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Why You Need to Think About Your Business Exit Strategy Now

Posted by Stephen King
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exit strategy

In the heat of running your business, you're likely much more preoccupied with the present than the distant future. Like most business owners, considering your exit strategy — the final stage of your business's lifecycle — is probably one of the furthest things from your mind. 

A successful exit strategy, however, requires that you consider your exit much earlier than you might expect. In fact, the sooner you start preparing, the better your exit outcome will look.

GrowthForce President and CEO, Stephen King recently sat down with Jeff Brown, Senior Vice President of the M&A advisory firm Corum Group. They discussed the art of exiting successfully, when business owners should begin preparing, how buyers value businesses, and what owners need to do to achieve success at the end of the business lifecycle.

"I'd rather you come to me 18 months [or] two years before you want to sell the business," said Brown. 

Click here to watch/listen to the Podcast!

There are three ways to exit a business: continue working with a plan, transition management, or sell. Referring to the third scenario, selling your business, Brown put it this way, saying "Businesses are sold — not bought," which means it's up to business owners to ensure they have solid numbers and have worked through any issues within the organization to win over prospective buyers. So, although Brown suggests at least two years to assist business owners with exiting, it's never too soon to start preparing!

Who Are the Buyers?

If you need to win over buyers, you need to know who your potential buyers are. According to Brown, all potential buyers fall into just two categories:

  1. Strategic Buyers - Strategic buyers are usually other businesses (probably, your current competition) that want to acquire your products, customers, locations, and footprint. They likely have their own processes, staff, and strategy in place, and although they might keep some of yours, they'll likely adapt and streamline your business to their existing values and procedures.
  2. Financial Buyers - Financial buyers are those with money they want to invest with the purpose of turning a profit. These owners can be passive venture capitalists, wanting to purchase a business that'll function with the management currently in place, or even family owners who'll hold onto the company for a long time to support their families. They'll focus primarily on your business's ability to function without you, its scalability, and your projections.

What They're Buying, When They Buy Your Business

Brown recommends that entrepreneurs, who plan to sell in the future, test the market early to understand what potential buyers actually want. "We all do test marketing with our products and services. We roll out in beta, see how the reception is, adjust, tune, adapt, and then roll out the product or the service in its final form for the marketplace." Brown said, "The same is true for businesses. It's very valuable to test market the business."

Depending on the type of buyer, their market strategy, and their goals for your business, Brown says buyers assess three major categories within businesses:

  1. Market Participation - Within this category, potential buyers consider your position within the marketplace, who your customers are, and customer loyalty (customer lifetime value and acquisition costs). They'll also consider the market, in general, evaluating the competition and deciding whether the market's growing or shrinking.
  2. Management and Operations - Potential buyers also consider the strength and continuity of your business's operations. This includes management, employees, technology, assets, products, and services.
  3. Financials - The most important category, financials reveal everything about a business: the quality of its operations, soundness, and its potential for growth.

As Jeff Brown puts it, every buyer is different and has different strategies, and business owners should look for ways to fit their businesses into potential buyer's agendas. Brown points out, however, that one unifying factor all potential buyers tend to look at is R value.

How to Calculate Your R Value

R Value = Revenue Growth % + EBITDA %

For example, a business with 15% growth and a 20% EBITDA would have an R value of 35. Business owners can then compare that R value, and its two components, with those of other businesses to assess the best place to invest money.

Top Factors That Help Businesses Sell Themselves

Although R value is a useful number, there's much more to every business than its R value. Potential buyers will assess the whole business, at a granular level, before deciding to make an offer. To achieve market share, management, operations, and financials in your business that'll sell themselves, focus on measuring, tracking, and improving the following factors that'll drive up your business's value.

1. Predictability

Predictability in every aspect of your business makes it extremely attractive to potential buyers. With documented predictability, new owners know exactly what to expect from your business. Achieving predictability in service businesses can be somewhat tricky, but it's not impossible. 

Service businesses with subscription-based pricing models have a standard flow of revenue that can be anticipated on a regular basis. Customer relations and client termination clauses can also improve predictability in businesses. Companies that show regular revenue and regular expenses make safe investments.

2. Revenue

Extremely important to potential buyers, revenue represents your business's earning potential. Potential buyers will look at your revenue, but will also want to break it down to assess the different types of revenue and the quality of that revenue. For example, long-term recurring revenue that can be predicted and relied upon is more valuable than revenue from a temporary, one-time project.

3. Expenses

Potential buyers will, of course, consider your cost of doing business. They'll look at your direct, indirect, fixed, and variable expenses. Brown recommends business owners transfer as many fixed costs to variable costs as possible. This can be done by outsourcing non-core processes.

Brown also reminds business owners that it's important to be able to quickly identify personal expenses run through the business in order to provide an accurate representation of your true cost of doing business. While it's sometimes okay for business owners to pay for things like meals, transportation, or even country club memberships through a business, these don't represent actual business costs. If left in the reports shown to potential buyers, they'll cloud the business's actual value.

4. Profits

Does the business make money? That's the number one question. 

More specifically, potential buyers will want to assess profits on a granular level, looking at your company's unit economics. They'll want to see profit and loss statements by product, service line, and by customer to understand which aspects of the business drive growth, which are the top earners, and which are the bottom earners.

5. Automation and Operations

This category includes your management, your team, and your technology. What policies and procedures do you currently have in place and how well do they work? Potential buyers will evaluate your operations and consider existing personnel as assets. This is especially true in service businesses, in which the people represent the product.

In addition to business operations, potential buyers look at the automation of data collection, analysis, and reporting. Do you have technology in place that facilitates the tracking of accurate metrics?

6. Cash Collections

Potential buyers want to know how efficiently you get paid. Automate billing and cash collections. 

Tighten up your invoicing and use electronic payment as often as possible. Assess your days sales outstanding (DSO) and sales cycle. Consider whether changing payment structure would improve your cash flow.

7. Market Share

Depending on the size of the marketplace, market share is more important in some businesses than it is in others. If you're operating in a limitless market, where you'll never run short of potential customers, it's not that big of a deal and quite difficult to measure. If you cater to a specific, limited type of customer, then market trends and your share of the market is essential to assessing the value of your business.

8. Scalability

A business's ability to scale and grow largely dictates the potential return a buyer might earn on investment. Related to the market size, share, and demand is your ability to scale. Scalability, however, might also depend on geography, research and development, or the ability to expand into addition product lines or service models.

9. Projections

Business owners often shy away from making projections, afraid these types of "promises" will commit them to the business's future performance. Brown, however, thinks business owners, "need to get beyond that." He said, "Projections are a reflection of what your game plan for getting better is, what you're predicting for the future performance of the business . . . [W]ho's better positioned to predict the performance of the business in a forecast than the business owner, the business leader?"

Explaining that projections are built upon a set of assumptions, Brown emphasizes the importance of outlining those assumptions to potential buyers. If those assumptions change, the forecast changes too. Doing this transfers responsibility from the business owner onto the assumed circumstances.

Identifying Drivers, Measuring Unit Economics, and Documenting Predictability

Timely, accurate, and reliable bookkeeping and accounting systems lie at the heart of every aspect of bolstering a business's exit strategy. From implementing the right technology to collect and measure financial data to instating a proper team of back office experts, a sound bookkeeping and accounting system will provide you with the tools to create a solid, successful exit strategy within your business. Whether you're approaching the end of your business's lifecycle or simply preparing for the future, remember it's never too early to start planning your exit.

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