EXIT STRATEGIES: Planning your sale from the outset

Few entrepreneurs set out to start a new venture with the objective of building a company to sell. Most set out to build a business around an opportunity and along the way comes the better salary and benefits. As it grows and develops, they are consumed with the next deal, next year’s plan, the need for external funding and the task of simply generating sales to make payroll.

Sometimes they think of their eventual retirement but it seems a long way off and rarely do they think that they may be forced to sell or that someone may come along and make them an offer they can’t refuse.

Few entrepreneurs consider whether they might actually be better off by selling. Take a moment to work out what you are getting in terms of remuneration, benefits and dividends. Then consider what you could earn if you sold the business and went to work for someone else or stayed on to work for the new owner. How much worse off would you be on a month to month basis? In fact, many people end up earning more from their new job. Now work out what you would receive after tax if you sold the business. Divide that value by the expected life of the business (remember that few businesses last more than 10 years). Would your new salary plus a share of the sale proceeds make you better off over a ten or twenty year period?

When I sold my first business for US$9.6 million, my new salary was higher and I was no longer responsible for meeting the payroll of 160 staff every month. My share of the sale proceeds was around US$4.6 million. I put US$1 million into a trust fund for the education of my three children and left the rest in shares of the acquiring corporation. I could not possibly have made that amount of money in a lifetime of working on a salary.

Very few firms last forever, most are lucky to survive for 10 years. On the basis of probability, I was certainly better off taking the money. Certainly, for the rest of my life, I could expect to live well. In any case, like a lot of entrepreneurs, I went on and started other businesses which I subsequently sold at a premium.

Some entrepreneurs do set out with the intention of selling their business; this was what I did with my last company. Others build a company to undertake an initial public offering (IPO) and find they don’t have the right type of enterprise which lends itself to an IPO and decide to sell instead. Many companies are approached to sell and some take up the offer.

Then there are those who find that their best option for retiring or of liquidating their investment in the business is by selling, but they are under no pressure to do so. They can take their time and wait for the right moment.

Sometimes they will put out the word through their professional advisors or maybe use a business broker. Other situations which might encourage them to sell are:

• There is no successor in a family business (about 50% of all family firms).
• The owner/manager wants to spend more time with their family.
• The fun of the venture has faded and the owners have lost interest.
• A better opportunity presents itself.

People who have the time to plan the sale of their business will often involve their professional advisors to help them develop up to date information on the company. They will prepare an information memorandum, maybe even a business plan. They will seek advice on a valuation and typically be told how their industry calculates a sales price or how a net present value (NPV) or similar valuation can be calculated.

Selling the firm without taking the time to fully investigate its growth potential and to provide a convincing case for the buyer is, however, not a proactive strategy for getting the maximum value for the business when you do sell.

Firms which sell based on a historical earnings formula are simply giving the firm away based on what they have achieved (or not) rather than selling on what the business is capable of in the future.

A common situation which confronts many business owners is that they have been forced to sell. He or she does not really want to sell but circumstances force it on them. This can occur through a variety of circumstances, many of which are outside their influence:

• Internal changes at a major customer leads to a loss of business.
• A major customer goes bankrupt and puts the firm into a cash crisis.
• The market collapses and the firm is no longer viable.
• A key supplier goes out of business or is acquired by a competitor and is no longer willing to supply components.
• New legislation requires a major upgrade of the plant and equipment which is beyond the resources of the owners.
• A key employee leaves.
• A partner wants to retire and the remaining shareholders are unable to buy him out.
• The CEO owner/shareholder has to cut back on work due to ill health.
• Litigation exhausts the firm of cash and incurs massive debt.
• The market temporarily declines due to terrorism or natural disaster and the firm does not have the resilience to survive it.

When this happens, the worst situation to be in is to be unprepared. Planning the sale of the firm is akin to disaster planning. Simply by going through the process of developing a plan to sell the business, a lot can be learned and the firm better prepared for a such an event.

When a business gets into trouble, the net worth tends to dissipate quickly. There is often a shortage of cash and debt finance is hard to find. This situation often forces the business into a fire sale. In these circumstances time works against the seller leaving them with inadequate time to set up a sale which enables the owner to extract the maximum value for their business.

In the case of having to sell the business, the difference between the valuation which can be achieved by being fully prepared and ready can be many times the average industry sale price. The return on the resources devoted to undertaking a systematic process of preparation can have a very significant impact on what the shareholders will realise for their investment.

Finding the right buyer and being well prepared for the negotiation can often result in a price to the seller considerably more than what could be achieved through more traditional methods. The return on investment from the cost incurred in professional advice used to groom the firm for a well-prepared sale is very high. Since you can never know when you might want to sell, or need to sell, being prepared can make a significant difference to the sale price.

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.