Having started and grown three of her own technology business, Judith Bitterli, chief marketing officer at AVG Technologies, explains how to develop an effective exit strategy.
AVG was the lead supporter of our small business competition The Pitch 2014. Find out who won and register your interest for 2015 here.
When I began my first start-up as a young entrepreneur in the 1980s, I was so excited and focused on getting my software business off the ground that it never occurred to me to think about a long-term exit strategy, let alone capture any exit thoughts in my business plan. But over the years I learned from experience that it’s vital to plan for the future right from the start. It’s the same whether you think you will stay in the same business until you retire or if you intend to build up the business and make your fortune by selling up; you need to decide really early on what your exit strategy will be.
Here’s my personal advice:
- Look ahead.
First, if you have a business partner make sure you have a buy-sell agreement in place from the start. This should stipulate the terms under which one can buy the other out and the formula for the price. Second, understand how a business is valued in your field. Is it based on revenue, EBITDA, earnings or net income? Then do the maths. If, for example, you need a £1m to retire on and the business valuation is to be based on four times earnings then that tells you that you will need to target £250,000 in earnings per year to get your selling price. Lastly, knowing what you want in the long term can actually help shape your business plan. For example, a family business you plan to pass on to the next generation has different exit requirements from a business that you one day plan to sell.
- What type of buyer do you want?
If your end goal is to sell the business and make a lot of money then you need to think about who might potentially want to buy the value you are creating. It could be a competitor or a larger company in a complementary market or even your employees. Whoever it is, have a clear idea of what will interest them because knowing this will determine every business decision you make. For the last business I sold, my business partner and I took not the biggest offer but the one that was strategic to our business, provided well for our employees and required a very small earn out.
- Know your true value.
It sounds obvious but you would be surprised how many people underestimate the real value of their business. A lot of entrepreneurs sell their business and later realise they could have sold it for a lot more. Your hard work has made the company what it is so make sure the sale value fully compensates you for this. Conversely, overvaluation is just as common. If you pitch the business too high investors will just walk away. So familiarise yourself with how the business is to be valued and the multiple assigned to revenue or earnings. For a preliminary estimate of what your business might be worth why not take a look at the valuations of companies similar to your own that have sold in the past 12 months.
- You don’t have to sell it all.
If you want to step back but are not yet ready to give up everything you don’t have to. Consider splitting your business into component parts and only sell those parts you can live without. This is ok if you own 100% of the business. More often small businesses are owned by a small group of shareholders with the share capital divided among them. Selling your shares so you can retire can be difficult. The other directors won’t want any outsiders coming in and taking over but cannot afford to buy the shares themselves. In this situation you need a shareholders’ agreement. This is a legal document that specifies how shares are valued and what rights exist to control ownership when they need to be sold.
- Step away gradually.
If circumstances allow, the best way to ensure a smooth transition for the business is to manage the handover process so that it is very gradual. Appoint your successor to the top decision-making position but stay involved in some of the day-to-day operations. This gives your successor time to grow into the role. If they are a family member it can be helpful for them if they know they can consult your experience from time to time. A further benefit of gradually stepping back is that it helps everyone adjust to change. Last but by no means least the process of letting go gradually is also beneficial to you. Owners are often so wrapped up in their business that relinquishing control can be tough. Learning to wind down, find new interests and take more time away can take time.
Without an exit strategy, you will have effectively painted yourself into a corner. You will have created a job for yourself that you are unable to leave. Remember to start on your exit early and turn to qualified professionals for help. Most people only sell their business once, so you need to get it right first time.
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