Critical Factors for Exit Planning

Every year, many companies are sold for numerous reasons: no corporate successor, a complete realignment of the owner’s life, health problems, etc. The prices offered by potential buyers often disappoint small business owners, leading to tough negotiations before selling the company.

First Rule for Selling a Business: Start Preparing Early

Many owners underestimate the effort involved in selling their businesses and only deal with the issue shortly before the company is sold–much too late. If you want to get a fair price for your life’s work, you have to begin preparing your company for sale long before you put it up for sale.

First, to get the best price for the company, the seller must know the key factors by which potential buyers rate the company. To do this, it is essential to keep an eye on all of your company’s figures.

In their aspirations to sell, many business owners shift their focus from long-term strategy to short-term tactical thinking that doesn’t allow them to position themselves as a strong competitor, mainly when uncertainties occur. Only by addressing the most critical factors which are decisive for a company’s sale can the exit planning process be thoughtfully and sustainably improved.

Many factors can be identified in this category, the most important being:

Know Your Business

Get a deep understanding of your business, industry, and marketplace dynamics. Become familiar with your market and get clarity on your go-to-market strategy. Know your target customers and design your products to meet their needs and preferences. For example, for a drug manufacturing company targeting children, the size of the needle will be a deciding factor for customers to purchase.

Car manufacturers are a very fitting example. In connection with the VW emissions scandal surrounding excessively high emissions from their diesel engines, the brand’s stock value plunged, and the company lost credibility. The loss in value could be measured–specifically in numbers. Investors lost billions.

The backlash not only affected VW’s stock market value. Some manufacturers have also been discredited outside the trading floor. Holding the buck in the market means that the market position suffers and, with it, the company’s value.

Identify what the buyers/investors are looking for and ensure that those value creators are present in your company.

Build a Strong, Stable Management Team

So-called “one-man shows” are almost impossible to sell. But even companies in which the owner works 16 hours a day, seven days a week, do not represent a simple sales mandate. The decisive question is whether the company for sale will still function profitably after the sale and without the owner. Each owner can best decide for himself whether another owner (i.e., buyer) can successfully continue his company or whether even broader internal structures are required.

Buyers want to see a solid and stable management team that will continue to grow the company. The management team should not be dependent on the business owner to make crucial decisions. The team should be complete, well-trained, and capable of growing the company.

Invest in Long-term Strategies

Instead of focusing on short-term goals, invest time, money, and effort in the long term. Focus on building excellent infrastructure, intellectual property, innovations, and human capital. Innovations provide differentiation and, hopefully, large future returns after the initial start-up investment. Accordingly, product innovations are like a fire accelerant in the context of a sales process.

If large investments in product development, marketing, or machines are necessary after the sale, a buyer will offer much less to offset that future investment. It is, therefore, essential to carefully consider the right time to sell with the right strategy.

Identify and Define What You Want to Achieve by Selling Your Business

By far, the most expensive mistake a business owner can make is not preparing his exit from the company. Those who exit in a hurry and under pressure are likely to realize low sales proceeds. The active preparation and implementation of value-enhancing measures should begin with identifying what you want to achieve from the sale. State the motivation behind your decision to sell your business: to accumulate wealth for retirement? To move on to something new or challenging? What you want to achieve by selling your business could be unique, and you must be aware of it.

Understand the Business Valuation Process

You need to have an accurate idea of your company’s value to justify the sales price you want and present its value convincingly. Expert valuation advisors help identify the right valuation process for your unique business, but they should not work in isolation. You and your management team should be actively involved in and understand the entire process well.

Despite the multitude of existing company valuation methods, no single approach can fully depict a company’s value. However, experienced specialists possess the knowledge of those methods and can conduct a professional analysis of the company’s overall situation.

Define the Exit Timeline

The timing of your business exit is crucial and should be decided strategically. Do not wait until the company is in trouble before deciding to sell. Also, avoid thinking only about selling when you, the entrepreneur, no longer see yourself running the company. Exit planning takes time, more than most business owners anticipate. To achieve your desired exit goals, you need to allow sufficient time for the exit planning process, including defining your exit timeline. Have a clear idea of when you want to exit.

Identify Your Preferred Exit Strategy

There are many exit strategies, the most popular being mergers and acquisitions, family succession, selling your stake to a partner, and management or employee buyouts. Depending on your goals and with the help of expert advisors, you can identify the most suitable exit strategy for you.

Know Your Industry’s Business Cycles

Everyone knows that the economy plays a critical role in a business exit. However, having a deep understanding of your particular industry’s business cycles will help you strategically time your exit, so you will benefit more by selling your business when the industry shows an upward trend.

Understand Market Dynamics

Get a clear understanding of the market sentiments, trends, and expectations. You can benefit more when demand increases and supply decreases. This is when more investors will be interested in buying your kind of business.

Start Planning Now

As soon as you decide to exit your business, consider the tips listed above to recognize which problems could arise at an early stage. You now know what typical mistakes to avoid and how to successfully exit in close cooperation with your advisors. Finally, to manage the lengthy process well, heed the following tips:

• Always keep all required data up to date so that you are ready for the due diligence process and can start negotiations at any time.
• Stay on track if the process is going according to your exit plan. If not, make adjustments to your exit plan with the help of your advisors to re-align it with your exit goals.
• Do not let yourself be distracted by the day-to-day business. Build strong operational plans, strategies, and structure and assign reliable personnel to handle the operational tasks and replace you so that you can move forward with your exit quickly.

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