EXIT STRATEGIES: Structuring for sale

Creating a sustainable competitive advantage for the buyer to exploit will not, by itself, provide you with the means to maximize the sale value of your business.

You also need to structure the business so that the buyer will be able to quickly capitalise on the opportunity or potential in the business.

The value you will receive for your business is directly related to the level and timing of revenue and profit the buyer can extract from the acquisition. The longer it takes for the buyer to exploit that value the less it is worth to him.

The more distant the expected benefits and the higher the degree of uncertainty that benefits will be achieved, the less pressure you can create to get the deal signed.

Future benefits are discounted back to the present to arrive at the net present value of the opportunity.

The higher the NPV the more you can offer as value you provide to the buyer.

The more distant the benefits and the longer it takes the buyer to generate a return on investment the lower the NPV and the lower the value of your business to potential buyers.

Looking from the opposite viewpoint, the quicker the buyer can exploit the benefits the more certain the projected profits and the sooner the revenue and profits are earned, the higher the NPV and the greater potential value of the business.

If provided with a target rate of return the buyer will be prepared to pay more for earlier revenue and profits.

Therefore your objective must be to create a set of conditions which enable rapid transfer of ownership to the buyer, smooth integration of business activities and quick and effective roll-out of the program to exploit the opportunity.

The basic questions you should be asking yourself are:

1. What does my business need to look like at the time of sale?

2. What can I do to allow the buyer to more easily exploit the opportunity?

3. What can I do to enable the buyer to generate new revenues earlier?

Reducing integration time and costs

Once you have identified potential buyers you can start reviewing your business to identify how it might be more rapidly integrated into a buyer’s operation.

If the buyer is an individual how can you prepare your business to enable the new buyer to take control and quickly exploit business opportunities?

One of my workshop attendees put it like this: “The more I look like the buyer the easier it will be for them to buy me.”

What he was saying was where there are fewer differences in culture, remuneration, entitlements, processes and so on, the easier it is for the buyer to integrate a new subsidiary. There may be a number of things you can do to reduce time, cost and stress of integration.

Old products

Are there any products or services you offer which would not be of interest to the buyer or would distract the focus of the potential buyer away from the main opportunity?

Old products tend to come with customer obligations, perhaps dedicated staff, equipment, inventory and so on. Perhaps those could be sold off prior to the sale of the core business.

Parts of the business which are not relevant

Are there parts of the business which are not relevant to the value being acquired? It might be better to carve them off into a separate company and keep them out of the deal or sell them in advance.

For example, you might be able to arrange a management buyout of those parts of the business not relevant to the buyer’s opportunity.

That would have the effect of speeding up due diligence, reducing time needed to integrate operations and reducing the cost to the buyer of having to deal with redundant capabilities.

Adherence to standards

Are there standards you should be using relating to areas such as design, manufacturing, packaging and so on, which the buyer will want to implement prior to rolling out new products or services? Can they be implemented prior to the sale?

Product interfaces

Are there interfaces or interface capabilities which would need to be incorporated into products or services before they can be rolled out?

Are they able to be incorporated prior to the sale or could you make changes to products or services to reduce the work needed to implement them?

Customer, supplier and partnership agreements

If there agreements need to be changed to allow you to sell the business and transfer capability to the buyer those changes should be implemented in advance.

If they need to be modified to bring them into line with the buyer’s standard agreements you should investigate how you can assist with those changes by making them prior to the sale or by getting agreements for changes from your customers, suppliers and partners before the sale.

Information system interfaces

It is almost certain that your internal financial reporting and other systems will need to be replaced by those of the buyer or that he will need to interface with them.

You should investigate capabilities within your own systems to ensure that you have as much interface capability as possible. If you can anticipate requirements and plan for them integration and handover will be easier.

Remuneration and entitlement alignment

There are always problems when businesses merge where remuneration packages and entitlements to vacations, public holidays, bonuses, etc are different.

You might want to investigate those arrangements with potential buyers to ascertain what possible misalignments might occur.

It might be worth offering a special bonus on sale to your employees to cancel or alter existing entitlements so the buyer has the flexibility to implement his own compensation packages.

Succession plan

The buyer will be concerned about the number of people leaving the business at the time of sale or shortly afterwards.

He will want to be sure that key people are retained and that the management capability to operate the business is in place after the sale, because a number of senior executives will want to leave soon after the sale.

Most senior executives in small firms prefer to work at a senior level and may be uncomfortable working at a lower level in a large corporation.

Those individuals, who will most likely be cashed up from the sale, will want to use their newly-acquired wealth to pursue other interests.

It is important to ensure that knowledge and capabilities within the business are adequately protected.

That could be done by ensuring successors are in place for senior executives, key employees are paid a retention bonus for staying on and information within the business is well documented.

You need to be able to assure the buyer that he will be able to effectively transition business knowledge to his employees.

Transition arrangements

The firm should be sensitive to ensuring that the buyer is supported throughout the transition period. It may be worth considering retaining senior executives under a consulting arrangement for a limited period to assist the buyer to transition the business across to new management.

Rather than allowing the buyer to imagine risks in the transition the firm can address those issues in advance and offer solutions.

The more perceived risks can be addressed with acceptable solutions the more willing the buyer will be to proceed with the purchase.

That solution also offers greater flexibility for the buyer to encourage senior executives to stay if they are needed but ensures that the risk of them leaving is addressed.

It also means the buyer could terminate those people earlier if necessary.

Cancellation of external relationships

In some cases the buyer will have a capability which will replace an existing arrangement with an external supplier or distributor and the buyer will want to terminate existing arrangements. The buyer may also have his own preferred agreements which he wants to apply after the sale. In anticipation of such possibilities the firm should have agreements in place which allow for termination.

The firm should also have arrangements in place which allow the transfer of any rights under agreements to the buyer. The opposite might also apply, where an arrangement might be cancelled by a supplier when then business is sold and the firm will need to have alternative arrangements in place.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.