Exits boom but two-thirds of companies aren’t ready to realize value

Are we facing a succession crisis? Learn how to avoid the risks associated with poor exit planning.

By ansaradaThu Feb 27 2020Mergers and acquisitions, CEO-CFO

A massive 77% of baby boomer generation owners expect to exit their businesses in the next decade – 53% of them within the next five years, according to William Buck (Exit Smart Survey Report 2019).

The shift presents an opportunity for buyers and sellers alike, but brings with it the potential for serious risk if exit strategies aren’t prioritized and planned in advance. Despite the high numbers planning to exit, only 34% of those surveyed actually had an exit strategy in place.
Unfortunately, too few realize the importance of proper exit planning in ensuring that they maximize the price that they receive when they finally decide to sell.
Liz Smith, Director, William Buck

Without an exit strategy, you risk:

1) Loss of business value
There are a number of reasons why a poor business exit can lead to a loss of value both within the transaction and of the business itself.
 
  • Dependence on owner: According to William Buck, 21% of owners said their business is highly reliant on themselves. Unless they can demonstrate the business will be able to run smoothly without them, the value of the business stands to decrease with their departure. They need to be able to show that the future profitability of their company doesn’t depend on their being there – something they will struggle to do without proper succession planning.
 
  • Buyer has the upper hand: If the seller is disorganized with their business exit planning, they lose control over the sales process and the buyer gets to dictate the terms of the deal. If they don’t have the information structured and ready to show profitability, owners will find themselves at the mercy of the market and not able to proceed on their own terms.
 
  • Lack of confidence: Without visibility over current business health, owners lack the confidence to go for their optimum sale price. Just 42% stated they were confident they could achieve a reasonable price for their business.
 
2) Being blindsided by the due diligence process
Many business owners are surprised by how intensive due diligence can be, and find themselves underprepared for the scrutiny their business will face. With 61% of them working more than 40 hours a week already, the amount of additional time, cost and resources that are redirected to the due diligence process can take its toll.
 
3) Struggling to find a buyer
In the survey, 31% of business owners cited ‘being able to find a buyer’ as their top concern regarding their exit. And they are right to be uneasy; a US report by the Exit Planning Institute calculated that only 20-30% of businesses that plan to sell actually find a buyer.

How to avoid risk: Stay future-focused, act short term

To avoid these risks, business owners need a comprehensive exit plan that surfaces issues and addresses those within the business prior to going to market. The priority should be improving the business so that it is attractive to external buyers. In fact, Forbes says you should consider your exit strategy to be the same as your growth strategy.

‘Value-building activities that prepare you for an exit are synonymous with the activities that create healthy and profitable businesses, right now’, and an owner could increase the saleable value of their business by ‘up to 300-500% in two to three years’ quite reasonably.

William Buck suggests it takes 3-5 years to set up a business for a successful exit, which is why a long-term strategy should be in place well in advance.

Ultimately it comes down to being ready; by having critical business information visible, organized, managed and structured in the way that not only improves business health and value in the short term, but that – in the long term – will give buyers full confidence in their decision.
 

Prepare your exit strategy now

Starting preparation early in a company’s lifecycle leads to better outcomes every time – and that starts with knowing your business information inside and out.

A shockingly small amount of owners (2%) see value in having their financial statements audited, yet this is the exact same data that will be under scrutiny by potential buyers in the due diligence process. To avoid surprise issues that can surface at this stage, owners need to do their long-term transition planning in advance and ensure their business is in its best possible shape long before the time comes.

Ansarada’s M&A: Company Sale/Exit Pathway is a digitized checklist containing all the critical documentation that ensures a company is healthy and prepared for sale. This best practice template is built off the insights from more than 35,000 transactions completed in the last 12 years and enables you to upload all your documentation into a single, secure platform. When it’s finally time for an exit, this same information is structured and ready to transfer seamlessly into a data room for a swift execution.

The Pathway shows you exactly what you need to provide and why it’s important to potential buyers, and can automate the entire process for a faster, simpler way to reach your outcome. Watch your score progress towards 100% to signify both optimum business health and total readiness for an exit or sale, so you can maximize value and ensure both sides come out winning.

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