Shadow small business minister Bruce Billson recently embarked upon a ‘listening tour’ to find out the problems faced by Australian enterprises.
So what are the main issues SMEs are grappling with? Accountancy and business advisor network DFK recently conducted a survey of its clients and staff to identify the top 10.
Yesterday, we kicked off with number 10 – cloud computing. Today, we turn our focus to exit strategies.
The majority of start-ups don’t have an exit strategy in mind when they start, which isn’t ideal since such a strategy cannot be produced and implemented overnight.
However, this state of affairs is understandable. It sounds almost insane to create an exit strategy at the time of writing the business plan.
You are full of ideas and inspiration for your new business and have no interest in leaving it before even starting, so why should you think about an exit strategy?
Many tech businesses have their exits planned – to sell the business for at least the same amount as Instagram, about $1 billion. To succeed, the exit strategy must be in place from the start.
Most have a long-term plan for their business, almost like a job and may not be looking to sell for decades. That is fine, as long as there is a plan.
“An exit strategy forces you to think in directions you might never do otherwise. And that can bring clarity around other issues,” says Cheree Woolcock, director and partner of DFK Australia New Zealand.
The sale process is, of course, different if it is through an owner’s choice, rather than out of necessity – such as a downturn in health, disability or death.
If selling to an outsider, start with the following questions:
- What are you selling? Shares? Assets?
- If selling assets, what assets are you selling/transferring and keeping? Are you selling intellectual property? Are they transferable? Are you selling know-how?
- Timeframe: when do you want to exit?
- Write a brief overview including history, milestones and strong points. It is important that you don’t give away any trade secrets. Organise a confidentiality agreement before revealing any secrets.
“Externally, there are issues to do with customers, suppliers, bankers, reputation in the market place and much more. Analyse each and every one of them,” recommends Woolcock.
The most important question: Who is the potential buyer?
In a small business, for example, 75-80% of businesses are sold to someone the owner already knows, such as a supplier or client. Rarely does someone walk in from the street to buy.
When you know where the buyer is coming from, it is time to think about price. There are several different principles regarding price.
One common principle is EBITDA: Earnings before interest, taxes, depreciation and amortisation.
The EBITDA of a company provides an indication of the profitability of the company based on its present assets and its operations.
Different industries have different EBITDA: a cleaning business has, for instance, a lower EBITDA than a high-tech business. Discuss this with your business advisor and accountant to determine the right level.
There are many things that can go wrong, such as the buyer not being able to obtain finance, so it’s important to be realistic about the timeframe and the price.
Here are 10 guidelines for your exit strategy:
1. Start early.
2. Be realistic about the timeframe and price.
3. Know what you are selling (and what are you not selling).
4. Be open to alternative sale processes (e.g. I want your assets and your staff; I want your clients but not your equipment; I can only pay two-thirds; vendor finance).
5. Know the income tax, GST, CGT, stamp duty and other tax issues surrounding the sale.
6. Analyse the cashflow and debt obligations around the sale.
7. Review your intellectual property asset and intangible liability.
8. Look at lease agreements.
9. What happens after the sale? Will there be a restrictive covenant for the next five years, for example, or do you need to work again within six months?
10. What are you going to do after the sale? You are used to a busy lifestyle.
What are your plans?
Another key factor is staff.
“Most people get very nervous in trying to understand how the change will impact on their position in the firm and their personal financial position,” says Woolcock.
“Also, how safe is their job for the future. Some senior members are key people in a business and their presence may be vital for a sale. Make sure you don’t lose a buyer because your senior staff member walks out the door to a competitor.”
Above all, get advice: talk to your accountant early and continuously, as well as your board members and/or partners.
A successful exit depends on a carefully and thoroughly executed exit plan which takes in all the above factors into consideration.