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Planning your Exit Strategy - Part One

London, UK (23/09/2010)

LONDON (FD Centre) by James Nicholson-Smith, Regional Director, The FD Centre

Buying and selling a business is a very emotional process for the entrepreneur, seemingly out of their control but in the hands of the accountant. Over the next couple of pages, we talk to some of the most entrepreneurial finance directors from who are the leading providers of Ds to ambitious businesses to explore how this gap is bridged.

Colin Mills, founder and CEO of the FD Centre, has successfully managed the 2 largest exits managed by the company. "In both cases the hardest part was getting the owner of the business to see his business from a potential acquirers' viewpoint at the earliest possible stage".

All too often business owners think that their business is attractive because it's theirs and want acquirers to understand the emotions involved to get them to this point. Unfortunately this is "bad baggage" to take into a sale process. As one builds a business, many mistakes are made which adds no value to the business, but adds significant value to the entrepreneur's personal experience. It is therefore astounding how many entrepreneurs want to be repaid for those experiences in the valuation of their business.

When to Consider an Exit Strategy for Your Business
Planning an exit from business should ideally be considered as part of the long-term strategy, ie at the earliest possible time. This can help position the business within its market sector and identify the USPs, or it's uniqueness within that sector.

This will often lead one to be able to identify who are likely to be the best buyers and what would they be looking to achieve by acquiring a business like that. In almost all cases, businesses are valued as a multiple of operating profits. Therefore an essential element of exit planning is maximising the operating profits in the run up to an exit.

However the value acquirers put on a business could also be; 1) an acceptable premium over the cost of setting up the business themselves or 2) the price of acquiring a similar business owned by someone else or 3) £1 more than someone else who also wanted to buy the business if there was no alternative.

The Importance of Your Management Team
As a business grows, the stakeholders like banks and other funders place great value in the strength and resilience of the management team. It is often the same for acquirers of businesses. Therefore a business that is totally dependent on management to deliver its profits and its growth, will become almost un-saleable if the same management team want to leave when the exit completes.

There are some exceptions e.g. exits involving brands which are sold to companies like Unilever or P&G. These acquirers will only be interested in the products, their customers and their product development team which are then absorbed into their larger manufacturing, distribution and sales machines. Consequently an essential part of exit planning is determining what a potential acquirer will want from an ongoing management team and then delivering this to them.

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