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Plan your exit or let it happen without planning to
I’ve had the privilege to work with many exceptional business founders. Many of them are my contemporaries, middle aged, grown children, starting to think about slowing down or taking some money out.
When it’s all said and done, there are only a few motivations for exiting.
I’ve done it twice and it got harder as I got older, not easier.
I want to retain control of the business but take some money out
The founder usually loves to work and loves being around the people at work. They love being in control. They aren’t ready to completely retire and would miss their people, work environment and the challenges of expanding and improving on what they achieved so far.
This type of exit is well aligned to an IPO or staff and management buy out.
I want to retain ownership but don’t want to deal with the headaches any more
This is a transfer of operational control to a new leader. The founder could be exhausted or bored with their daily routine. They may be ready for a change in lifestyle or have health issues they can’t share with their staff.
This exit is well facilitated by transferring control to one or more family members or hiring a new CEO or management team. A progressive sell down of the founders shareholding can also be used because the new shareholders bring with them potential for identifying and hiring new leadership and operational talent.
I want to reduce my responsibilities and also get some money
The founder is looking to retire after a long career and go travelling or sit on a beach or a verandah. Many founders at this stage also want to start something new for the buzz and excitement of building the enterprise from scratch, perhaps in a completely different industry. Some founders want to embrace philanthropy and the arts.
A buy out or trade sale is often a great option because the acquirer often has access to or can recruit leadership and executive talent. The acquirer often has a strong capital management plan which will help properly fund and ensure a transition of the business over a longer period of time.
So, what goes wrong?
- Planning:
Most entrepreneurs and founders get a huge amount of personal satisfaction from growing a business. After a few years the buzz slows down as they start to have to deal with making the payroll every month, pressure from competitors, external economic factors, leakage of IP just by being in the marketplace and so on. This tends to happen when the brand equity of the business goes up and customers start coming to you unsolicited.
The years go by and the founder starts looking towards an exit but doesn’t have any clear plan of how to execute it.
Founders don’t realise the exit is just another business project. A big one perhaps but it still has a time constraint, it still needs resourcing and still costs money.
Resourcing the exit is often the biggest issue because the founder simply can’t ask one of their staff to handle the exit. Professionals who normally deal with business exits are valuation experts, legal merge and acquisition specialists, corporate advisors and so on, most of whom are not usually part of the founders circle of trusted advisors.
Time often runs out and founders are reduced to a fire sale of their business at the onset of a significant medical event or some other personal emergency which one day prevents them going back into work.
- Valuation:
Most founders have talked to someone who has given them some idea of what their business is valued at. One person. They also usually have an idea what type of organisation they will exit with, whether internal family members or existing management takeover or IPO or venture capital or trade sale.
However most founders I’ve worked with don’t have a real idea of how their business can be valued. They are very stuck in the minutia of operating the business and all they see is why a potential acquirer or new manager would not value their business highly.
We read the press and hear about massive valuations, multiples of revenue rather than profit, for small and medium sized businesses.
The things these valuations have in common is a large amount of recurring revenue or some unique operating know how or technology which they lead the world with. The latter group is a much harder group to break into and often these are younguish entrepreneurs with a strong technology background. i.e. not at retirement age.
For everyone else, the best way to drive the enterprise valuation is recurring revenue growth.
The second key part of the valuation is the runway. How much market is still left for the business to expand into ? If your market is saturated with competitors, all you can do is pick up churn customers, dissatisfied with their current supplier plus whatever CPI growth brings you. Your competitors are all in the same situation and this tends to diminish your enterprise value because buyers of your business want to see unlimited green fields, not a runway fast running out.
- Pivotting:
Once a founder makes the decision to exit, the valuation process will yield clues about how to maximise that valuation. The business needs to be made ready for a change in ownership and/or control.
The founder is the person best placed to pivot and exploit a new growth strategy. This can significantly increase both the growth rate percentage in revenue and therefore the enterprise valuation, as well as the revenue quantum in dollars. The growth % and amount of $’s both have a multiplying and not additive impact on exit valuations.
For example, recurring revenue growth can be accelerated by :
- Switch products and project (i.e. time bound) services to recurring revenue where possible
- Identify new recurring services lines and market them aggressively
- Identify markets in new territories, other Australian States, potentially the highly populous countries in South East Asia
- Build out a new customer base using your new growth strategies and cross-sell what you can into your existing customer base
- If you haven’t already, immediately implement effective Digital Marketing strategies, they work 24/7 for you. It’s better to outsource because you will never be able to hire in all the capabilities for the breadth of skills that you will need. Measure everything in your marketing and sales pipeline. Face to face business development used to work in the 1980’s. Now you need one of your faces in front of at least 100 customer faces as much as possible.
- Give every single staff member a performance plan to help pivot the business, which they self assess i.e. it’s not work for the founder but the KPI’s perfectly align to the founders personal and business needs.
- Pivot your monthly management review to include all the non-financial metrics you often think about but don’t act on. These non financial metrics should take up about half the time of the monthly review. It’s not about the financials, you’ve got those covered. You forgot about your people.
Planning to exit?
In summary, work out what type of exit you want and how much you want to be involved going forwards. Make a plan to get it done and set a 3-5-year deadline. Fix your reporting and internal feedback systems, your people will help you execute the exit plan, or they will hinder you. It’s 100% in your control. Pivot now to maximise your enterprise valuation, it can’t wait until tomorrow.
Copyright Aspero9 2020