Business exit strategy: make sure you have a plan ‘B’

Mike Robson, director at business consultants Azure Partners, details why businesses up for sale need to have exit options.

exit strategyOn the horizon for the majority of businesses is the prospect of an exit strategy. And while almost all businesses are saleable, not all businesses can be sold for a price that is acceptable to the owners.

It is therefore essential to have a ‘Plan B’ exit strategy in place before even beginning to attempt the execution of a preferred ‘Plan A’ route.

We say this for four principal reasons. Firstly, despite what many businesses brokers will tell you, some business sectors are simply not attractive to acquirers.

Potential acquirers will naturally be interested in buying your business to increase their future profitability by combining your capabilities with theirs.

Strategically minded acquirers may be persuaded to pay a higher price in the belief that your sector will grow rapidly or that they can leverage your management, clients, processes and IP with their attributes to create a higher value in combination than the two businesses have separately.

So when starting a pre-exit planning project, the first thing you should do is to attempt to identify strategic value for potential acquirers. But in some sectors and for some businesses this is simply not going to be a realistic hope – so you need a ‘Plan B’.

Secondly, before making an acquisition, many acquirers are increasingly performing extensive non-financial due diligence on marketing propositions, sales processes, people and culture to determine whether they can integrate your business with theirs to create the desired additional value.

We find that many business owners have built their businesses around their own very individual skill sets and experiences, and that many aspects of the business’s culture can be a reflection of the owner’s individual personality which may, unbeknown to the business owner, cause serious issues for a potential acquirer.

Mindful that many mergers and acquisitions fail to create added value, they may turn down or reduce their offer price if they regard the acquisition and integration of your business as being too difficult or risky because of perceived cultural issues.

Thirdly, the negotiation phase tends to be easier and more effective if the acquirers know you have a ‘Plan B’ option, which does not involve a sale to them.

And fourthly, acquisition activity has reduced significantly last year and this year compared with previous years because of the general economic climate and potential acquirers’ willingness and ability to fund acquisitions. It looks like this situation will continue, so next year and perhaps 2012 will not be good years to be selling a business for high value.

So what does a ‘Plan B’ look like? With all but the smallest clients a ‘Plan B’ is one option that does not involve an outright sale.  A typical ‘Plan B’ involves the development of a professional board, second tier management and processes that enable the owners to hand-over the day to day running of the business with the confidence that it will develop effectively without them.

The business owners retire or move on to other careers or businesses whilst extracting value over a period of time through dividends. In the cases described above, the shareholders can often extract more value through this route than through an outright sale. And, of course, you still own the company and can sell it at a later date.

The work done to develop a professional board and the second tier management should also, over a period of time, increase the profitability of the company and therefore further enhance existing shareholder value and make the business a more attractive acquisition target when market conditions improve.


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