Typical Timeline of a Solid Exit Strategy
Selling a business takes more time than most business owners realize. There is a specific process that needs to be followed in order for a sale to be successful. Specifically, this blog focuses on a sale to a 3rd party. Other types of business transitions will have similar steps, but this week is focused on a sale as the exit strategy.
There are 10 steps to a successful exit strategy - in three major sections:
Transition Planning
Define the Exit Strategy/Date (Valuation)
Pre-Sale Preparation
Preparation & Exit Process
Broker/Banker Selection (Valuation)
Marketing Preparation
Marketing Process
Letter of Intent
Due Diligence
Re-trade & Final Negotiation
Closing and Beyond
Closing
Post Acquisition Integration
Let’s run through each of these steps and discuss the details and timeline.
Define the Exit Strategy(3 to 5 Years Before)
Whenever I meet with a business owner, one of the most common questions is how long in advance they should start planning their exit strategy? Of course, the simple answer is 3 to 5 years before the intended exit event. However, it's never too soon to really start thinking about your exit strategy.
Most owners don't take the time to do this until it's too late or becomes mandatory because of health or age. The simple fact is that 83% of attempted business transactions fail to reach the finish line. Business owners that take the time to really plan in advance have a much better chance of success when the time comes.
Unfortunately, most business owners also don't know what their business is really worth or how businesses in their industry are valued. So a great starting point would be to get a valuation on the business. I don't recommend getting a certified valuation which is something that can be used in a dispute or in a court of law, rather, I strongly urge all business owners to get a valuation that would tell them what the business would be worth if they transitioned it now. You can get one of these for free right on our website - or you can engage with us for the first step in our 4 Step Process - the Transition Readiness Assessment or TRA. In it, we complete a 360 degree assessment of the business, identify things to work on, and provide an opinion of enterprise value.
But I digress. A great exit strategy includes the ideal desired outcome, which should define the desired type of exit, target date, and exit value. Once you understand those three components, you're well on your way to defining a solid exit strategy.
Pre-Sale Preparation (1 to 3 to Years To Execute Strategy)
Once you understand the current value of the business and the ideal desired outcome, you'll have clues for what needs to be done in order to prepare the business for the ultimate transition. For our clients, in step 2 of our process - the Roadmap for Value Acceleration or RVA - we provide a step-by-step, customized plan to get the business ready for transition. The RVA typically runs for 12 to 36 months - which is step 3 in our process, Relentless Execution.
By first identifying the things that need to be done and then developing a strategy to complete those things you can prepare the business for the ultimate exit strategy. Now, most business owners don't take the time to step back and look at their business objectively, the way a buyer would. It is so vital in this step to get fresh eyes on the business in order to identify the things that will improve the value and improve the chances of arriving at the ideal desired outcome.
It just takes time to prepare a business for transition. Business owners should not short-change this step in the process because it is critical to building long-term value.
Broker/Investment Banker Selection (12 to 18 Months Before the Target Date)
Picking the right broker or investment banker is essential to achieving the desired outcome. Business brokers typically work with small businesses, and investment bankers work with middle-market businesses (usually over $20M in revenue). Collectively, they are also known as seller representatives.
There are many factors to consider - including industry experience, marketing strategy, success rate, and cost. And, it’s so important to select someone that the business owner likes and trusts because they are going to spend a great deal of time with their broker or banker. A great partner will have valuable knowledge about how the industry is trading and provide a fresh opinion regarding valuation. It’s not uncommon for seller representatives to have specific industry knowledge and relationships with prospective buyers.
Marketing Preparation (3 to 6 months)
Now that you have the right seller representation, it’s time to prepare for the marketing effort. The time it takes to prepare for the “marketing effort” is a function of how prepared the business is for transition! Frankly, most business owners skip the first two critical steps above and jump right to selecting a broker or banker. HUGE MISTAKE!
If the business owner takes the time to carefully plan the exit strategy and then relentlessly works to prepare the business - this step can be a breeze. Brokers and bankers who step into an opportunity with one of our clients are always pleasantly surprised that the data room has already been assembled, which makes it so much easier to prepare the marketing material - sometimes in as little as 30 days.
If, on the other hand, the business has done little or nothing to prepare in advance, the process can drag on for months.
Marketing Process (3 to 6 Months)
Now that the business is fully prepared and the marketing materials are ready, it's time to jump into marketing the business. The marketing process can take several forms, including a broad scope marketing effort all the way down to a targeted audience campaign. It's really up to the business owner and seller representative to decide which marketing process works best for their business. Confidentiality is the key because no business owner wants his employees, vendors or customers to know the business is for sale.
The best outcome of a well run marketing process is a "bidding war" where multiple buyers are trying to buy the business. The more attractive the opportunity, the more likely a bidding war.
Letter of Intent (3 to 6 Months Before)
Depending on the timeline of the process, and the type of sale desired, the first shot across the bow from a buyer may be in the form of an Indication of Interest (IOI) or a Letter of Intent (LOI). An IOI is simply a letter from an interested buyer offering a range of value who needs more information to get to the LOI. A skilled broker or investment banker will be careful to provide just enough information to get to an LOI.
It's really, really, really, really important to not hide anything before from the buyer before he submits a Letter of Intent. (Yes, that's for “really’s.”) If you disclose everything in advance, warts and all, you can reduce the likelihood of a re-trade at the end of the process after due diligence. More on that next.
Due Diligence (3 to 6 Months)
I'm really sorry to keep beating this drum, but a well-prepared business with clearly defined processes and clean, solid data will make the due-diligence process so much easier. The objective here is to complete the due diligence as quickly as possible. However, if you don't have the data required or the business is not prepared, due diligence can drag on for longer than 6 months. The longer due diligence drags on the more likely the deal will fall apart. It's just that plain and simple.
If the buyer is an individual, expect the due diligence to be relatively easy. If on the other hand the buyer is a sophisticated buyer like a strategic or financial buyer expect them to bring a microscope to the due diligence process. Again, the faster a business owner can provide the information requested the faster due diligence will be complete.
Final Negotiation (Re-trade) (30 Days Before)
After due diligence it is very common for buyers to come back and renegotiate the terms of the letter of intent - we call this the “re-trade.” In fact, for many buyers, due diligence is nothing more than an exercise to uncover things that had not been previously disclosed thus giving the opportunity to renegotiate the deal. Buyers that are not ready for this step in the process are typically very emotional and this is where deals explode.
However, if you understand that it's coming, although it will never be a pleasant experience, it will be over quickly and hopefully on the path toward a final close. We advise business owners to come up with a hard floor number. A hard floor is the absolute bottom price that they would accept in order to do a deal. I also advise them not to come up with this number on their own, rather, include their financial planning professional in that process.
So let's say for example a business is worth approximately $5 million. They've gone through all of the steps outlined above, and arrive at an LOI from a buyer in the 5 million-dollar range. If the seller has taken the time to establish the hard floor, in this example our hard floor is $4 million, when the retrade comes and the valuation goes down from $5 million to 4.3 million for reasons that certain things were not disclosed before the LOI, that number is still above the hard floor and therefore still a good opportunity to exit the business.
Business owners that don't do that typically get very emotional when the re-trade comes (and it's coming) and that's where they walk away from a deal - angry and hurt. We are all about educating buyers on the process so that they can try to take the emotion out of the deal and make the best possible decision for their future and their business.
The Closing (Hopefully on Target!)
Now that the final purchase agreement is in place it's time to close the deal. This day, in the life of many business owners, is the best day of their life as well as potentially the worst. Perhaps the best because they have now sold their business at a value acceptable to them. Perhaps the worst because they don't know what they're going to do next. It is so important to really define what comes next as a part of Step 1 of this process. A business owner that clearly understands what comes next is ready to move on and is excited about the opportunities that lie ahead. Business owners that aren't prepared find themselves waking up the next day wondering what to do. Don't let that happen to you. Make the closing the best day of your business life - and you can do that by really preparing in advance!
Post Acquisition Integration (12 to 24 Month Post Closing)
Don't forget this one - it's critical for the success of the transaction! And, many business owners remain with the business for some transition period, if not long-term. If the buyer is a financial or strategic buyer there is much to do in order to integrate this business with potentially a larger business or a financial buyer's models. If the buyer is an individual, the former owner should spend time to give them everything they need to know in order to operate this business.
So - there you have it - Ten Steps to a successful business transition! Were any of them surprising to you? Are you prepared to walk through ALL of the steps! If you do, you’ll be well on your way to a successful business transition! If not, you’re just rolling the dice with your most valuable asset!
Start Today! Call me for a FREE consultation, get started on our 4-step process, or join our MasterYclass today!
Prepare like your business value depends on it… because it does!
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ABOUT THE AUTHOR
Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at tom@masterypartners.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).
Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.