Is there a difference between running a business to ensure you can exit and cashing out one day Vs. running it to keep it forever? Yes there is, the last 24 months. Every owner needs to run a business as if they wanted to cash out one day. The ones who are committed to sell just need to start to execute some key items around 24 months prior to the sale. No guarantees on timing of course, just action items that will change the odds in your favor of selling.
Think of running your business to maximize its potential as an Options Strategy. If successful you are giving yourself the option to sell out one day, even if you never exercise that option.
To emphasize the point here are two lists. The first one is a list of value drivers that underpin the maximizing of your potential. The second list relates to the 24 months prior to sale to ensure the transaction goes smoothly and you ace the due diligence test.
Value Drivers – My Top 10
- Web site spells out a compelling story that demonstrates how my life will change with your product.
- You are continually increasing market share in your sector, heading towards a top five slot.
- Sales and profits are growing at 25% after adding back owner benefits.
- You launch successful new products often enough to ensure legacy products don’t dominate sales.
- You are driving the business towards significant EBITDA with the potential to hit the $5m to $10m range.
- You are managing the dependency on big customers to ensure the impact of losing any one customer is less than 5% of annual revenue.
- You are constantly nurturing and recruiting great talent with a blueprint that is repeatable.
- The company’s success is no longer dependent on the owner.
- Your sales and cash flow forecasting models are getting better over time.
- You measure the right metrics to allow you to understand success and failure.
The Exit Strategy Checklist
- Appoint a new resource, advisor, chairman to project manage this related list. e.g. me
- Keep the P&L items clean, minimize personal expenses, pay market salaries, and use dividends for toys.
- Use a respected auditor with expertise in your sector. File clean, timely accounts in accordance with GAAP.
- Ensure all non-core activities are divested.
- Consider investing a little more aggressively in innovation and keep it tightly linked to your compelling story. Be brutal about mistakes.
- Buyers don’t like a long shareholder tail. Be careful with ESOP schemes and sophisticated structures. Tidy up the shareholder list if possible.
- Tax planning: it is never too early to consider the tax position of shareholders and to plan accordingly.
- Build a collection of due diligence files over time, covering all the data that acquirers need.
- Tidy up IPR, patents, and trademarks as quickly and as efficiently as you can.
- Address long-term litigation issues more aggressively.
- Regarding key staff, consider reasonable non-competes and incentives surrounding an exit.
- Double down on creating a constant buzz around your brand. Customers and acquirers buy for emotional reasons!
- Consider more meetings/alliances than usual with the bigger players who may form a buying list one day.
- Establish some early realistic expectations on value with all shareholders!
- One year prior to your ideal completion date for a sale, appoint a relevant Investment Bank.
Ian – I like your idea of keeping the checklist and making sure you start working on it 24 months prior to expected sell date. from running the business perspective I don’t think there is a difference. You still need to manage the business as if you are going to own it forever, otherwise you run the risk of deteriorating your business and not be able to sell it in a timely manner or at expected price. The real difference is keeping the house in order so that you can “wrap it up and leave” on a short notice when the time comes.
Harry I agree you need to run the business as if you will own it forever. However there are specific items that you must attack in that last 12/24 months prior to a sale. If you were happy keeping the business for annual yield I’m not sure you would appoint investment bankers, double down on creating a buzz etc. In my experience some of the actions required of owners only happen when an exit becomes a realistic goal.