Exit without Exiting – Focusing on the Business and Not the Exit to Achieve a higher Valuation
Business owners often dream of selling their business, reducing their workload and enjoying their financial freedom. Most business owners have the necessary funds to retire, but simply can’t reduce their involvement out of fear their business will fail without them. Such concerns are not unfounded for small to medium enterprises (SME’s) as the owners are critical to the business.
As a result, investors tend to avoid businesses with owners that wish to retire, due to the perceived risk of losing goodwill, or they tend to expect a large discount on the valuation for assuming such a risk.
This risk is not limited to just SME’s, even Apple Inc, a fortune 500 company, did not bode well following the departure of its co-founder, Steve Jobs in 1985. The return of Jobs in 1997 drove Apple’s turnaround, and proper succession planning contributed to Apple’s success today, with Q1 2017 quarterly profits of $17.9 Billion.
Fortunately, there are some very simple steps owners can take to plan their retirement without sacrificing terms and price. The focus should not be on selling, but on:
- Developing and implementing a strong business strategy;
- Devising and implementing a succession plan;
- Implementing robust financial controls; and
- Gradually reducing their operational involvement, moving to a non-Executive Board level position.
Once a business is operating without its founder, it will eventually attract more investors at better terms and a higher valuation.
Before implementing this approach, owners should take time to understand their needs and those of the business. The following steps are recommended:
- The personal goals of the owners with regards to the business should be clearly defined. Owners should consider the role they would like to play post exit, the percentage ownership to retain, the level of pain they can tolerate dealing with investors or new management and the short and long term pay-out they require to retire. The advantage of not selling immediately is the ongoing potential dividends vs. a large payout.
- Owners should understand the risks in their business and start reducing or mitigating such risks assuming they will no longer be involved. Many transactions are abandoned during the buy-side due diligence process from deal issues could have been avoided by the company. A third party vendor due diligence (VDD) can be a proactive approach to highlighting and addressing such risks before they become deal breakers. The VDD also helps prepare for potential negotiating points and highlights matters that may potentially increase the value to the business.
- The next level of management should be identified. The majority of successful CEO’s are hired from within. Owners should identify and start grooming their replacement.
- Owners should then understand and assess their best exit options and approach potential strategic partners or financial investors based on their needs and that of the business.
Engaging an experienced advisor with a proven track record is key to implementing the above strategy.
Once the above is implemented, there will be serious investors interested in the business, due to its strong financial systems, a focused strategy and a management that doesn’t rely on its founder.
The best part of the above approach, is if a deal falls through with an investor, the business owner can continue enjoying dividends, without worrying about the day-to-day operations. That’s enjoying an Exit without really Exiting.
Incubate Advisory is a boutique firm helping investors with acquisitions and business owners with growth and exits. Their approach is to take on an active role in the business, through an interim CFO, CSO, COO or CEO role to drive change.
Services also include buy-side and sell-side due diligence, interim CEO/CFO services, strategy development and execution and board roles. Clients are generally mature businesses and boutique investment offices. www.incuabteadvisory.com.
Ara Sahakian, CPA, CA and Managing Partner at Incubate Advisory
Ara is an investor, advisor and a business owner. Previously a director at HSBC Private Equity ME, he is the founder of Incubate Advisory, a boutique Transaction Advisory firm, helping investors with acquisitions and business owners with growth and exits. A CPA and CA with a Masters degree in Accounting, Ara began his career with PwC Toronto and helped establish the Transaction Advisory practice in PwC Dubai. Ara has founded several successful businesses and continues to seek investment opportunities. He is an active Board member of The Terry Fox Foundation and chairs its audit committee. He has been in Dubai since 2000 and operates between Canada and the UAE.