14 Tips For a Successful Business Exit Strategy
Preparing your business for sale is a multi-step process designed with one goal in mind – maximizing the value of your business at exit. Even if you’re not wanting to sell your business now, it’s important to create a business that is “built to sell.” Larger businesses have much more at stake if they’re not ready for prime time. The best approach is to postpone the sale for a few years and gradually implement key changes to their business to maximize the value of the company. Basically, anything that increases transparency, efficiency, revenue or profitability, or decreases risk or costs, should be considered. These include the following key areas to increase the value of the company at exit.
1. Build a Real Management Team
Start at the top (for example a CFO, a COO and an HR Director) and fill out lower level positions as needed. Define roles and responsibilities for each position and hire top-notch people.
2. Set up and document business processes and systems
This includes an employee manual, an automated accounting system, a CRM system, a marketing and sales process, etc. Such systems reinforce and support the management team. They also provide transparency and give further evidence that the whole business is not just smoke and mirrors.
3. Clean up the company’s books
Clean company records unleash the power of your financials, improving the effectiveness, and timeliness, of decision making. This starts with a professional accounting audit, but ends with actually implementing the auditor’s recommendations. Examples include better documentation of expenses, invoices, backorders, payroll deductions, benefits, cash management and more.
4. Conduct an inventory of all physical assets
Update this inventory at least once a quarter. This typically includes furniture, books, hardware, specialized equipment, manufacturing or office supplies and software. There are numerous good software programs available to track and manage physical inventory at larger businesses. For a small business, you can simply use an Excel spreadsheet. Many companies over- or under-estimate the value of their physical assets. If you under-estimate, you are leaving money on the table when it comes time to exit the business; if you over- estimate, you create suspicion in the buyer’s eyes and endanger the exit strategy negotiations.
5. Form an advisory board
This is different from a Board of Directors, since the advisory board members have no formal fiduciary responsibilities and therefore assume no legal liabilities. They are advisors, not directors. Bring in smart people who you trust, who understand your business, and who will ask tough questions and help you find the answers. There are many variations, but all effective advisory boards have the following in common: independent advisors who think for themselves, understand the business, work well with each other, and who are willing and able to spend at least a few hours a month on the business. Avoid the temptation to form a showboat board where the advisors are famous but have no time or interest in helping your business. Also limit the number of golf buddies, relatives and friends on the board.
6. Hire an outside firm to conduct an operations audit
We are not talking about a financial audit. A business (or operations) audit covers marketing, sales, customers, partners, internal operations, management structure, compensation and more. The audit is usually quick (just a few weeks), and it identifies and prioritizes outstanding issues in every area of your business.
The auditor should be objective, so don’t try to save pennies by having internal staff do it. Ideally, if you plan to sell your company in 5 years, you should do an operations audit now, with follow-up audits every 12 to 18 months thereafter. The follow-up audits can be focused on the areas that need most attention (for instance, marketing, sales or Information Technology). Audit prices range from $3k to $20k, depending on the size of your company and the extent of the audit.
7. Address problems identified in the audit
Designate a competent leader and create teams to address any areas for improvement uncovered in the audits. Make sure each team understands they are responsible for solving these problems, and set up a reasonable reporting framework (update you once each quarter, for instance). Hold the leader and the teams accountable for results, because solving these problems shows a potential buyer that your company is nimble and has a culture of continuous improvement. Even if you hire an outside firm to guide you through the process, you will still need an internal leader to coordinate things within your company.
8. Hire a competent firm to conduct a valuation for your firm
Repeat this every few years as you approach your target sales date. A valuation serves several purposes; it provides an unbiased estimate of your company’s value by a third party. If you hope to sell the company for $25 million, but the valuation comes in at only $6.5 million, you know something is wrong.
An audit typically identifies at least a few areas of concern:
- Perhaps the issue is too slow a turnaround on inventory, or
- Too much spending on executive compensation, or
- Limited growth among more nimble competitors. Professional valuations range from as little as $5,000 all the way up to $50,000. The lower end should be fine for smaller businesses (say less than $5 million).
9. Review all insurance policies
Make sure the company is adequately insured for all major risks. The easiest way to do this is to bring in one or two insurance agents from competing companies. Most insurance agents will develop a comprehensive proposal at no charge. Once you decide on an insurance package, be sure to have your corporate attorney review the policy to make sure you are actually covered for the risks you deem most important.
10. Develop and test a disaster recovery plan
This is especially important for businesses with major computer infrastructures (dozens or hundreds of servers) and time-sensitive, mission-critical applications. Many firms specialize in disaster recovery planning (or “business continuity planning”). A good plan usually requires months of preparation and testing before it is considered complete. It is vital that your plan addresses both backup and recovery procedures. We’ve seen too many companies who do an excellent job backing up all their applications, systems and data, only to fail during a disaster because of inadequate recovery processes.
11. Review all employee, partner, and vendor contracts and policies
This review is designed to make sure your company is in compliance with all applicable city, state and federal laws, and minimize chances of frivolous lawsuits or other legal actions. Many small business owners have their real estate attorney handle all of their legal issues — this is a huge mistake. You need a competent business attorney who understands and works with businesses like yours.
12. Draw up appropriate stay agreements for key employees
There is a chance that key employees will leave the company if they hear rumors of an impending sale. A “stay agreement” specifies the terms and conditions under which an employee may leave. It can impose penalties for leaving before a certain date or event, such as loss of stock options, etc. The goal of the stay agreement is to provide incentives and “golden handcuffs” for key employees. They’re also an effective means of quieting any negative talk through the grapevine. Talk to your attorney and HR Director and have appropriate stay agreements drawn up and signed by key employees.
13. Start networking
Start with business buyers, other business owners, and business brokers. A good place to start is a local entrepreneurship group, a city Chamber of Commerce or a local chapter of a business broker association. MBBI (the Midwest Business Brokers and Intermediaries), for instance, has monthly meetings where business buyers and sellers can get together to learn more about buying and selling a business — typically for the cost of a lunch. Other useful groups are The Entrepreneurship Institute, the Turnaround Management Association, and the Association for Corporate Growth.
14. Looking for the right opportunity
Finally, although it usually takes years of preparation to sell a business, sometimes the right opportunity comes along much sooner. Be sure to watch market trends and keep your ego in check. Many entrepreneurs have missed opportunities because they were convinced they could do better later, only to watch their window of opportunity close over time. If a great offer comes along before you have everything in place, take it — or at least give it serious consideration. This is especially true for fast-moving, trendy businesses, where being “first to market” can create huge valuations (which usually decrease rapidly once the trend fades). Examples include companies like Facebook, YouTube, Airbnb or Uber.