EveryMonth (November 2012): Thinking ahead – the secret of a good exit


Understanding what motivates the owner-manager

For many of you the decision to set up your own business will not have been driven by the desire to maximise your income or build a company that you can eventually sell at a profit. 

Perhaps you were passionate about a product or service that you developed and you set up the company in order to bring that product or service to market.

Maybe you were motivated by the desire for independence, perhaps to escape a large corporation where particular political skills were needed if you were to climb up the ladder.

To some of you, loyalties to your staff, your customers and your suppliers may be as or more important than achieving the highest possible sale price.

When it comes to moving on, understanding your motivation and non-financial issues is likely to be key to making the right decision.

When is the best moment to sell?

The typical growth/life cycle of a company begins with a start-up phase where your new company makes losses before the product or service is successfully brought to market.  (Statistics show that one third of companies fail in their first three years of trading before they have proved the viability of their business.)  This point is described as chasm one.

It may be possible to sell your company before chasm one has been crossed but in most cases you will face a distressed sale and cash and time invested will have to be written-off.

The next stage of growth will be crucially dependent on the development of a well‑rounded management team because your business will have reached a stage where its growth is limited by the capability of a particular individual. This phase, known as chasm two, is tricky because the characteristics that motivated you to set up in the first place and allowed you to survive the first years in business, are different from those required by a team builder seeking to scale up.

On the basis that buyers are interested in companies with real growth potential, the ideal time for a sale will be after your company has entered the steep growth curve shortly after chasm two. If you wait longer, your business may have achieved high but plateau profits but may have nowhere to go but downhill.  At this point your future growth may need to be overseas or in other markets and it may be necessary to move into chasm three (an international operation perhaps) to justify a high selling price.

The prevailing market for company sales

However good your company’s prospects, the prevailing market for company sales will be a key factor when you decide to exit. With the current depressed stock markets and a shortage of bank debt the prevailing market may be poor for many years to come. However, you might be able to negotiate a good price from a strategic buyer in your particular sector.

What about a management buy-out?

For many of you in the current market the only realistic potential buyer may be your own management team.  However, your team may need to be significantly strengthened in order to replace your personal portfolio of skills and experience.

It is therefore very important to assess the needs, capabilities and motivations of your existing management team and to identify any gaps that need to be addressed as the business grows.

What puts off buyers?

Your buyer might be reluctant to proceed if:

Your business is over dependent on a particular person (probably you!) for sales or production;

The company is over dependent on a key customer;

Unless the key relationship is secure and your buyer is confident that new business can be won it may be very difficult to sell the company at a price you would accept.

 You don’t own key intellectual property;

If your business is founded on intellectual property it does not own (software companies can be a good example of this, especially where software is based on freeware), your company may be vulnerable to competition and difficult to sell.

 You are over dependent on a key supplier;

In this case you will need to convince your buyer it will be possible to find replacement supplies on satisfactory terms.

 Your technology is obsolete;

Technology companies can often have a very profitable service or product which becomes impossible to sell because it has become outdated. You will need to convince buyers that you are ahead of the marketplace or that you offer a wide range of successful products/ services.

 Your company has several owners with differing personal objectives;

It may be difficult to do a deal if some of you wish to enjoy an income or remain in control, whilst others would prefer to have an immediate capital return and/or see opportunities in the buying business. 

 There are on-going legal disputes with a customer or former customers;

A significant legal dispute will raise doubts with your buyer about the quality of your product or service, or the way in which it has been sold, and this will damage your position.

Assessing the best time to exit

The Everyman Legal Exit Assessment Form is available for you and your advisers to use when deciding on the best time for your exit. It will also help you to gauge whether a sale to management rather than a trade sale may be the best route for you to explore.