Posts Tagged ‘exit strategy’

The Exit Strategy That Keeps Your Bags Packed

One of the many challenges in creating a viable exit strategy for selling off your business interests is how to determine the timing.

Its one thing to say you want to work until your 55 and then sell the business, but it could be quite another to actually have a motivated buyer show up willing to pay your price.

So I propose the evergreen exit strategy whereby the business is always up for sale in a figurative sense i.e. there is no permanent for sale sign sticking out of the lawn or hanging from the side of the building.

With an evergreen exit plan, the business owner has developed the mind set that he or she cannot control when the best time is to sell, so they have to focus on what they can control, which is making sure everything in the business is up to date and supportive of a potential sale, and making sure that the day to day actions of the business are directed towards increasing the overall value of the business.

This mind set is not easy to develop as many business owners are more locked into the thinking that they will sell at retirement, period.

But an evergreen mind set always allows for the ability to consider and react to any opportunities that may arise at any time.

Think of it this way.  If you’re 10 years away from your expected time of exit and a highly motivated buyer comes along for some reason and wants to offer you considerably more for your business than even you think its worth, would you not want to seriously consider any potential offers that interested party is prepared to make?

Even if you develop the proper mindset, there’s still some work that needs to be done to allow you to even seriously consider opportunities that may arise.

First, the business must maintain what I call a “sell-able” state of being.  There has to be a continual effort to make sure that the financial statements are up to date, that all equipment and facilities are in a good state of repair, that regulatory issues or legal issues are dealt with quickly and not left to linger, that employee, customer, and supplier contracts are up to date, that the business has developed sufficient management depth to allow profitable operations to continue once the owner is gone, and so on.

If your business can’t stand up to the due diligence process of the prospective buyer and his or her advisers, then any opportunity that does materialize may just as quickly pass you buy.

Second, the business owner(s) has to be prepared to look at any opportunities quickly as motivated buyers don’t tend to stand still very long and could very well move on to the next best option.

Following this strategy also doesn’t require you to do anything if you don’t want to, or don’t feel the benefit is sufficient to sell.  What it does do is allow you to be as opportunistic as you want to be.

Over a period of 10 to 30 years, the future is going to be very hard to predict.  So when opportunity comes knocking, it may very well be worth opening the door and seeing what’s on the other side.

Technorati Tags: Business Exit Strategy, Business Finance, exit plan, exit strategy, selling a business

Business Finance Goal Review For 2009 and 2010

If you’ve spent any amount of time on this blog, you’ll here me talk repeatedly about what I call the 80/20 of Business Finance which comes down to three things”

• Securing the capital the business requires when it requires it.
• Managing the cash flow of the business to meet operational needs and minimize costs.
• Continually working towards the exit strategy of the business and in the process making sure everything the business undertakes supports and enhances the long term value of the enterprise.

So in 2009, how did you do?

As a business manager and owner, did you stay at a strategic level and manage the finance elements of the business through these three focus areas.

Has the business improved in each of these areas over the course of the last 12 months?  What about what lies ahead in 2010?

The December year end is a time for celebration in many parts of the world and for many businesses, its also a time of year end planning, next year planning, and overall performance measurement.

Just remember that to have the financial success your seeking, the business finance side of the business needs to be managed and kept in balance with the marketing side.

And to me, there is no better place to start increasing your returns and future probability of success than through getting more focused on the three things mentioned above.

Finance doesn’t have to be hard, but it does have to be directed. Leaving all the Business Financing decisions up to the bean counters is just asking for trouble.

The key is to identify the metrics of the business that everything summarizes into so that you can quickly understand the overall health of the patient without knowing the inner workings of each moving part.

I had a Brazilian boss for a year and a half during my time working for a large multinational company.  Whether it was because he was Brazilian or a type triple AAA personality, I’m not sure, but he thought he knew everything about everything.   As a marketing person by nature, finance was something he needed to learn to do his job.

So every month, we would sit down and I would produce one piece of paper with all the key metrics of the business, all the things we needed to measure to make sure that the three core elements of finance I have mentioned were intact and functioning properly.

We would sit there and debate each item… why this was up and why this was down.  His goal was to show me in less than an hour each month that he knew more about our financial position than I did, and my goal was to survive the interogation.

But the process did serve a purpose.  At least once a month, even at a high level, he took the time to zero in on business finance and see if everything was in balance and if it wasn’t, to identify the actions required to get things to where they needed to be.

My boss wasn’t the finance expert, I was (of course I never told him that).  And he didn’t have to be.  He needed to manage the overall business and stay at a strategic level.  And that’s exactly what he did.

Technorati Tags: Business Finance, Business Financing, exit strategy, managing cashflow, securing capital

How To Know When To Cash Out

Every business will change ownership someday.  Some will have internal family succession plans while others will just decide one day to place the business up for sale.

But when is the best time to sell a business?

If you follow some of the investment bankers and business brokerage firms, they will speak to the M&A cycle, and where its at, at any point in time.

The basis of the M&A cycle is that over a period of time, buyers are more actively interested in acquiring businesses and business assets than at other times.  Factors that feed into the formation of an actual cycle are available capital, the economic landscape, market potential in different industries and so on.

While there is definitely a pattern to overall M&A activity, it also becomes a selling tool for M&A firms, brokers, and consultants, all  in the business of making money from buy/sell transactions.

The is also the more traditional approach to simply building your business year over year until you reach retirement age and then, at that point, if there is no internal or family succession, then sell your business interest in the open market.

Personally, I subscribe to a third approach…

Sell your business when someone wants to buy it for a fair or inflated price.

Under this approach, your business is always for sale whether you’ve been operating for 20 months or 20 years. By being open to this possibility, there may be more opportunities to consider over time than you may have thought possible.

The rationale for always being ready to sell is quite simple.  It takes a buyer with access to capital to complete a sale and without buyers that have the desire and means to take action, there is no market.

And you never know when you have created something of value for someone else.  Take a look at websites like YouTube.com and more recently Mint.com where young entrepreneurs were offered small fortunes to acquire their business models, only a few years after start up.  Perhaps you would view these as extreme cases, but the point here is when opportunity comes knocking, what will you do?

When a motivated buyer is interested in what you have it typically doesn’t hurt to at least listen.  And the motivation for buying could be all over the map… You own a property with a location of interest, you’ve developed a new technology or have a strong product brand, and so on.

The other side to this coin is what happens if you don’t take advantage of a great offer from an impatient buyer?  You could end up better off over time, but that most certainly is not guaranteed … a bird in the hand …

If the buyer is a competitor with money, then the competitor will likely take another approach to gain market share and end up becoming a stronger competitor in the future.

Another scenario to consider is when a small company hits the market right and starts growing like crazy, attracting buyer interest in the process.  If a larger company steps forward to buy you out because they have the infrastructure and resources to take advantage of your business offering, will you be able to scale the business yourself if you turn them down?

People can look back in the rear view mirror and say so and so business was foolish to sell out to XYZ company because of the profits generated from XYZ over time.  But there is absolutely no guarantee that the buyer would have been able to achieve the same level of success and in fact could have ended up failing badly and cashed out for nothing.

Too often, sellers establish their own time line for exit with the hope that there will be a fair market when the time comes to put the business up for sale.  And when you view your exit strategy decades into the future, this becomes a form of long term horizon gambling.

I’m not saying you should sell anytime someone shows an interest in a business you own, I’m merely saying you should consider it.

The best time to sell may be sooner than you think.

Technorati Tags: buyer, exit, exit strategy, Sell A Business, seller

Creating Optimal Cash Flow Trends Can Significantly Increase The Value Of Your Business Sale

When you list your business for sale, the bids and eventual proceeds you can expect to receive will be largely influenced by historical cash flow results. Your focus cash flow in the period prior to sale, can significantly increase the profit you realize.

Buyers will tend to look at a business sale price as a multiple of the expected future net cash flow. The multiple will vary based on industry and also future expected growth. The best way to increase the multiple in your favor is to focus on optimizing the cash flow base that will be multiplied.

The ideal financial picture would show 3 to 5 years of past financial statements that show steady and even exponential growth in both earnings and cash flow. Alternatively, there are three other historical cash flow and earnings trends: 1) declining cash flow, 2) cash flow that trends up and down, 3) steady or near flat cash flow results.

If your business is experiencing declining cash flow or eradicate cashflow, the cash flow base and the multiplier will likely be reduced due to future uncertainty. Steady cash flow results will not likely impact the base, but the multiplier will not be high due to absence of growth potential.

Lets look at a few different scenarios to give you a better idea of how these different cash flow trends impact a business sale.

Scenario #1. Mature business sale where the business has been in flat to slight decline. This is a very typical situation where the business owner(s) have held the business for a long period of time, are no longer investing in growth, and are at or near retirement age. To prepare for sale, there may be a final push to show better results from selling off assets and optimizing accounting statements. But the long term historical trend will show that the cash flow improvement occurred immediately prior to sale and will not likely stop the base and multiplier from being discounted.

Scenario #2. Business showing steady cash flow results where growth has been siphoned off to the owners. Because the actual financial results do not show growth, there will likely be no increase to the multiplier. If a typical multiplier was 3 to 4, a growth based multiplier could be 5 to 10, potentially making a significant difference to the proceeds the business owner can expect to receive. Yes, the financial statements can be recast to build back in the funds taken out by the owners. But recasting can be imperfect based on the convoluted ways owners extract funds from their businesses. Plus, unless the recast is done by a third party with significant review, its not likely to be assigned much value by potential buyers.

The key takeaway here is to start planning your exit strategy and future business sale well in advance. By investing in growth 3 to 5 years prior to listing the business for sale and generating financial statements that drive results to the bottom line, business owners are more likely to garner premium returns in the market. The extra work and effort could generate a huge payday by potentially increasing both the base and the multiplier.

Technorati Tags: business sale, exit strategy, sell your business

Why Is The Business Exit Strategy So Often Overlooked?

If you’re like most business owners, you or may not have thought about  your eventual Business Exit Strategy.  Lets look at why this is a very common issue with business owners and why it should be given more time and attention. The underlying goals of any for profit business is to generate cash flow, build assets, and create a profitable exit plan from the business some time into the future. While the these goals are clear, the exit related goals do not get a great of attention until the owner is getting near retirement age or after some event causes the owner to need to exit. The result tends to be a suboptimal ending in terms of money actually realized from selling their business interests. Here are the main reasons (from my observations and discussions with business owners) for a lack of business exit planning and the resulting disappointing financial returns. 1.  Business owners do not see a connection between what they’re concentrating on in the business today and their eventual exit.  This is a highly flawed way of thinking as the present and future are closely linked in a number of ways. The actions of today, will impact the potential of any future exit.  If the goal is to build optimal wealth, then all activities need to be ultimately geared towards increasing the value of the business enterprise, which effectively is to increase the value of the business exit.  If the present actions are eroding the potential future exit value, then they should be corrected in order to maximize overall wealth of the owners. 2.  Business owners assume that the process of exiting from their business will be quite straight forward and easy to navigate when the time comes.  Again, in most cases this can be a radically incorrect assumption that can have a disastrous impact on the business owner’s retirement fund.  The reality is that business exits can be hard to manage and in many cased they take way longer than expected to complete and the profit realized is far less than expected. 3. Business owners don’t want to deal with the end of their business ownership, so its easier to just ignore the whole ‘process and wait until they’re forced to deal with it.  This holds true for many individuals that started a business from scratch and operated it for a considerable length of time. 4.  Another misguided point of view many owners have regarding their eventual business exit is that there will actually be a buyer ready to buy at the exact time the owner wants to sell for the price the owner wants to sell for.  This type of thinking can lead to very disappointing results. In reality, a business owner should always be ready to exit and always be directing their business to achieve an optimal future exit, regardless of when it actually takes place. If a buyer is looking for your type of business right now and is prepared to pay a premium for a business in an optimized and sale-able position, then a business that is always ready to exit stands to profit handsomely.  While this particular circumstance may never occur, it also prepares the business for immediate exit if other circumstances present themselves, either personally or professionally. The most common unplanned circumstance I can think of here is the sudden passing of the owner or a death in the owner’s family where the owner does not want to continue with his or her business commitments on a day to day basis.  If the owner is always ready to exit, then this or any other unforeseen circumstance will reduce the potential of a massive discount in sales proceeds caused by a sudden unplanned business exit. If you want to get the most cash out of your business exit, then start building one into your planning, because you never know what the future holds.

Technorati Tags: business exit, Business Exit Strategy, Business Finance, exit strategy