The 3-Year Exit Runway: how to prepare yourself and your business
Assuming that the business you are now running will not be passed on to your family when the time is right (this will be the subject of a future paper), preparing the enterprise for a future sale is probably the most important Work Activity in front of you as a business owner / entrepreneur. We suggest a sense of ‘evergreen urgency’ on a 3 year cycle such that when the moment arrives (you are ready or the market is pricing your business exceptionally well or a buyer is at the door or whatever the situation may be) you can maximize the opportunity as opposed to just reacting to it. There is no other business situation that fits the ‘haste makes waste’ mantra more than this one!
There are really two big aspects to this preparation: it is not just about preparing the business but also about preparing yourself. This latter one is often overlooked but just as critical. That said, let’s tackle the business preparation first.
Sale minus 3 years (ie, now!):
- Clean-up your Financial Statements by removing personal expenses and producing a defensible adjusted EBITDA running record with clarity on the addbacks. This consistency will pay off when the time comes.
- Address Business Concentration Your business will be more valuable if you have no customer representing more than 5 or 10% of your margins. Note that we are saying ‘margins’, not ‘sales’. As not all customers generate the same margins, this metric of where your dollar margins (not percentages) comes from is much more important than the topline share. Also, if your largest (by dollar margins) customer(s) cannot be easily offset, a reasonable ‘plan b’ could be to make this customer relationship more contractual with an eye towards giving the acquirer the maximum possible amount of comfort about the continuity of this customer relationship.
- Review the Legal and Tax Structure of your company by talking to your advisors. It is very likely that your acquirer will propose an asset sale (for liability issues) and that you would prefer to minimize the taxes paid on the transaction. This is the time to get ready for that.
Sale minus 2 years:
- Besides addressing your 1 or 2 largest customers by margin (as pointed out above), this is the time to attempt converting as many customers as possible to a recurring revenue mode. Often times you can ‘play’ with a combination of pricing and a ‘customer bonus’ (half in the middle of a 3 year contract, say, and then again at it’s renewal) that customers really like as they can sometimes budget that to pay one-time hits or as a cushion against unforeseen circumstances.
- Develop a plan to document your systems and procedures. A good and organized collection of this information will give your acquirer confidence of continuity which will reflect in the value you realize from the transaction.
- Take a sharp look at your organization and its dependency on key players that may not be transferable to the next owner, including yourself! This is a time to plug those holes and for you, whether you retain the CEO title or not, to start acting more like an Executive Chairman and have a COO or President in place that will have at least 18 to 24 months in the saddle (and will stay with the business) prior to the transaction.
Sale minus 1 year:
- Start working on ‘the story’. How you or your family started the business, its major milestones, your reasons for the sale, etc. This will be an important part of the ‘book’ and also your initial conversations with qualified buyers.
- Develop a credible and supported 5 year plan with not only P&L figures but key strategic moves to consider. Keep this plan quarterly fresh.
- Identify the right types of buyers. A competitor? An executive that got downsized but wants to keep going? A family looking for a business to pass on to their next generation? A thoughtful list here will be of great value to your main advisor on the sale.
- And lastly, identify an investment banker and/or advisor that can help you navigate and negotiate this big moment.
And now let’s talk about your self preparation. As we said earlier, this is often overlooked. Our suggestion is that you start this process on ‘sale minus 3 years’ but certainly no later than ‘sale minus 2 years’. The main aspects of this preparation include:
- Family conversations: are your spouse and children on the same page? If not, how can you help bridge their hesitancy?
- Do you have enough hobbies (sports and/or philanthropy and/or continuing education and/or ?) that will occupy some of your newfound free time? Should you add another interest to the list?
- Do you have a disproportionate number of ‘business friends’ versus ‘life friends’? Some of your ‘business friends’ may transfer to your new life and status but certainly not many. How is your ‘village’ going to look like after the sale?
- And, finally, how will you feel about the person in the mirror? Even with a very successful transaction, how you see yourself might change if a lot of your persona has always been invested in the ‘business executive’ life you have held to this point. How are you going to describe yourself to the inevitable question from a stranger: “what do you do for a living?”. Is ‘happily retired’ the right answer for you? ‘Investor’? ‘Dedicated to philanthropy at this point of my life’? ‘Business Consultant’? How comfortable you feel about those answers (or any other that might fit you better) will be a big determinant of your peace and happiness after the sale. Consider it carefully and prepare yourself to enjoy!
At Lift Insight & Capital Partners we have seen many aspects of this transition, from the importance of ‘business transferable value’ to the ‘feeling of the day after’ and would be honored to help your journey from day one. Check our website at www.lift.partners and get in touch!