Exiting a Business
DECIDING TO EXIT
It’s the most emotive topic you’ll face while building your business, and probably the hardest to make.
How you plan to exit your business is potentially the most emotive topic you’ll address while building it. It’s a very personal decision that should generally be addressed when your business is still young, as it will influence many of the decisions you make along the way.
There are four general motivations for exiting a business:
• It’s time for you to personally get out.
• You want to cash out of the equity you’ve built in the business.
• You want to raise capital for the company.
• You want to pass the company along to family/partners.
Many business owners fail to plan for their business succession or exit. Exit strategies focus on how a business owner can successfully extract themselves from their business on their terms. Some forward planning will maximise the return you can achieve on your business.
Once an exit strategy has been put in place many business owners have been surprised to notice immediate benefits such as:
• Increased profits
• Higher efficiency
• Greater peace of mind
• Clearer focus
Exit planning will increase the value of your business and give you more freedom – more choice over how much time you want to spend in the business. By following a sound strategy, you can begin to work right away on achieving your business goals that will be aligned to any exit strategies.
When you ‘exit’ your business, you are potentially ceding control of one or both of two distinct aspects of the business:
• Operation of the business, and
• Ownership of the business.
What aspects of your business you choose to cede and your motivations for doing so will impact the type of exit option you seek. Let’s look at exit options and their operational or ownership implications to you.
There are generally three options for owners that would like to exit their businesses:
• Sell your company to another company or personal buyer.
• Conduct an Initial Public Offering (IPO), which means selling shares of your company on the public exchanges.
• Pass the company along to family or partners. Succession planned.
Each of these options has different implications on your future operation or ownership role in the company. The following table summarises how the three exit methods impact the transfer of ownership and control in addition to how positively they align with the various potential motives an owner may have for exiting their business.
(See PDF for table).
Aside from a planned exit, such as a trade sale or float of a business, sometimes events transpire that result in the owners of a business not being able to continue to run it. We are referring to unexpected and unplanned events. These could be financial, personal or environmental factors. It is important that business owners put systems in place that not only protect themselves but their business from any unexpected events. A recent example was the tragic death of John Ilhan, the owner of Crazy Johns. When he unexpectedly passed away, his business did not miss a beat and all Crazy Johns, customers and staff were well managed and assured of the same excellent support they had always received.
WHEN SHOULD YOU SELL?
The best time to sell your franchise is when it is in a stage of growth or when it is at the pinnacle of its growth cycle. Some considerations when selling your business include:
• Turnover – You will need to ensure you have maximum sales levels for the last two years or at least that the sales are increasing and be able to explain why
• Profit – You need to demonstrate the business profit is high for the previous two years as it is likely that a purchaser will take your profit amount and multiply this by 2,3 or 4 (depending on their accountant’s advice) to work out the value of your business. So for example, if your business was returning a $100,000 profit each year, then a 3 times “multiplier” of that profit figure would value your business at $300,000.
You should also discuss the sale of your business with your accountant, lawyer or a business broker. There are many aspects to the sale and there are taxation liabilities and advantages to be gained by seeking expert advice.
Business purchasers today are discerning and well advised. They will demand an extensive amount of information from you. The professional presentation of your business is of great importance and must be factual supported with historical data.
Compile a Sale Proposal to give to potential purchasers. The primary purpose of the sale proposal is to provide information about the business, its historical performance, the reason that it is being sold and the costs of acquiring the business. It is incumbent on you to provide all relevant information. Do not keep things from the purchaser that may be relevant. Silence is an act of misrepresentation just the same as being consciously deceptive.
SUGGESTED CONTENTS OF SALE
The Sale Proposal should, at a minimum, contain the following:
• Cover Page – with a title and a good photograph of your franchise at work – being a franchise or franchisor – give a great visual here.
• Introductory Page – an introductory page giving a detailed history of the franchise (any awards you may have won, community involvement), the number of years that it has been established, the date you opened for business and details of whom you are, your background and experience.
• Your Business – general information on the system, the number of franchisees in the system, and some information about the group – when it began, founders’ history, what the company offers its franchisees, company culture and a brief overview of planned growth for the business.
• Franchise Sales Information – all the information you can provide on your sales (including charts or graphs) showing the history of your sales and profits and explanations of any increases or decreases in the franchise’s sales and or profitability.
• Competitor Analysis – You should provide a detailed analysis of any competitors we may have. You can include direct and indirect competitors.
• Operations – a description of how your business operates, the number of team members and the working hours. It is recommended that a few photographs of your ‘franchise at work’ are included here, particularly happy team members busy serving lots of customers!
• Assets – a description of any assets you wish to sell. You should disclose whether any asset is encumbered or subject to a Chattel Lease, and whether you intend to pass any encumbrance on to the purchaser. You should also include a list of assets that the potential buyer will need to purchase if they go through with the sale.
• Franchise Agreement – General details of the Franchise Agreement, such as the Franchise Service Fees, Group Marketing Fund, Franchisees obligations, reporting requirements, franchise terms, Franchisors obligations, etc. All incoming Franchisees will be required to sign their own franchise agreement but this will be arranged through the franchisor (or assignment if franchisor entity is being sold) through the sales process.
• Financial Statements – include profit and loss accounts for the previous three financial years (if possible), including budgets and graphs if possible. You should also include a copy of the notes to the financial account and a full explanation of any assumptions used in preparing the accounts. You should highlight any debts, depreciation, and amortisation, one off costs, and personal costs which may be extraordinary or not applicable to the purchaser.
• Reasons for Sale – a full explanation of why you are selling.
• Sale Price – the sale price and a full breakdown of how it has been calculated (including an apportionment of equipment, goodwill etc), and whether any tools and equipment are included in the sale price or must be calculated and paid for in addition to the sale price at settlement.
• Appendix – you may wish to put all graphs, financials, charts etc. in an appendix. You may also wish to include any ‘public relations’ clips of your franchise’s achievements, awards, newspaper clippings and samples of your business generally.
You built your businesses with a plan, and by planning your exit strategy you can be sure to reap the benefits of your hard work. No matter where you are with your business, an exit strategy plan is a necessary step towards achieving your goals.
Blame no-one, Do something, Expect nothing…
Vicki Prout is Chief Sherpa at Sherpa Group. The team at Sherpa Group are ready to engage with you in all facets of expansion, whether it be simple questions such as should I expand, if so how, what, where and when and why? Possibly the Sherpas can be your mentors in your network in some way!
For more information contact Sherpa Group on:
Phone: 08 8354 4887
(no harm in having a coffee!)