One reason for considering an exit is that your business has plateaued. You may have had a good run building up the business, perhaps over many years, but have now hit a ceiling. It’s a frustrating place to be – what worked in the past no longer seems to give the same results; you can see plenty of opportunities but can no longer find the formula to turn them into success.
There may be many reasons for this stalling of business growth: misreading the market, failure to refresh products or services, pricing that no longer reflects the value offered, suppliers tightening their terms of business, unproductive team members, the wrong skills sets, not keeping abreast of industry movement and developments, or perhaps you’ve just got tired. These all fall into one of two categories: cash and capability. You need them both to sustain growth in your business and to remain agile, responsive and profitable. Run out of them and you may be tempted to throw in the towel and seek an exit – perhaps sooner than you envisaged.
Cash can get squeezed from many directions from price pressure in your market, loss of a major customer, increasing supplier costs, poor financial planning, lax credit controls or unexpected bills.
Capability may run short if you aren’t able to attract and retain the right people, you don’t invest in technology, on-going training isn’t part of your team development, you don’t have an ongoing process for new product and service development or you run out of physical capacity, such as manufacturing plant.
If you seek to sell in these circumstances you will no doubt promote your business as having much to offer and having great potential, yet also having to reflect on flat or even negative growth over previous years. Put graphically, what you get is the classic ‘hockey stick’ growth curve – or jam tomorrow. A potential buyer will question why you are selling if the future looks so rosy and question the validity of your apparently optimistic outlook. Either way you are potentially facing a tricky game of ‘push and pull’ over the value of your business.
In reality, it is perfectly reasonable for a business to hit a ceiling. We are not all blessed with deep cash reserves or ever-expanding capability so to seek a buyer who has these attributes may be the best option. However, it would be preferable to avoid cash or capability squeezes in the first place so that you’re not ‘forced’ to seek a way out by selling up.
From the perspective of exit planning – the majority of which takes place before you get to the point of selling – giving yourself time to adjust the business can make a significant difference to your exit outcome. We recommend starting your exit planning two to five years ahead of when you would like to sell or step back. This gives you and the business time to make changes that in the best cases can be transformative in what you achieve. Both cash and capability challenges can be overcome during this period.
There are five steps you can work through that are relatively straightforward:
- Assess what you need and what you’d like to achieve from your exit. This involves personal finance planning and is best done with the support of your financial adviser or wealth planner. Although a lot of this revolves around money it is also important to map out other elements that are important to you, for example how much time you wish to spend in the business, the legacy that is important to you and what happens to the business when you’re no longer the owner. The result is your desired outcome.
- Undertake a thorough business review to understand the current condition and value of the business and identify the gap between the business today and the desired outcome from your exit.
- Develop two plans: the first is the business plan, the second is a plan that focusses on your role and how you step back from the business being dependent on you.
- Engage a business adviser to provide support, guidance and advice to implement the business plan.
- Prepare to sell – be that to the existing management team, an employee ownership trust, a trade buyer or an investor.
These steps will highlight cash and capability issues (as well as many other attributes such as strengths, risks, opportunities etc) in the second step – the business review. The two to five year timescale can then be refined and narrowed down based on what needs to done.
With our help you will have a plan and the support to give you much greater confidence in the future of your business. Cash and capability issues can be managed and the business put on a much stronger footing. Although this is ‘exit planning’ in action the results can be so positive you may wish to stay on as the business owner for a lot longer. Discover more by talking to us.
(Image by standret on Freepik)