How to maximise the value of your business when you exit

How to maximise the value of your business when you exit

How to maximise the value of your business when you exit When it comes to succession planning, bear in mind some essential points to ensure you maximise the value of your business and achieve a successful exit, explains Craig West, the president of the Australian chapter of the Exit Planning Institute.

Most business owners go into business planning to maximise value and then extract that value (most often by selling) when they exit. But research tells us most don’t have a plan or strategy around how to do this. This means many often fail to either maximise or extract their business’ value, or both.
To achieve a successful outcome, business owners need to focus on two areas – internal and external.

Internal areas
When it comes to internal areas, the question to ask is ‘what are the key things we can focus on to ensure our business is valuable, attractive and saleable?’
In my experience, there are eight key areas to focus on when answering this question:

1. Size                                
Simply put, ‘size does matter’. While I am not in favour of growth for growth’s sake, designing your business to grow to at least this level of turnover will maximise value.

2. Business model
Is your business operating under a boutique or scale model and, even more importantly, is every aspect of your business aligned with your model?
This includes:
• customer service;
• online presence;
• the people you employ;
• your pricing strategy and;
• your marketing materials (avoid business cards on flimsy paper).

3. Revenue
Recurring revenue is vital. Do you have clients on long-term retainers, extended contracts, or some type of residual income trail?

4. Sales and marketing
Your business needs to be able to generate new business, leads, enquiries and, ultimately, sales without relying on either you or a key person’s skills and sales ability. All businesses need a sales and marketing machine.

5. Systems
Save yourself time, effort and money: Not only are systemised businesses far simpler to run, far less stressful and, generally, far less risky, they are also more valuable.

6. Employees
Do you have an employee incentive plan whereby employees are rewarded based on performance? This could either be a profit share-based plan, or, ideally, an employee share ownership plan (ESOP).
This substantially reduces one of the key risks for buyers – that your employees will exit when you do.

7. Corporate governance and compliance
Focusing on this area can add considerable value (particularly when we look at attracting the right type of buyers) – as well as reducing risk.

8. Owner dependence
The business must be able to run independently of your involvement.

External areas
When it comes to external areas, the question to ask is ‘what do we need to prepare to attract the right buyer (who will pay more)?’
Having bought and sold several businesses over the past 15 years, there are several factors that stand out to me when answering this question:

1. Strategic buyer
For every business there is a strategic buyer who will pay more for your business simply because they benefit more than most other buyers. The most common example of this is complementary products and services.

2. Information memorandum (IM) document
A well-prepared IM will be able to attract and convince the right buyer.

3. Tax planning
Every exit has several different elements of taxation; nearly always CGT, often stamp duty and sometimes other taxes as well. Inadequate planning in this area can cost you a large percentage of the sale price in taxation.

4. Due diligence and documentation
Many transactions fall over at this point but this can actually be used to assist in improving the value of the business. If all your documentation is complete, accurate, up-to-date and demonstrates a well-managed business it will support your value proposition – not detract from it.

5. Negotiation
Being in a position to create some competitive tension by attracting several of the right buyers is a good start, but the conduct of the negotiations and discussions leading to the actual sale are a very important aspect of the process.

6. Legal agreements
Often business owners are concerned the legal agreements will ‘scare off the buyer’, but this is very rarely the case. Far more importantly, the legal agreements need to be structured to protect you after the sale – particularly around the key issues of any warranties, assurances provided, and also any event or finance included as part of the sale terms.

7. Corporate advisers
Business owners should not try to sell without the best advice. Well represented businesses are generally taken far more seriously and are perceived to be far more valuable than those without representation. A corporate adviser who has a reputation for selling good-quality businesses, automatically positions your business in that category.
Importantly, post-exit you also need assistance with asset protection, estate planning and ongoing investment planning. The change from business owner to self-funded retiree is substantial.

The correct implementation of the items outlined above will achieve two key outcomes – maximise the value of the business and successfully extract that value upon exit.