Exit planning – who wants to succeed?

Exit planning – who wants to succeed?

At some point in time, a business owner must seek to exit the business, either by selling to a third party or being bought out by existing and/or new management or handing over the reins of power and control to a known successor.

The difference between a deal that generates exceptional returns for the exiting owner and one that disappoints depends on the forethought, positioning and execution that go into developing a strong exit strategy.

It’s my belief that the most successful exits occur when business owners plant the seeds early – maybe even three to five years ahead of the anticipated succession date or liquidity event – typically a trade sale or an MBO.

When planning their exit, forward-looking owners should seek to strengthen and consolidate current operations, cultivate new profit improvement activities and jump start future growth opportunities for the next set of owners to harvest. A sale to a trade buyer is a very common exit strategy for a business owner and allows the owner to withdraw from the business going forward. It normally entails the disposal of a company’s shares or assets and even liabilities, in whole or in part. The acquiring party is usually either a strategic buyer who intends to grow the business by leveraging current assets or a financial buyer who wants to generate a financial return on invested capital through some future liquidity event.

An MBO is the term used for a ‘Management Buy Out’, where the management team partners with a Private Equity firm and leverages debt financing to buy out the existing owners of the business. For the management team, this provides them with an opportunity to part own the business they work for and to share in the increase in value of the company that their hard work helped to create. For owners, a leveraged MBO means a sale to people who best understand the business as well as a sale process that is discreet. Private Equity involvement means that owners can be paid cash, in full and up front.

The process of succession planning considers how the business will continue after the retirement, death or illness of the owner or other key individual(s). In a family business, this often means passing the reigns to the next generation. In non-profit organisation, this may mean a long-serving CEO or Board member(s). A good succession plan is not only important when a business owner leaves the business: it can also give the business more strategic direction and improve morale as people feel involved and valued. It also ensures that important information about the operations of the organisation are documented and retained in the corporate memory post the departure of the key individual(s).

Whether it is a liquidity event or a leadership transition, business owners can maximise shareholder value through a six-step process:

  • Stream-lining current operations to reduce risk and increase value in the eyes of the potential acquirer.
  • Positioning for performance by identifying the most attractive growth opportunities and putting the company on a path to achieve them.
  • Evaluating the optimal exit approach, whether it is a merger with, or sale to, a strategic acquirer; a sale to private equity owners or a management-led leveraged buyout. In doing so, we assess the industry trends, business cycle timing and equity market conditions pertinent to the business.
  • Preparing the organisation for sale or transition, ensuring the enterprise can run sustainably apart from the owner’s/CEO’s involvement, rather than because of it.
  • Preparing the selling documents to facilitate an efficient and effective Due Diligence process by prospective buyers.
  • Customising the equity marketing approach to identify and qualify potential acquirers and, through a “Reverse Due Diligence” process, anticipate their needs and concerns.

10 things VCs seek in a Business Plan

  1. An experienced and well-balanced management team with a sound track record
  2. A venture with a unique concept or idea that meets an unmet consumer need
  3. A target market and proven niche product
  4. Almost unlimited growth potential
  5. A strong competitive market position
  6. Very healthy but realistic, financial projections
  7. A venture that is usually developed and looking for expansion funds. Preferably a high-tech firm, but also firms in other sectors
  8. Detailed financial statements (preferably with milestone charts)
  9. A potential equity stake of around 30% of the company in exchange for funds (though there is much variation)
  10. Potential exit routes identifiable at the time of investment.
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