So, you have decided to start planning to sell your business.
The good news is that you are ahead of the pack, with 3 out of 4 business owners having no documented exit plan. This is despite 70% of private business owners planning to retire in the next decade. In fact, 100% if business owners will eventually exit their business – one way or another.
Given the potential effort-to-payoff ratio, it is always surprising that more business owners don’t actively prepare their businesses for sale. It’s an incredibly important phase of the business ownership cycle. Some consider it the most important:
“I don’t believe you are really an entrepreneur until you have exited, because you haven’t completed the cycle. You’re still standing on third base. It’s not about starting, anyone can start a business. Until you’ve actually sold one, you haven’t touched all bases.”
This blog outlines a range of different exit options and provides some helpful tips for business owners considering a sale in the years ahead. It all starts with understanding what the possibilities are. There are more than most people imagine.
Types of Exits
There are many ways to exit your business. In the end, it comes down to your business or lifestyle preferences. For example, you may have a professional services business and wish to gradually ease into retirement by scaling back the size of your firm and selectively working with a few top clients. And this is a perfectly valid exit strategy.
The point is….it is a strategy.
Where owners come unstuck is when they don’t have a strategy, or are caught in between two different types of exits.
Types of Sale
Initial Public Offering (IPO)
An IPO is when a previously unlisted company offers its shares for sale to the public leading to a stock market listing.
While this has significant upside potential, it requires a considerable amount of preparation and time to ensure the business meets the ASX listing criteria
Strategic Sale
Strategic acquirers are typically competitors, suppliers or customers from the same industry. The tend to pay above market value because there is something about the business that is inherently more valuable once it has been incorporated into their infrastructure.
It is critical that you understand why your business is valuable to a strategic acquirer as it will inform how you manage the negotiations. Are you a competitor causing them headaches? Or do you hold a niche market position they would love to own?
Be careful with information disclosure, especially to parties in your industry.
Private Equity
Investment firms are typically looking for a medium-term capital gain through cost reductions, improvements operational efficiency and in many cases private-to-public arbitrage. That is, buying the business at a trade sale multiple (e.g. 2.5x) and selling at a public multiple (8x or more).
Private equity firms tend to focus on fragmented markets where industry consolidation can generate economies of scale.
The pace of these transactions tends to be rapid, so it is critical that your ducks are in a row before engaging in discussions.
Trade Sale
This is the most common form of exit for small and medium private businesses and typically involves the sale of assets and goodwill to an owner operator.
These transactions focus solely on risk versus return (i.e. what is the profitability of the business and what is the expected return on investment).
Value improvements can be made by either boosting profitability or de-risking key elements of the business (e.g. reliance on the owner).
Management Buy-Out (MBO)
An MBO occurs when the management-team of a company decide to buy-out the company they work for. The business continues as a private company, with the original owners selling their shareholdings to the MBO team.
MBO’s are great for protecting confidentiality as the transaction occurs internally.
Some challenges include management liquidity and maximising sale value to an internal party.
Partial Sale
Involves the sale of part of the business and may include a division or assets/IP such as a database or loan book.
Consider where the value in your business resides. There may be an opportunity to partition a valuable division or asset for sale.
Related Party
Sale to family or friends
While these close relations make for a quick transaction, they are often the lowest value. This is potentially why only 24% of business owners are planning on family succession.
Tips of Business Owners
If you are considering selling your business in the next 5 years, it is worthwhile talking to an expert. At Octavian, we work with smart, proactive business owners to help them prepare for a high-value, successful exits. Our unique mix of licencing allows us to sit down with business owners and provide genuine independent advice across the full range of exit options.
Below are four tips to help you on your way:
1. Exit on your own terms
Selling your business is a great achievement. You‘ve built something of lasting value and should be immensely proud. When it comes time to exit, it is about doing so on your own terms, not feet first!
2. Be informed
Understand your sale options. This includes being aware of the risks and benefits of each option, as well as when you need to begin the planning process.
3. Have a plan and stick to it
Whether you plan on finishing big by selling your business for millions, or simply winding down the operations to ease yourself into retirement, have a plan and stick to it. It is very easy to hold on for that new customer or next project. We call this “forever on the edge of a new harvest”. Be disciplined in planning and executing your sale.
4. Engage an expert
There is no doubting the fact that you know your business better than anybody else. An exit planning specialist is someone who knows how to prepare, market and sell a business. They should be able to offer you the full spectrum of exit options and help you down whichever path you choose.