Over the last 25 years we have had many conversations with business owners, as well as investors and buyers. Two things stand out clearly from those discussions:
1) Most business owners are not well prepared to consider succession issues,
2) There is frequently a great disparity in perceived value between owners and buyers.
The Need for Exit Planning
Research suggests that only about 20% of business owners have a formal exit plan in place, leading to various challenges when the time to sell arrives. Several factors contribute to this lack of preparation:
- Lack of Awareness: Some owners may not fully understand the importance of exit planning or may underestimate the complexity of the process.
- Time Constraints: Running a business demands a lot of time and attention, leaving owners with limited bandwidth to focus on exit planning. Finding the time to work on the business, rather than in the business, is a constant challenge.
- Emotional Attachment: Owners may have emotional ties to their businesses, making it difficult for them to consider and plan for exit.
- Optimism: Many founders are optimists by nature. It’s a trait that serves them well in overcoming the inevitable hurdles that come with growing a business. It’s also a trait that allows for things that are not of immediate importance to be swept aside.
However, optimal succession outcomes necessitate early planning and action, whether it’s a generational transfer, partnership, or sale. Without proper preparation, owners risk disappointment when seeking new owners or investors.
Why Early Preparation Matters
Several factors can impact the success of a business sale:
- Overvaluation: Owners often have unrealistic expectations regarding the value of their businesses. An owners’ view on this is often shaped by outlier reports of very successful sales, speculation around price achieved, or by reference to multiples of publicly listed companies. Valuation of private companies is a complex undertaking and one that requires a mix of financial awareness and an understanding of how buyers or investors go about appraising a business.
- Poor Financial Performance: Businesses with declining or unstable financial performance may struggle to attract buyers or achieve desired sale prices. Introducing bullish forecasts for coming years does not overcome the reality of past performance in the sceptical eyes of buyers.
- Founder dependence: Larger companies tend to manage the separation of shareholding from management better, but for many founder-led businesses a failure to put in place a leadership team that has demonstrated its capability can either stop a deal or introduce undesirable requirements upon the seller.
- Market Conditions: Economic downturns or industry-specific challenges can impact the ability to sell a business at desired multiples. Owners almost invariably view their businesses through a positive frame, but differing views of the future can prevent a deal from being done.
Ultimately, the value of a business is that point of equilibrium between the least that a seller is willing to accept and a risk-averse buyer is willing to offer. The key is to understand who the buyers are, why they will be interested and how they appraise a business.
Three Factors That Make For A Successful Exit
We have seen some very successful outcomes when it comes to selling a business. The three things they all had in common were:
- A founder who focused on an exit strategy, either from the beginning or well ahead of any possible sale. They had a vision for the business that included their personal goals; their strategy was aligned with delivering that vision; and they actively tracked their progress by conducting periodic appraisals of the value of the business.
- They created enterprises that had strong processes, people and systems. They recognised that securing a buyer or investor was an exercise in perceived risk reduction.
- Seeking guidance from people with direct experience in investment and sale processes was a natural extension of building the internal capabilities they had in operating their businesses.
There are an increasing number of businesses that founders have spent 30,40+ years building and are now wondering about how to step away. For that commitment and effort to generate the desired financial outcome, those business owners need to focus hard on an Exit Plan and a Business Appraisal valuation to understand what will drive value in their company.
Ready to discuss your exit strategy?
Don’t leave your exit strategy to chance. Begin by developing a solid exit plan and conducting a thorough business appraisal. Our team is here to guide you through the process and help you achieve the best possible outcome for your business sale. Book a call with me today.
