As a small business owner, your responsibilities span from answering customer calls to driving the financial, HR and marketing arms of your business. When the business is thriving, the last thing on your mind is an exit strategy. The truth, however, is that having an exit plan and strategy is critical in determining how attractive your business is to a potential buyer. Over the last few years, I have had the opportunity to work with a variety of small businesses as I completed an assessment or due diligence on them.
The majority of them were at a stage of their business where they had to make a decision on their business transition. This is whether they were looking ahead to the next stage of growth; coping with changes and thus refining the model; preparing for succession planning or getting the business ready for sale. The businesses I reviewed, across a range of industries, could all be considered successful. Their results were good and they were growing strongly. The one big challenge the owners all faced was to understand what to do with the business and at what point would they attempt an exit.
My top 4 tips to small business owners are:
1. Determine your exit timeline
What most owners do is work until they have had enough and at that point, while they consider the next step the business reaches a stage of ‘limbo’. The investment in the business is usually minimal, succession planning may or may not have been considered and there can be a gradual erosion of value. It is critical that there is at least a 3-5 year plan prior to the owners exiting the business. While this may be difficult it is important to have a timeline planned even if this deadline changes as the plan to support this can be put in place. In some cases, the timeline may even be brought forward but the plan will still enable the owner to be reasonably prepared.
2. Determine your exit triggers
This is probably the most important step once the owner has decided on a timeline. This will dictate all future decisions. Events that could trigger your exit could be: a lack of successors, ill health, personal circumstances, an inability to invest in the business or simply a change in industry economics
3. Financial and operational preparation
You can maximize the value and appeal of your business by ensuring that the following financial preparation is completed:
(a) Ensure the financial affairs of the business are in order. This includes the EOY financials, monthly sales and profit records, and making sure that all customer and product information are up to date.
(b) The financial statements must reflect any adjustments or payments to the owner so that a normalised statement can be prepared which will allow the owner to get a clear idea of the anticipated value of the business. This is important because it puts the owner in a strong negotiating position.
(c) Ensure that all product information, inventories and stock takes are carried out and kept up to date and accurate.
(d) Ensure that business processes are fully documented and easily referenced for those undertaking duties for the first time.
4. Succession Planning
If the owner plans to exit the business, it’s important to determine who the successors are; they could be family, employees or interested third parties. This will also dictate future actions such as the transition, the passing on of Intellectual Property (such as customer relationships) and continued shared investment to ensure the business remains strong.
To transition a business while ensuring the entity does not lose value is a delicate balancing act, however, it can be managed by the close involvement of the owner and successors well ahead of the planned deadline. The further ahead this can happen then the smoother the transition will be. It also allows for both parties to assess and determine any potential challenges to be identified and addressed.
An acquirer is usually looking to assess the value of the business based on not just its performance but also how it has been operated. As a small business owner, don’t get lost in the day to day activities of your business. Take some time today and start thinking of your end game plan. Do you have an exit strategy? Is it still relevant or long outdated?
By thinking ahead, you will significantly increase how attractive your business is to acquirers or heirs and broaden your options in the future.