Why is exit readiness important? Part one

Exit readiness is a topic not widely considered in the SME market. Often an exit process is sparked from an unsolicited trade offer or an approach from an investor.  

Traditional sale processes are high intensity and they place a huge burden on the management team with no guarantee that a buyer will be found or will be prepared to pay the “right” value.  

With an increase in abort rates and the costs and negative trading impact associated with running a sale process, SMEs are increasingly seeing the benefits of taking a proactive approach to defining their exit plan and using that process to inform strategy.

As the founder of The Implicit, I’ve walked many clients through their exit processes and I’ve seen all sorts of triggers and time-scale drivers.

In this first blog (part one of two on this topic), I’ll share what I’ve learned about these factors, and cover the most common ‘prompts’ that justify investing in an exit readiness plan.

Triggers. What are the usual suspects?

Investor driven 

Investors need a return so it’s good practice to understand from the outset what their return aspirations are, their target hold period and work on gaining clarity about the potential routes available. 

De-risking

If you’ve been building the business for several years, continually re-invested and taken minimal salary you might find that realising some value from your efforts through de-risking allows you to reset your risk profile by allowing you to pay down mortgage, debts and put some money aside for school fees/ retirement.

Succession planning/retirement

If you’ve always had a clear plan to retire at a certain age, think about how this will be facilitated through investing in a strong senior leadership team. This can create more options from a buyer perspective. 

Family estate planning

Putting plans in place to account for sudden death or forced exit through illness helps to safeguard the value of a business asset and this also creates routes for exit. More business owners are prioritising building and preserving value with these sorts of backup plans. 

Time-scale drivers

Urgent

The driver for a quick sale is almost always the result of a negative event such as business distress, death of a key leader or shareholder dispute. Whilst there are ways to maximise value for distressed sales, that’s not an area of focus for me and leaving things until the last minute is not something I would advocate for unless you have no choice.

Defined

This could be retirement, exit parameters set by an investor based on their fund dynamic or a definitive goal set by a management team based on how they have built and delivered to a plan. 

Undefined

For some businesses where there isn’t a set time-scale, keeping an eye on exit planning to provide clarity of strategy, in place of exit planning to support the development of target is just best practice and ensures there are options if unforeseen events impact on management/shareholders ability to continue operating the business.  

The process of exploring readiness invariably leads to a deeper understanding of industry value drivers, active investors and strategic buyers helping to inform the strategy around how to build a valuable business whether you intend to sell or not.  

Now we’ve explored the triggers and time scales for exit readiness, join me next time for some practical tips to consider when forming your exit plan!

This blog was written by Charlotte Ashton, Founder Director of valued Vestd partner, The Implicit.