5 Mistakes to Avoid in Planning Your Exit Strategy
Nov 02, 2020
“By failing to prepare, you are preparing to fail” – Benjamin Franklin.
After years of hard work, late nights, and excessive amounts of time, energy, and money, you may be thinking about selling your company. Did you know that the critical window to plan for a transition in ownership is 12 to 18 months before the actual sale?
As a business owner, you know the daily demands of creating, building, and operating a viable company. But when you don’t step out of the day-to-day operations and look objectively at every corner of your business, you are standing in your own way.
Without a strategic exit plan, you may receive a lower value from the sale of your company. There are five major mistakes that can easily be avoided in the exit planning process:
- Not taking adequate time to prepare. It is never too soon to plan for the sale of your company’s sale. The more time you take to plan, the better outcome you will receive. Expect to evaluate your business operations and correct inefficiencies at least 12 to 18 months before actively looking for a buyer.
- Not knowing what buyers look for in a potential acquisition. One of the critical components of an exit plan is understanding what potential buyers look for when placing a value on your company. Although you know the true worth of your company, buyers are interested in the hard facts. Serious buyers will look at five major areas of your business:
- Legal (contract review, corporate governance, risk management)
- Finance (review of capital and debt structure, A/R needs, growth capital needs)
- Accounting/Reporting (audits, ICFR, tax issues)
- Human Capital (policies/procedures, compensation aligned with roles, compliance)
- IT/IP systems (operating software, data security, disaster recovery plan)
When best practices are embedded in each of the five critical areas, a potential buyer or investor is more likely to increase the enterprise value.
- Not being clear on your end goal. When you don’t have clarity around why you are making this transition, the necessary decisions along the way become much more complicated. Are you looking for financial security in the future? Do you want to ensure a legacy in your name? Spending time clarifying your priorities and goals will guide the decisions and the process.
- Not preparing your company for the exit. Buyers are looking for companies that are viable, scalable, and predictable. A few of the pitfalls that you can avoid in this process include:
- Take a step back – if your company and employees are too reliant on you, your departure may cause difficulties in the transition. Slowly ease yourself away from the significant operations of the company to help the transfer process.
- Have the appropriate documentation – having all of your business operations in writing will help potential buyers understand the business functions and requirements ahead of time.
- Offer to train the new management – you may have specific skills inside your business. You can offer your expertise to the new owners as a great way to build trust and increase the company's value.
- Don’t take the first offer. You must look at more than just the financial part of an offer. This is your legacy, and the person who takes over your company should be more than only the highest bidder. You want to find someone who will continue to grow your business long after you are gone. Jumping on the first offer can lead to regrets, so be sure to take your time in choosing your successor.
To learn more about creating a strategic exit plan, please visit GrowthtoExit.com. Over 12 weeks, we teach you what a buyer looks for inside a company and the steps you take to ensure the buyer likes what they see. Pre-sale planning is essential to a successful exit.
Your company is the product. Growth to Exit® is the process. The Buyer is your customer.
THIS INFORMATION IS FOR GENERAL INFORMATION ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE AND DOES NOT NECESSARILY REFLECT THE OPINIONS OF TSG PUBLISHING. YOU SHOULD NOT ACT ON INFORMATION RECEIVED FROM GROWTH TO EXIT® WITHOUT FIRST SEEKING ADVICE FROM YOUR LEGAL COUNSEL.