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Exit Strategies, Exit Plans and Succession Plans Written by: Nathan Kelly Managing Director Baron Consultancy Exit strategy overview There have been many articles and opinions expressed about Exit Strategies, Exit Plans or Succession Plans but very few offer the full package that is required to help you achieved the desired goals and objectives when it comes to planning your exit. We believe it is important that you first understand the importance of implementing a plan, it is through this process that you can only hope to achieve what we believe is its true definition - What is an exit strategy?

exiting or leaving your business on your own termsEvery business is bound to change hands sooner or later and if you wish to have it happen on your terms you need a plan to cover all circumstances, even on occasions that may be out of your control. You should operate your business so that it is ready for your exit every day of the year because you never know when circumstances will force your hand - Illness Death Divorce Partnership breakdown The last thing you want to happen is to be forced to sell your business in a hurry because circumstances have robbed you of your desired outcome. An Exit Plan is one of the most important tools you should have in your business. It’s a plan that considers your future desires and ensures that you remain focused on achieving those goals whilst removing you from the business. Some well organised business owners have an Exit Strategy as part of their business plan and make no secret about achieving this goal. Putting strategies in place regardless of whether you have the desire to sell in the near future or at some time in the future can significantly help to achieve your optimum sales price. This is because businesses with systems in place and are operated under management are more attractive to a broader market of potential buyers. A good Exit Plan enables a smooth transition with less likelihood of disruption to the operation. By planning your exit well in advance you can maximise the value of your business and enable it to meet your future needs. We recommend that you make sure your plan is attainable - set a realistic timetable and measurable milestones along the way and stick to them. An Exiting Strategy or a Succession Strategy is a multi faceted process that includes an analysis of your business, a valuation of your business, the preparation of your business for sale, setting a realistic time frame and many other considerations. What is involved in an exit strategy? The Exit Strategy is all about preparing your business for the eventual sale of your business on your terms therefore it is important to prepare it in such a manner which is attractive to a wider range of potential buyers. It is believed that you should start planning your exit strategy from day one, it should form part of your business plan and be the underlying force which guides the processes of how you operate your business. You will need a strategy that will maximise your selling price, but please don’t worry if you haven’t formed a plan as yet. This is where we bring the greatest value to the process, we can advise what buyers are looking for when they purchase a business and suggest strategies to satisfy their needs making your business a more attractive proposition. You will need to consider - When do you wish to exit (time period) What do you wish to achieve financially If you are prepared to invest the time, effort and money in the process If the time, effort and money required is worth the eventual result The method of sale that best suits your circumstances Removing yourself from the business Make sure your accounting procedures are in place and are easy to follow Make sure that your profit and loss and balance sheets are well prepared Complete a business plan Complete a marketing plan Ensure your plant and equipment is documented and in good codition Ensure your intellectual property is well documented and up to date Make sure there is the appropriate lease security in place That your customer contracts are secure and transferable Employee contracts are well documented and signed off on Your operating procedures are documented and are in use That your employees are familiar with your operational goals and objectives What are buyers expectations? This can vary depending on the type of business (industry), their experience and their goals and objectives, but there are some common elements – Security ensuring sustainability Acceptable return on investment (ROI) and acceptable risk Attractive industry fundamentals and growth potential Some form of barriers to entry or protectionism Easy or simple to operate Easy to manage and ideally under semi or full management Attractive lifestyle (ie. short hours) An industry in which the buyer has some related experience Sound, transparent financials In situations of mergers and acquisition, strategic and synergistic fit When a buyer evaluates your business they will want to review the following information, of course there has to be a balance in what you show them to attract their interest and secure a contract and what you should show them during the due diligence period. Your involvement in the business Financial records Financial procedures Operating procedures Debtors Creditors Customers Databases Contracts Employee records Your premises Location Competitive analysis Lease conditions Intellectual property Legal issues Insurance Business plan Marketing plan Licenses and permits Stock Working capital Plant and equipment Other assets Building and maintaining these points are critical elements in order to maximise your selling price. Ways to exit your business According to our research the following are the most likely exit strategies for a business owner – Advertise the business for sale without identifying a buyer 26% Sell or pass on to a child or another family member 25% A trade sale to someone in the industry 19% Close the business and sell the assets 17% Sell to management or staff 7% Don’t Know 5% *Source Small Business Survey Program April 2004 CPA Australia In summary we look at the five principal options click on the topic that is of interest to you – Selling your busines Pass to family member Mergers and acquisition Sell the assets Management or staff buy out Another is public listings which we will briefly discuss but will not go into a lot of detail, as this requires significant legal advice for which we are not qualified to provide. Selling your business The most common exit strategy for a business owner is to sell the business to another person or company. This is usually done privately or through a broker. One of the most challenging issues when selling a business is how to price the business so that you achieve your desired price and still meet market acceptance. This is where the exit strategy plays a significant role during the process, but only if you have realistic desires and if you allow an appropriate timeline. Selling your business will also be easier if you can - show year-on-year increasing profitability create a high-quality product or service develop an innovative product or piece of intellectual property build a strong customer base recruit a high-quality team maintain premises and assets in good condition Pass onto a family member You may want to pass or sell your business to a family member and why not? If you have children who are capable financially and technically and have a desire to maintain the family business you should consider passing the business by way of gift or sell it to them. If you are looking at selling it to your children the banks are going to want to see significant documentation on the ongoing resources and plans of the business after you have gone. We can also assist in this process, making sure that the transition is impartial and that all issues are addressed to benefit all participating parties. Mergers and acquisitions Mergers is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another with no new company being formed. Acquisition usually occurs when a similar or larger sized business wishes to acquire your type of business. Depending on the industry what makes this option attractive to a purchasing company is the ability to merge the two businesses reducing the infrastructure necessary to run both businesses. This is referred to as “economy of scale”. Of course you can always wait for one of the above to happen or if your business is prepared correctly and ready for the process we can assist you in targeting potential purchasers protecting your confidentiality and possibly offering the second best chance of achieving the highest price for your business. There are two levels in the Mergers and Acquisition market, privately owned companies and public listed companies. Sell your assets This is a reasonably simple process. It requires you to obtain or place a value on the plant and equipment and then sell them usually to the competitors or similar type industries. You may also want to sell your customer database or other assets not normally considered in this method. Before you undertake this method of sale discuss with your solicitor if there are any legal implications to just closing the business and selling the assets. You may have lease commitments which are not that easy to neglect, you may have warranty claims to consider, it is always better to consider all options before closing the doors. Management buy out This is another viable option and I am surprised that more transactions do not exist using this method. I recognise that not all employees are good managers but if you have a successful exit strategy one of the elements you should be adopting are to remove yourself from the business anyway and all processes should be documented diminishing your involvement. A management buyout (MBO) is a form of acquisition where a company’s existing managers buy or acquire a large part of the company. The goals of such a buyout may be to strengthen the managers’ interest in the success of the company, or just as often to save their jobs (the plant may have been scheduled for simple closure, or an outside purchaser may bring in its own management team, leaving the prior managers unemployed). MBO’s have assumed an important role in the corporate restructuring besides mergers and acquisitions. The key considerations are the fairness to shareholders, the price, the future business plan, and legal and tax issues. There will always be the concern of not wanting the employees to know, or concerns that they may want to leave if the business is sold. Let’s say for example that you don’t tell the management and employees that you are selling the business, you go through the entire process finding a buyer only to see at the eleventh hour that the employees or management leave anyway. You will lose both the money you have invested in the process and the buyer and/or have to reduce the sale price significantly to convince the purchaser to complete the contract. Advising the Management of your intentions can be easily managed if you know what to do. This method should not be discounted if this is your only concern. Public listings You can also sell your business on the stock market in an Initial Public Offering or IPO. The good news is that you stand the chance to receive the highest payout using this method against any other exit strategy. The bad news is that it is very expensive to obtain an IPO, and you can easily spend half-a-million dollars on attorney and accountant fees. Whichever method you choose you should discuss the strategy with your accountant for tax implications. We are happy to work with your accountant to achieve the desirable outcome. Please visit my websites to find out more www.baronconsultancy.com