Making an ‘escape plan’: Building a company to sell it
Many businesses owners will tell you that you should run your company as though it will keep going forever. In other words, so it can happily run without you.
For some entrepreneurs this thought sends shivers down their spine: after all, the business is their baby. But the reality is at some point all entrepreneurs need an escape route.
Building a business as though you want to sell it can be a pragmatic approach to ensuring this happens in a seamless and financially sound way. As a bonus, it can also be a way to not only improve the chances that your business is a success, but improve the likelihood that you have a comfortable retirement.
Here’s more on why and how to do it.
1. Consider why you might want to sell and when
Three-quarters of business owners (77%) plan to sell their business within the next decade, yet over half (53%) of them have no exit strategy in place at all. These survey results show that at some point almost everyone wants out of their business, but few are quite prepared to do it.
The reasons to sell are many. You’ll want to retire. Maybe you suddenly want to try something new. Maybe you realise the market is turning and now is the time to get out. Ultimately, all of these reasons filter down to a need for capital. Some people will decide to keep the business in the family or reward loyal workers. The key thing with all of the above options is that you’re still leaving.
Asking why you want to sell helps you define when you plan for it to happen – selling to start another entrepreneurial idea will happen sooner than retirement, for example. It follows, therefore, that in the back of your mind you should be considering what your strategy is.
2. Build an attractive company
All the things that make a company attractive to a buyer, make it a success as well. For example:
- It makes a profit (cash-flow positive)
- It has a plan for significant growth
- It has strong and varied customer relationships
- It is not dependent on just one or two people (such as you)
- It has a strong management structure and a productive workforce
- It has a strong reputation
- It is tech savvy
Another way of thinking about this is understanding the buyer universe. What is it that will make people want to make an offer on your company? Knowing this will maximise its value.
Much of this is clearly the aim for many business owners. Nobody wants to run a business at a loss. The one thing in that list that most entrepreneurs really have to work on is the fourth: not making the business reliant on themselves.
3. Don’t be a bottleneck
At some point you’re going to have to let go. Doing so is a real art, and a stumbling block for many. The problem is that unless an owner builds a business that can survive without them, it will all come crashing down the moment they leave. We know this as a bottleneck, because as the owner we’ve become that impediment to company growth and success. Nobody wants to invest in that.
In fact, one-fifth (21%) of business owners don’t think they will be able to negotiate a good price because the success of their business is reliant on them.
4. Prepare the exit plan
Early planning and preparation will hugely affect how much leverage you have when you come to find a buyer. In this situation the sooner this planning is started the better. Things to consider here are:
- Talk about succession – identify those who can successfully operate the business during any handover
- Consider tax strategies – keep up with evolving tax laws and put in place a strategy that helps manage the company wealth
- Put in place a long-term strategic plan – define how the company can grow and how this can be easily explained to others
- Keep finances in order – anybody taking over a business is likely to scrutinise these extensively
- Create reports – monthly/quarterly forecasting and strength/weakness reports can rapidly help a buyer understand the business
5. Determine the business worth
Your business worth is going to be based on much of the above intangible assets plus fixed assets such as machinery and products or stock. There are a number of ways to value a company, including price to earnings ratio, entry value, assets, discounted cash flow and industry rules of thumb. So don’t be surprised if different people offer up wildly different valuations.
Knowing how much your business is worth will help guide you about whether you’re on track to achieve your exit strategy, yet only 26% of business owners ever find this out before the actual sale. Getting an accurate valuation from time-to-time is therefore advisable, and doing so may require calling in the experts.
6. Seek advice
Making a strong exit plan and, when the time comes, actually selling are often complicated processes. So it’s advisable to call in the experts to make sure things run smoothly.
Less than a third (31%) of business owners seek advice on how to restructure their business to maximise its after-tax value, and just 37% seek advice to maximise the overall company value. Given what we said at the start about most reasons for selling being financial, this is fairly startling. There are different specialists out there who can help you build a strategy, offer an accurate valuation, create reports, find buyers and negotiate a deal. Don’t be afraid to use them.
Don’t forget to plan for yourself
One final piece of bonus advice: don’t forget your own plan. Less than half (43%) of business owners have an adequately funded retirement plan, often because they’ve been investing profits back into the business. It’s easy to get so carried away with running the business and building an exit plan that you don’t build one for yourself.