The 411 on Exit Strategy from an M&A Perspective
In the world of business, it’s never too early to start planning your exit strategy—because the sooner you start, the more rewarding your eventual exit is likely to be.
Think of it this way: Your business is an asset in which you have invested money. It has a revenue stream that supports your salary and possibly a sizable distribution of yearly profit. It should be increasing in value so that when the time comes, you will be able to harvest additional wealth. But even in light of this, planning an exit strategy is the most commonly overlooked consideration of an overall business strategy—it’s easy to ask yourself: “Why would I design an exit strategy when I still enjoy being in this business?” The answer is simple. By not planning out a path beforehand, business owners, their heirs or their successors may find that the options in the future are limited.
Every decision you make should have some kind of eye toward an exit strategy. When it comes to choosing which avenue to take, mergers and acquisitions can offer a significant return on investment for company founders. But successful transactions don’t happen by accident—they require months, if not years, of planning and hard work. To that end, here are five important steps to make your company more salable, more attractive and easier to transition. By enacting these steps now, you’re guaranteed a smoother and more successful exit from your venture—whether that’s six months or 10 years down the line.
1. Make Sure Your Financials Are Clean
Nothing turns a potential purchaser off more than undue risk. Minimizing that risk means ensuring the company has all of its paperwork in order—this includes your full financial history. I like to compare this to selling your house. You want to make sure it’s clean, tidy and well-maintained. Would you feel comfortable pushing your home off on potential buyers when it’s in a complete state of disarray? Probably not. It’s the same in business—your finances need to be clean and in order. Make sure there are no hidden expenses. Don’t idle funds. All of this can make your business look less profitable than it actually is. When your finances are in line, your buyer can better understand your business, and it’ll minimize any questions that might come up. You want your buyer to immediately see what the value of your company truly is.
2. Be the Best at One Thing
Never stop improving and developing your technologies. The bottom line is that acquirers buy only what is in demand, but not easily replicated. There are typically two primary motivations for companies to make an acquisition: They either want to fill a strategic gap in the company’s product, resources and capabilities, or they want to help the company enter a new market. By striving to be the best at one thing in one industry, you’re driving up your value from both of these angles. In the end, that’ll pay off big time.
3. Engage in Networking
Networking is one of the most important things you can do for the future of your business, and being highly-connected can make all the difference when closing in on a deal. It’s never too early for owners of companies to seek out strategic relationships. Whether it’s done by attending trade shows or engaging in industry events, don’t be afraid to start a dialogue and build your network. Networking is always easy to forget, and oftentimes it lands on your backburner—especially when you’re not looking to pull the trigger anytime soon. But I can’t stress enough just how crucial it is to stay dialed in to what’s happening in your industry’s space. Use that network for information building. Talk to other owners. Talk to vendors. Talk to people in the M&A space, too, so you understand what to expect when the time finally comes.
4. Focus on Growth
Typically, companies that are interested in paying premiums are growing. But I realize that’s easier said than done. Sometimes, in smaller companies, we’ll see that when someone is ready to sell, they check out mentally and physically. That can ultimately affect the revenue and sales of a business—you’re not going to get a premium if your business is declining. Always push hard to increase revenue and profit. And even more importantly, root yourself in your business psychologically—you can’t operate with one foot out of the door.
5. Start Now
This is probably the most important part. None of these other steps matter if you take too long getting to them. You should be thinking about your exit strategy the day you start your business. By keeping the issue of exiting in mind as you build your business, you will have the flexibility to handle the exact strategy at the appropriate time, and you’re protecting the value of the business you have worked so hard to build.
R. Scott Sutton, CFE, is vice president of Safeguard Acquisitions Inc. and vice president of franchise development for Safeguard Franchise Sales Inc. At Safeguard, Sutton is responsible for the company’s Business Acquisitions and Mergers (BAM) program. In 2014, he was named a Dealmaker of the Year Award winner given by Franchise Times® magazine. He is a board of trustee for the IFA Educational Foundation and serves as vice-chair of its strategic planning committee. Follow Sutton on Twitter @rscottsutton