There’s nothing like the feeling of growing and harvesting the fruits of your own labour. Fresh veggies straight from the garden taste divine yet are short-lived. Whereas the rewards of harvesting from your own business have the potential to last you for the rest of your life. That is, if you plan your exit strategy carefully to help you achieve your desired outcomes.
In this blog, we consider two approaches a business owner might use to plan their way out of their business: Harvest Strategy and Exit Strategy. We’ll look at the differences and similarities between them and explain which method we recommend using if you’re thinking of selling your business.
What is a harvest strategy?
Similar to the agricultural meaning, harvesting is all about maximising yield or business profits. Just like a farmer plans to make the most of every square inch of land, business owners employ a harvest strategy to eek every last drop of profit out of the business when they exit. To do this they look to minimise spending in areas that are unprofitable, for example by removing products that consistently trade at a loss or have been superseded by newer versions.
Harvest strategy in a marketing agency
Let’s look at an example. The owners of a PR and marketing agency would like to sell their business in five years time. In their portfolio they have one very prestigious client locked in to a long-term contract. They’ve been working with them for years and maintain a good-natured, profitable relationship. The agency also works with a couple of high street names. Their business is regular and profitable, but the brands don’t boast the glamour of their prestigious client. The agency also works with three SMEs many people have never heard of, which don’t generate significant profits.
In a harvest strategy scenario, the agency owners decide to cut ties with the SMEs as they believe having unknown brands in their portfolio won’t make a huge difference to business profits. They decide to focus their efforts and resources on developing their relationships and market share with the well-known brands because they perceive them to be worth more to their business.
The clear risk in this strategy is that it is purely focused on short-term profit and does not take into account external factors such as economic climate or internal factors such as the potential resignation of their key account manager. Reducing your portfolio to just a few clients is risky. Without a crystal ball, how can you be sure that a household name will generate more profit than an SME in five years time?
What is a business exit strategy?
Creating and implementing a business exit strategy is an alternative, less risky, way of making sure you extract the most profit from your business sale. Both harvesting and exit strategy are concerned with planting the seeds of success. Where exit strategy differs is it looks at a business holistically, not just at the profitability of individual products, services or clients.
In planning an exit strategy we look at the whole business model in detail. We take into account everything from your people and finances to marketing, processes, and even owner involvement. We consider how each part of the business adds value to the overall sale price and what needs to happen to increase this value-add over the years running up to exit.
Where it differs most from a harvest strategy is in cost cutting. An exit strategy may foresee a higher future value for your business if you grew your management team, thus significantly increasing payroll commitments. It might call for investment in new equipment or taking steps into new markets, also increasing costs. Rather than the cost-cutting focus of a harvest strategy someone following an exit strategy is positively spending on items they know will increase future profitability because they are allowing the business to scale.
What they are effectively doing is increasing the multiple a buyer will be willing to pay for the business, so even if profits didn’t change (which is unlikely) the value increases as the multiple increases. Profit and value are two different things.
In exit strategy you reap what you sow
In our world of supporting clients with exit strategies we consider the different parts of your business to be the roots of a successful exit. Each root has the potential to grow into a strong branch of a healthy tree. Taking care of each root individually helps the whole tree to flourish.
With a careful approach to exit planning you should be able to get back what you invest in business growth – and more. In the PR agency example, those SME clients could actually be hidden roots of success. They may not be household brand names now, but you never know what their growth strategy is or how they might perform in the future. Five years down the line, those three SMEs could be worth more to your business than their glamorous cousin. Ditching them without due diligence could prove disastrous.
In an exit strategy an owner might decide to invest in those SME client relationships in order to maximse their value upon sale. They consider a diverse portfolio to be more valuable than a strategy based on current numbers and short-term gains. Exit strategy is an objective way to look at the whole business. It’s not purely focused on growth and investment, so you might need to scale back activity in some areas too.
What’s best, harvest or exit strategy?
Harvest strategy could be a good choice where there are several business owners or investors involved and each has a different set of objectives and expectations. Expect disagreements with shared ownership. It might require a spot of pest control before you can harvest your portion of the crop!
Exit strategy is best for when you want to take a more considered, planned approach to exiting your business. This is the method we recommend to our clients. You must be willing to put the work in, possibly over several years, to prepare and get your business in the best possible position for sale or transition. Planning an exit strategy is about taking steady positive steps towards your end goal and reaping the (not just financial) rewards when you get there.
If you are anticipating harvesting the fruits of your labour and thinking about designing your business exit, book a free discovery call with us to discuss the options or contact us here. There’s no time like the present to start sowing the seeds of an abundant exit.
