In June 2004, the BRW commented on research into the exit plans of closely-held business owners published by CPA Australia thus:
“In the next five years, tens of thousands of small businesses will be up for sale. Many will not find a buyer.”
The fundamental causes of this projected outcome were two-fold: an ageing population with the imminent en masse retirement of the baby boomer generation, and a lack of clarity around an exit plan. The majority of business owners either had no clear concept of how they would exit their business, or assumed that generational succession (i.e. a family member would take over) would eventuate. For many, the idea of defining an exit strategy was too hard or presumably unimportant.
Now that the global economy has endured its recent correction, the impact on the small business community is pronounced. Many business owners are being forced to shut their doors, either voluntarily or through externally-driven administration, selling off what assets they can to meet their creditor obligations. Personal bankruptcies are on the increase. The credit crunch is putting the squeeze on traditional sources of debt-financing. Countless stories abound of the business owner offered a fair price for their enterprise 12-24 months before, only to be now staring down the barrel of financial oblivion after unsuccessfully chasing a higher dollar at the time.
Still, business continues and whilst the corporate landscape continues to change substantially (remember, this is not a recent phenomenon: think back 7 years to when we experienced the collapse of Ansett, HIH, One.Tel and any business with an ‘e’ prefix), the need to prepare an exit plan remains unaltered. The 2004 study’s findings are just as true five years on, particularly as the retirement plans of many Baby Boomers have been delayed following the decimation of superannuation holdings by the GFC.
So what does an exit plan look like? The Acquisiti approach to exit planning begins with two questions:
1. How much?
2. By When?
As Dr Steven R. Covey would advise, “begin with the end in mind”. Defining the desired outcome is critical to the development of an exit strategy. Without a specific financial goal and timeframe, the most likely characteristic of the plan is an aimless meandering towards an unknown destination. Once we understand the business owner’s fundamental objectives, we move into the exit planning process proper.
One of our recommendations to vendors is the severance of the emotional connection to their business. This is often a difficult request, given the sheer amount of effort and resource poured into the enterprise to get it to where it is today. However, a detached, impartial perspective is critical if the vendor is to see their business for what it really is: an asset.
Just as with every other asset class, potential buyers are looking for an opportunity that will deliver above average returns on investment compared with the relative risk profile. And in a crowded marketplace, your business will need to exhibit strong appeal to achieve your desired exit outcome. In short, the business needs to be exit-ready.
Exit-readiness is visible when the current owner could hand the keys to a new owner and walk away within a very short period of time, without detriment to the business. Achieving this state requires attention and action in some key areas:
1. Succession – the definition, identification, recruitment and integration of a competent leader(s) to take over the running of the business.
2. Principal-dependence – the extent to which the business relies on its current owner for revenue generation, operational management or inspiration should be eliminated as much as possible.
3. Clean financials – achieving bullet-proof financials is a critical component of the plan, as it will make the exit process far easier and makes more options available in terms of deal structure.
4. Operational efficiency – the development and documentation of core operating processes and procedures is imperative for building a sustainable organisation.
5. Securing IP – ensuring contracts are in place, ownership of intangible assets is formalised (i.e. through copyright, patents, trademarks, domain names, business names) and tacit knowledge captured and stored ensures retention of the business’ intellectual property.
The exit plan also takes into consideration the preferred exit mechanism, be that a trade sale, IPO, management buy-out or retirement into a non-executive Board position (the latter is a quasi-exit: the owner exits from the day-to-day running of the business but retains ownership), or a combination of these. Each option has its advantages and drawbacks, price limitations and timeframes, which all need to be taken into consideration when defining the strategy.
This might sound like a lot of work, and it is. Preparing a business for exit and defining the exit strategy takes time, commitment and energy, but the long-term benefits generally outweigh any short-term inconvenience. For many business owners, now is not the time to consider selling, but getting started on the planning should be a priority so that when the time comes to pull the trigger, you’re ready.
Acquisiti is a leading business exit advisory firm for owners of small to medium businesses throughout the Asia Pacific region. Established in 2004, Acquisiti provides a complete package of services including exit and succession planning, business broking, strategic sourcing and market appraisals. The firm’s clients are typically services-based enterprises with sale values in excess of $1m. For more information, visit our website at www.acquisiti.com or email Andrew Cassin, Licensed Business Agent, at firstname.lastname@example.org.