Exit planning doesn't mean preparing to leave - start by understanding the value of your business and yourself, explains business expert Stephen Kazakis
Most business owners at some point will consider the option of selling a business. Some business owners buy an entity with only this thought in mind.
So, what factors do you need to consider before embarking on this journey? Proof of concept, establishing a business and preparing it for market can take as a long as seven years from the point when you really get serious. Yes, you need to be prepared to sharpen your pencils, roll up your sleeves and work hard to make this happen. Most importantly, the business needs to be making a healthy predictable profit – this is non-negotiable. And it must be easy for a potential buyer to step into your role. If your business operates around you as the one with all the knowledge and skills to run the business, a potential buyer’s fear is that the business will fail without you.
Every business owner needs to be considering their exit strategy right from the outset. It is more crucial than ever for owners to plan ahead to ensure maximum results for the business they are building and selling. Exit planning is about building your business so that it lasts for the long term. And how do you achieve this? By building a business that will stand the test of time.
It’s the six pillars of exceptional growth that are the foundations for the success of any business. These are the nuts-and-bolts basics without which no business can succeed over the long term. If your business cannot succeed over the long term it will never become a saleable asset.
Your business has a predictable operations procedure with good systems and ‘How to’ manuals for all tasks including the testing and measuring for all activities. Exactly what do you do and how have you set it up so it becomes sustainable and systematised? How do you serve your clients? How do they buy from you and how do you deliver? Think about your marketing and your finance, terms of trade, administration and your customer service in general. What about your team development and recruiting? This is where all elements of your business must be predictable and easy to follow. Even businesses that have been operating for many years don’t necessarily have the best operations in place. Every time you grow so do your operations. You must be preparing for future growth and ultimately sale. Operations are ongoing. What are the key things you do in this area?
Like sport, business has a scoreboard and you must understand it if you are going to win and know when the time is right to sell the business. That scoreboard is finance. You will have taken legal and financial advice. Are your financials up to date and in order? A potential purchaser will be looking for at least three years of financial accounts as part of their purchasing process. Informing your accountant early on that you have an exit strategy will ensure that as you grow your business the structures are put in place to ensure that your accounts are presented in a consistent format.
You want brutal honesty about how your business is going? Look at your figures. You can talk big to your friends and you can tell your clients you’ve made $7m so far this year, but if it cost you $7m and one dollar to get there then your business will never be a viable sales option.
Your figures don’t lie. They are the final scoreboard on all the decisions you’ve made in your business. If your figures are strong you’ve made good decisions, if not you haven’t. It’s that simple. Is it making a positive cash flow without the key/critical staff being present. Having the right management structure is also non-negotiable.
The three key scoreboards you need to thoroughly understand – in no particular order – are profit and loss, the balance sheet and the cash flow forecast. If you don’t continuously look at these and understand finance – which is the language of business – you will be in trouble. You need to be able to showcase your break even, gross profit, cost centres as a percentage, and the balance sheet – this is the most important scoreboard of all. It tells potential buyers (and you) the truth – the cold hard truth – about every decision you have made in your business to date. From day 1.
Not many people understand that. It’s a mirror. Look into it. Because a potential buyer will!
You have a defined and proven lead generation system delivering leads within a cost per lead budget. Your marketing will be getting results and you will intimately understand three specific areas: your unique selling proposition (USP), your emotional selling proposition (ESP) (connecting with your current and future clients) and your community selling proposition (CSP), for which you have built a reputation from many of your customers and advocates who are confirming and saying, ‘Yes, you supply the product and service they need.
A saleable business has a progressed and defined sales system to ensure a 60% conversion on all leads regardless of the sales skills of the person selling. You will have a test and measured sales process which includes a call to action. You will have processes in place to make it easy for people to buy from you with a process of multiple steps. Any potential buyer will know that your competitors are lurking just around the corner waiting to snap up customers if you make things difficult. In fact a potential buyer may well indeed be your biggest competitor! Sales is the only activity that actually puts money into your business. Everything else takes it out. It is fundamentally important to grow this, system this and completely understand this part of the business. You have a well-defined target market with services and products for each and a variety of key customers – building a business based on just one or two clients increases the risk of those clients being lost with the departure of the owner, ensuring that the key customers do not make up the significant portion of the revenue.
5. Customer loyalty
Having a track record of keeping customers for life, in other words a ‘healthy book’, will boost your business value. Put systems in place to make your customers advocates and raving fans. Creating a customer loyalty program that ensures that people will not leave you just because something is cheaper or fancier or newer elsewhere – they truly belong to you – is invaluable. You need to keep being relevant and valuable. But remember, the loyalty has to be with the brand, the company and your team. No buyer will invest in a business that once the owner has gone, so do all of the customers. Embracing a philosophy of customer loyalty is of paramount importance – building this because it’s cheaper to keep a customer than it is to find a new one ensures a profitable business but it also ensures that the loyalty is scalable and stays long after you have left the business.
Are you building a strategic team who have buy-in to the business and what it stands for? You will be okay to not personally have all the greatest ideas in your business, and more importantly you are okay to encourage this to ensure the growth of a senior management team. Can your business operate without you? It needs to. Every employee should have a documented clearly defined role and a set of tasks and procedures which leads to measureable and desired outcomes.
So in conclusion, once you have agreed the timeframe for an exit strategy you will continue to work harder with even greater laser focus. You need to find a mentor or coach who will keep you accountable to the exit plan.
If you do not have a plan to exit at some stage, when the opportunity does arise the plan to exit will end in failure. However, ensuring you have the right foundations in place, selling a well-run business with systems and processes, procedures and rules, will provide benefits and satisfaction for both parties.
Ultimately think like a buyer right from day one.
Stefan Kazakis is a renowned business strategist, sought-after presenter and founder of Business Benchmark Group, which helps clients from a variety of crossroads and industries seize opportunities to achieve ongoing business success and substantial profit growth. For more information please visit www.busienssbenchmarkgroup.com.au or email [email protected]
Industry view: Tim Brown, CEO, Vow Financial
Every broker should have an exit strategy for their business, it does not matter whether it's a 5,10,15 or a 20 year strategy, but you need to start with the end in mind.
When planning your exit you need to have a vision of what the business will look like when you are ready to sell and what are the metrics that will tell you when you get there.For example, do you want the business to have 300 clients paying you $10k per annum in income, or do you want to be writing $100m per month and twenty staff, selling General Insurance, Wealth and Property.
Other things you need to think about will you sell outright, bring in a partner or dilute over time. Bring a manager into the business and you move into a Chairman's role. If these are your objectives you need need document them and put time frames around them so you start working towards achieving your goals.
Last but not least you need to think about the most cost effective tax structure for your exit. How long do you have to be in business to get small business roll over relief, will your SMSF
own the shares, will you set up a discretionary trust so your children can inherit the asset.
At Vow we are getting more involved in helping our brokers facilitate the sale of their business. Simply selling the book does not make sense. This gives no recognition to the good will you have built in your business over time. Vow wants to ensure we help our brokers achieve the maximum sale for their business when they choose to exit.
As well as heading Vow, Tim Brown is also President of the MFAA, where he encourages brokers to think ahead with exit planning.