LTT Business Bulletin - April 2015
Brendon Noney, Partner with HWL Ebsworth & member of LTT1,
shares some critical Exit Strategies for business owners
At various stages during the lifecycle of a Business, it is prudent for an owner to turn their minds to how they may exit the business in the future. Decisions on whether to select ‘Option A’ or ‘Option B’ may not have much impact at the time, but may have significant consequences when an owner looks to exit.
Fortune favours the prepared, and early planning may help to guide operational decisions, so that when the owner seeks to exit a business, they have maximised their chances of achieving their goals.
This applies equally to situations where the business is only newly acquired and it is expected to be retained long term or where it is rapidly approaching the time when an owner will seek to exit the business. Unfortunately, there is no one size fits all approach to development of an exit strategy. This article is not a ‘how to’ guide, rather it is a short discussion of some of the questions that you should be asking throughout your time as an owner of a business.
Some other related issues are:
* What can be done in the years before an exit to improve the attractiveness of a business for a prospective buyer?
* What steps can be taken to increase the chances of a successful exit from a business?
* What are the exit options for a business?
* How do Share and Asset Sale structures work?
* What can business owners expect in a sale process?
What are the goals on exit?
An exit strategy should be guided by what the owners will seek to achieve on exit. There is no one single answer to this question. For example:
1. I want to keep working, but am no longer interested in the work undertaken by the business. I want a change in career
2. I want to unlock the equity in the business, but would like to continue to work in the business after I sell
3. I want to sell so that I can retire
4. The business is no longer a core asset or it is underperforming and I want to focus on other interests
5. I want to hand the business down to the next generation.
Goals on exit will depend on a number of factors particular to your circumstances. The owner’s understanding of their goals will help guide the development of the owner’s exit strategy and allow the owner to focus on what is important.
Develop a strategy
Once you have an end goal in mind, you can start to develop a strategy and begin to execute on that strategy towards exit. Such a strategy will need to take into account such things as:
1. the size and nature of the business
2. who are the potential buyers?
3. when do you want to exit?
4. what tax strategies are available to you?
It is a good idea to discuss your goals at an early stage with your professional advisors to draw on their knowledge when developing your strategy. In particular, your advisors are likely to have advice on how to operate the business in the future so that it is as attractive as possible to potential buyers and the subsequent sale is as tax effective as possible.
For example, if your goal is to unlock equity in the business, but you are happy to continue working for the business after the sale:
1. The business may be a more attractive target for an investor who may not have significant industry experience and is happy to take a backseat to the management of the business. The business will be more attractive to an investor if it has clearly articulated policies and procedures regarding the day to day operation of the business, as this increases the likelihood that the business can operate without the guidance of the investor or you on a daily basis, allowing the investor to focus on their other interests and alleviate some of their concerns of the owner leaving the business after the acquisition is completed. Such policies and procedures may already exist, but it may take significant amounts of time to distil these onto paper, meaning the owner needs several months, or years, in order to develop and implement these policies and demonstrate the ability of the business to operate with minimal supervision
2. In contrast, an owner-operator is likely to already have a good working knowledge of the industry and is less likely to be interested in keeping the owner as an employee after the acquisition as they intend to be there on a daily basis
3. A staged exit becomes an option where you sell a portion of the business with a view to the balance of the business being purchased at a later date. This opens up the number of potential buyers to those that may not have sufficient capital to buy the whole of the business now, but should be able to in the future.
Once developed, the strategy is a living breathing thing that will change over time. It will be necessary to periodically review and adapt your strategy as your goals shift or your circumstances change. It should not be seen as a constraint to your business, as quite often implementation of a strategy will be complementary to the operation of a successful business.
Where possible, a review of the strategy and the business should be undertaken 3 to 5 years out from when an owner is looking to exit. A significant amount of work can be done at this time to make the business as attractive as possible.
Much like when selling a home, you weed the garden and paint the fence, value can often be added to your business for minimal cost if such strategies are implemented at the right time.
Developing an appropriate exit strategy requires a number of different skill sets including legal and accounting. Through experience, we have a strong understanding of issues that arise during the sale process which, with careful management, could have been avoided, and matters which can add value to the business from a buyer’s perspective.
This article was written by Daniel Stumm, Senior Associate
For further information please contact:
Brendon Noney, HWL Ebsworth
Partner | Sydney / Norwest
P +61 2 9334 8481