Selling Your Business: Developing An Exit Strategy For Your SME
Business owners should conduct regular reviews to determine if their business' objectives are best met through continued ownership, new equity, or a divestment (either partial or full).
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The decision to sell one's business typically requires a fair amount of deliberation and does not materialize overnight. Having built a business over time, most owners are understandably reluctant to part with their prized asset, particularly on terms they deem unfavorable. However, it is possible for a vendor to maximize the likelihood of achieving their price expectations, provided meticulous planning is undertaken well in advance.
Business owners should conduct regular reviews to determine if their business' objectives are best met through continued ownership, new equity, or a divestment (either partial or full). These reviews may reveal critical issues that could impact value, such as an impending economic downturn, changes in technology, changes in legislation or consolidation trends that are prevailing in the industry. Once the difficult decision to pursue a divestment has been taken, it is of paramount importance to commence an exit readiness exercise up to 18 months in advance.
The cornerstone of this exercise is the preparation of an exit strategy, which incorporates various financial and strategic elements. This would include the type of buyer, existing shortcomings in the business, capabilities that are most likely to resonate with the buyer and the potential impact on other stakeholders. A seller should identify the ideal buyer group for their asset (i.e. trade vs. financial), and determine which group is more likely to be aligned with their ambitions regarding price, transaction structure and vision for the business. For example, the financial buyer of an owner-managed business may require the current owner's involvement for the medium term, post transaction. This may not be acceptable to a seller looking to retire. Another example of misaligned interests would be that of a trade buyer seeking a controlling stake in an asset for which the owner only requires growth capital. The process of exit readiness also presents an opportunity for the seller to thoroughly examine the business and determine if there are certain areas (e.g. financial reporting and corporate governance standards) that need upgrading. In a similar vein, the business may have certain value enhancing competitive advantages that would need highlighting to an incoming buyer. Finally, the seller should consider the implications of a potential change in ownership on the business' various stakeholders. For example, a change in control may require consent from lenders and key suppliers.
The guidance of a professional financial advisor, who can help the seller crystallize these concepts, can be invaluable, particularly since it allows the seller time to focus on running their business. The advisor will also help determine the ideal time to approach the market depending on the prevailing market conditions. A seller's price expectations are less likely to be met during a period of economic uncertainty, when a gap in valuation can be challenging to bridge.
Once the exit strategy has been determined, the seller and their advisors should work on designing a transaction process that will culminate in a liquidity event for the current owners. Every process is unique and as such should be tailored to suit the requirements of the vendor. However, all processes should demonstrate the ability to generate market appetite for the asset, create competitive tension and maintain confidentiality. Potential buyers should be ranked according to their strategic fit with the business and likelihood of completing a transaction.
Approaching a group of the most relevant investors helps maintain confidentiality and determine the quality of any subsequent discussions and negotiations. It is not in the interest of the vendor to have their asset widely showcased since this only increases the potential for breached confidentiality and reputational damage. Packaging the business so as to emphasize its key selling points will be crucial in order to generate investor appetite and justify value expectations.
Advisors should subsequently work alongside the seller to manage and drive the negotiation, due diligence and documentation work streams in order to bring the transaction to a successful close. In the Middle East region, it is not uncommon for a sales process to last between six and twelve months from the point of preparation of the sales documents. Inadequate planning or a lack of sound professional advice would only prove detrimental to the overall transaction and the seller's objectives, therefore the exit readiness strategy is critical.
This article is based off a talk Ashish Joseph gave about exit strategies for SMEs at a recent Dubai event conducted by the British Business Group (BBG). The BBG is the region's foremost business to business networking group; enabling British businesses in the UAE to meet with like-minded professionals and further their business interests.