There should be very little. Yours should be a high-level strategic role to be most attractive to buyers.

This independence between founder and business is pretty much impossible in the early years. It is something you work towards. Build this end goal into your recruitment strategy and when building a hierarchy. Also ‘train’ your customers and suppliers to deal with other members of your team, not just you.

build holiday time into your exit strategy planning


2. Document processes and procedures

“It’s easier for someone who knows how to do something, to just get on and do it.” “Documenting processes and procedures is boring.” “You have to update them every time something changes.”

You might believe this, but you are not going to be able to take the holiday in (1) if you don’t build knowledge sharing into your business.

Most problems occur when the person who is the ‘expert’ at a particular thing are not present. They may be on holiday or sick leave. What results might be a scam invoice being paid because security processes are unclear. Or it might be a batch of food is manufactured which is cross contaminated because clean down procedures are unclear.

So take it one process at a time. Document one procedure a week/month and you will soon get through them all. If you really can’t do it, hire the services of a company to document them for you.

They should be foolproof so that any team member can perform the necessary tasks within the team.


3. Pass customer relations to your team

No matter how long you’ve had your business, there will be some customers who still like to deal with you. You are also still the best salesperson in your business. The two combined can lead you to staying involved in day to day tasks.

Set yourself a target to offload one customer relationship to your team each month. Don’t just dump a file on a desk and walk away, your customer won’t like that. Take the time to introduce them to your team and to establish why it will be better for your customer to have a number of people to turn to, not only you.

As with other points, this will help to promote the independence of the business and separate it from your personal involvement.


4. Build new supplier relationships

Having a reliable group of suppliers is great, but over-reliance on one or two suppliers can be seen as a liability. By spreading your business between more suppliers, you keep your best suppliers hungry to work with you. They know you have other options.

You can also make the case to an acquirer that you have other sources of supply for your critical products.

manage suppliers in exit planning


5. Build a recurring revenue income

We said earlier that you won’t have to learn to sell your business if it is well structured. This is arguably the most important factor to get right.

Valuable companies can look into the future and see where their revenue is going to come from. Recurring revenue or subscription models enable a business to reliably predict its future income. This allows buyers to more accurately formulate their cash flow projections, and they may be raising finance, so these projections are really important.

No matter what your product or service, there are a myriad of revenue models to look at and one is sure to fit. Cost them carefully to attract a customer’s commitment whilst maintaining your own profit levels.


6. Review your premises lease and other key contracts

In business and personally, once we’ve arranged and committed to something, we tend not to review it unless we absolutely have to. This can catch people out and reviewing standard arrangements and documentation should be a regular activity.

For instance, are your staff contract terms up to date. Do they incorporate all conditions necessary by law?

Are you still paying market rent for your premises or has that changed? Has the government moved the Small Business Rate Relief qualifications?

For the nitty gritty of everyday overheads, are they correct? We have come across businesses who have moved to an outsourced staff model, yet small things like software licenses were still being paid for.

Now that may sound trivial, but you’d be amazed how quickly oversights like this mount up.

hand over key relationships in your planning your exit strategy


7. Review customer contracts

With customer contracts the key element is that they can be transferred with the sale of the business, and without notifying the customer. There needs to be a clause stating that the obligations of the customer under the terms of the contract continue, even with a change of ownership of the business.

If it states otherwise, what is your buyer actually purchasing? Your buyer will be looking for this protection and it is frequently overlooked when first creating customer contracts.


8. Measure your net promoter score (NPS)

The NPS methodology is the best predictor that your customers will re-purchase from you and/or refer you.  These are two key indicators of a healthy and successful company.

Increasingly, investors and private equity companies use NPS as a way to measure the health of their acquisition targets.

According to this in depth article in Fortune Magazine, two thirds of the Fortune 1000 are now using NPS as a key measure of business. Those that use the information skilfully turn it to a long term competitive advantage. Others are simply paying lip-service to the idea. Be the former.


9. Benchmark your value

Every business starts somewhere and in 10 or 15 years from now, it would be nice to remember where that was (we are back to the map analogy).

Whether you use our Value Builder Score to put a mark on paper now regarding your value, or another metric, is up to you. Having a mark of value now is something to compare to on your journey.

As you progress into new markets, grow bigger, more profitable, revising that benchmark helps to affirm the decisions you made.

A good benchmark like the Value Builder Score will also confirm the areas of the business which need most work. This means that instead of just focusing on growing profits, you will be focusing on the aspect of your business which will grow value. There is a key difference.

benchmark your exit strategy


What exit structures are open to me?

If you were buying a car you could pay cash, get a bank loan, take finance from the motor company or lease it from a third party. Selling a business has a similar array of options. Some are in your control, some are for the buyer to decide at the point of sale.

In very basic terms these are;

  • Liquidate your investment. You’ve had a good income over many years from your company. You’re financially sound and you can simply stop. Close up, sell the assets, liquidate the stock and never look back.Open market sale. Run an advert and see who makes an offer.
  • Strategic sale. Approach selected competitors or near competitors who would benefit from owning your business.
  • Management buy out. Approach your senior management team to see if they have an appetite to take over the business. They would buy your stake in the business from you, releasing you into retirement.
  • Employee ownership. Similar to MBO but the entire workforce become owners of the business.
  • Investment. You may support investors buying a part share in your business. You get some cash now, but most likely have to continue working alongside them for a number of years. Their expertise help to build the business to a higher level, and you all exit together with a sale later on.
  • Float. When businesses reach a particular size, they may decide to offer a public share option and float on the stock market.


It is very unlikely that your early exit strategy plans will know which of these methods of sale will become reality. Being knowledgable of the options will be enough to discount some. For instance, if you build a large, loyal workforce around you, it is unlikely you will liquidate and put them out of work.

Other options will only become clear when you’re close to selling. Open market and strategic sales are very similar and often brokers will run sales campaigns for both simultaneously.


What will a buyers opinion of my business be?

This is a reality check. Take off the rose tinted glasses. Look at your own business with clarity for the first time in a long time.

A small service garage we once valued springs to mind. The kitchen was a kettle on the windowsill leading to the only toilet. The office was a desk in an alcove with more paper than any business should see piled on top of it. There was no customer seating.

Staff has been employed once but now it was only the owner. They couldn’t hold on to any mechanics because they expected minimum working conditions. The local customers were slowly moving away and new ones simply didn’t trust the business because of how it presented itself. It was a dying business.

The owner had not noticed the world changing. They were left behind by clean garages with seating, magazines and coffee machines.

Walk through your business as though you’ve never set foot in the place before. Look at what you see. How people behave. What you hear. Is it looked after.

Does it leave you with an impression of a well managed business that you would want to own, or something different?

If you can’t divorce yourself from your blinkers, get a trusted advisor to walk through the business with you. When you’ve done a physical walk through, try the customer experience when no one knows it’s you.

Many potential buyers will put a small order through a business they are looking to buy to test how it reacts.

Examine your business like a buyer


How long will it take to sell my business?

The answer is “longer than you think”.

Even with the lifetime of a business to plan your exit strategy, you are still going to need a minimum of 2 years to actually secure a buyer.

The best estimate you can get is by working backwards. Don’t start with the date you want to sell your business, but the date you are likely to be able to leave for the last time.

Working backwards from here you can produce a timeline in which you may have to include

  • date of leaving
  • handover period- this could be a couple of months, or it could be that you are contractually working for the new owners for a year or two. The 9 point action plan above will reduce the likelihood of this, but can’t eliminate it completely.
  • time for negotiations and deal agreement
  • time for advertising – there are so many variables in every business sale it is impossible to guess how long it will take to find a willing buyer. A very raw average is 12 months. If you have a specific niche or a specific set of requirements this will be longer.
  • time to select and engage your professional advisors. A broker or M&A specialist is obvious, but the earlier you involve other professionals the better. Put your accountant in the picture. Select a commercial solicitor to represent you. Engage a HR, H&S, Patent specialists or others if required.
  • time to prepare your business for the examination it will receive. Are your financial records in good order. Staff contracts all in one place. Customer contracts valid, and many of the other aspects covered already in this article.


Even the most well run businesses should take a minimum of 2 years to work through this process. When you give the sale of your business the due time and process it needs, you will see the benefits. If you don’t set aside this time and bring your business to sale in an unprepared hurry, you will undoubtedly be diminishing its value.


Conclusion

We’ve covered a lot in this article. There’s a lot to take in.

  • Define what business success means to you
  • How your business needs to operate
  • What exit structures are open to me?
  • What will a buyers opinion of my business be?
  • How long will it take to sell my business?


What we hope to have provided is a peek into Pandora’s box with 9 aspects that you can focus on and review throughout the life of your business.

Number 9 in our list was a benchmark to get you started. Why not do that now. Click here.

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