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Exit
strategies
for SMEs
The importance of exit readiness and
a well-designed sales process
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
By Ashish Joseph
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
Ashish Joseph is a Manager within Deloitte’s Corporate Finance Advisory team with over ten years of financial advisory experience in the Middle East.
During this time, he has advised a number of clients on valuations, financial feasibilities and mergers and acquisitions advisory. Prior to joining Deloitte,
he worked with KPMG in Kuwait. Ashish has a BBA in Finance from the University of Texas at Austin and holds the CF qualification from the ICAEW.
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.
The advisor will 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.
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.
Developing your exit
strategy
How can an executive coach help you plan
a course of action? By Martin Braddock
Every business owner
eventually exits his or her
business. Some may leave
by choice (e.g. retirement,
acquisition) and other external
factors, while others depart
due to changes in the market
or a change in personal circumstances.
As the owner, you are the
champion and set the standards
for your business. Your reaction
to considering an exit strategy
may be, “That’s not something
I need to think about yet. I need
to focus on winning and serving
clients now.” While immediate
business growth and development
are inevitably filling most of
your “thinking space,” it’s never
too early to start thinking about
your exit strategy.
Of course you have options: you
can choose to let your exit evolve
organically or choose to take
control to influence the outcome.
The following questions can
help you decide if you want to
consider an exit strategy:
1. What do you want for
your business?
What impact is your business
making? Are you are helping
your clients create the changes
they want? How important is this
to you? Perhaps you have even
developed and implemented new
processes, tools or models that
enhance your relationship with
your clients. Who will maintain
the momentum if you exit?
2. What do you want
from your business?
You may have invested time,
money and creative thought in
the startup and growth of your
business, together with funding,
licencing, inspiring and leading.
How can you maximize your
return on the investment?
So what are your options?
1. The organic option
You simply let the business run
its course. But if you do this and
then you are no longer physically
capable of operating your business,
then it may not be sustainable
without you. Or, someone
else decides it is time to close the
business, perhaps as a result of
intervention by another entity or
person, such as a bank, investor
or business partner.
2. The proactive option
You could transfer the business
to a family member, a colleague
or another stakeholder to continue
your work. This outcome of
course assumes your identified
successor wants to continue to
operate your business! Perhaps
you could sell the business. However,
there has to be something
to sell. If you are your business
(meaning that when you walk
out the door, income generation
stops), then there really is nothing
to sell! Or you can use the
time between now and your exit
to create value in your business
that a buyer will be willing to
pay for (i.e. intellectual property,
product/service models). If a
buyer can step in and operate
your business without you or
integrate your business into
another operation, you could
relinquish ownership profitably
and with the knowledge that
you’ve helped accelerate another
business’ growth.
Determining the future of your
business is your decision. The
time you spend now considering
your exit strategy is time well
spent, for you, your business,
your stakeholders and clients.
Sometimes exploring the options,
which can be numerous
and complex, can be better
evaluated with an executive
coach.
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Entrepreneur may 2016
may 2016 Entrepreneur 91