Leaving Your Business in Good Hands

Mon, 21 January 2013

A common theme we hear from business owners is “I want to exit”.  But this requires a great deal of planning.  You should consider your own exit strategy up to 5 years before the date you may feel you wish to step out of the business – or at least out of the level of involvement you currently have.

This is a neglected but important issue as it should affect how you structure the business going forward.

So, if you haven’t given it much thought then you should take some time to understand what you want to get out of the business, and when – and how you can make five years a realistic time frame for an exit strategy – whatever that means to you.  You need to organise and structure the business so that you are leading it not running it, in other words it is operationally independent of you.  And you need to put in place the key strategic building blocks that a buyer will value when looking at acquiring your business.  These two key ideas are mutually linked in that a business that runs brilliantly and grows profitability without being dependent on the founder is both a joy to own and a highly valuable proposition.

There are four elements to a succession plan:

Building Value – increasing the traditional multiples by which your business is valued.

Timing – Your business will pass through a number of predicted stages dictated by your energy levels.  There will be the good times and the times of frustration when the business doesn’t seem to grow any further no matter how hard you work.  This is when you need to invest in the business to reassess its structure and ensure maximum use of the resource capacity within the company.

Independence – Everyone in the organisation should be aware of their function and areas of responsibility within the business.  You need to plan to drive the business forward profitably.  And for planning your exit you need to be working towards a position where your leaving will not affect the company’s development plans or operation.

Priorities – Understanding what is important to you in your exiting.

It is this fourth area that I will cover now.  In assessing your priorities there are three main options available to you: income, equity or control, or a combination of these.  You may want to leave the business as the CEO but still have it provide you with an income or your intention could be to sell it on to your own staff or an outside interest and walk away.  Alternatively you may want to sell your equity but retain control.  Each is a valid option but all require careful planning.

A good way to start this exercise is to list the order of your requirements.  It may look like this:

1. Equity
2. Control
3. Income

Or it could be:

1. Income
2. Equity
3. Control

Or any other combination that meets your needs.  But by settling out your priorities you can begin to consider who may be able to succeed you or who will be interested in taking some or all of your equity.

If you anticipate your successor is going to come from within your business then you need to consider what their priority list will look like – probably dictated by their current life stage.  For example if someone has a young family with ten years of school fees ahead of them, then income is likely to be top of their priority list and financing the purchase of equity a lower priority.

So having decided on your priority list and having identified third parties outside or inside your business you think will be interested in your proposition, you will open negotiations.  If both parties can be open about comparing their needs then you have the basis for recognising if a deal is potentially possible or if you both have priority lists that are incompatible.  If this is the case, then you can walk away before too much time and too many costs have been wasted.  If you have set up the business from scratch then it is easy to become very emotionally involved in discussing its future.  Formally setting out priorities makes negotiations less personal and easier to discuss.

I mentioned the importance of thinking five years ahead.  It may seem a long period, but if for example, you are in a situation where you have a management team that is interested in negotiating a Management Buy Out (MBO), then by setting this sort of time frame, you may be able to put in place improved performance criteria whereby the MBO team can purchase equity through profit shares.  Or if key performance indicators and performance milestones can be set out for a number of years, then third party finance organisations can be approached to discuss funding, based on successfully hitting these targets.

Whatever route is right for you, time and planning is necessary if you are to achieve the outcome you want, at a price you want.  Don’t let a lack of strategic planning now hinder your future retirement or ability to move on when you want to, with maximum benefits.

Top tips:
• Take some time to understand what you want to get out of the business, and when.
• There are four elements to a succession plan: Building Value, Timing, Establishing Independence in your business and Understanding your Priorities.
• Use a ranking of income, equity and control to understand the relative priorities of a potential succession candidate or acquirer.

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