You have devoted countless hours and made numerous sacrifices to achieve the dream of many: to build a successful business. It’s now time to reap the fruits of your labor, and start enjoying your financial freedom. It’s time to plan your exit. Selling your business can be one of the most financially rewarding, yet stressful events in your life. It can be a grueling process, taking away precious time from operating your business with no certainty of financial close, as transactions can fall through at any point in time.
Many transactions are abandoned during the due diligence process, when large deal issues or a combination of smaller issues are highlighted to investors by professional advisors. In many cases, these deal issues could have been avoided by owners. Based on our experience with transactions, the following are four simple improvements you can make to your business to increase its valuation, help negotiate better terms and increase the likelihood of a successful transactions.
1. Build a management team
You are key to your business, making the most important decisions and even driving sales. But do you have a succession plan in place? Although investors are likely interested in your business due to your leadership, you are probably the single largest risk to them. The simplest way to mitigate this risk is to plan for your own succession and build and empower a management team. This may require a cultural change and will definitely require strong operating and reporting systems, regular management meetings and significant investment in developing your people. Sharing the reins may be your biggest challenge ever. But it will be well worth it as it may give you an additional exit option- exiting without really exiting. If your business is being successfully managed by a team, you may not have to sell your business. Instead, you could move to a board position, reduce your day-to-day involvement and enjoy whatever it is you prefer to be doing.
2. Build a strong finance team
When was the last time your finance team questioned one of your decisions? One of the most common deal issues that can be avoided is a weak finance team. Investors need to rely on financial information to make their investment decision and need a strong finance team to help them manage the business post acquisition. Without accurate financial information, informed decisions cannot be made. A strong finance function requires a strong leader that can challenge and add value to your decisions, has modern financial reporting systems in place, produces accurate and timely monthly reports, tracks budgets and forecasts and produces annual audited financial statements. A strong finance team can work well with a management team, helping you exit without really exiting.
3. Legal structure
One of the most common avoidable deal breakers is not having the proper license in place reflecting the activities of your business. Investors will simply avoid acquiring a business that may breach local laws, therefore, getting the right license is imperative. If you have multiple licenses or businesses, it may also be useful to have a legal holding company structure to facilitate the transfer of your shares to the new shareholder. An offshore holding company structure may be useful for holding local company shares, allowing more tailored shareholder agreements with different classes of shares under English law. Other avoidable deal issues include not having a brand properly registered, operating under a different brand than the registered trade license and employees not registered under the trade license.
4. Sell side due diligence
One service that can help you prepare for an exit is a sell side or vendor due diligence, whereby a professional advisory firm, such as my company, Incubate Advisory, is hired to perform a due diligence on the business on behalf of the business owner. This is a proactive approach whereby risks are identified and addressed early in the process, before they become deal breakers. It also helps prepare for potential negotiating points and may even highlight matters that may potentially increase the value of your business. A sell side due diligence may also give potential buyers comfort before investing, augment internal resources for a potential transaction and put the business owner in control of the process, accelerating the time to close.
Selling your business can be a time consuming process. The key to adding value to your business before you exit is being prepared. You may want to consider hiring professional advisers to help you manage the process, and to help you maximize the value to your business.
This article by Ara is based off a talk he gave to the British Business Group Dubai & Northern Emirates at a breakfast session on the subject of exit strategies, focusing on how to add value to your business prior to exit or raising capital. The British Business Group Dubai and Northern Emirates (BBG) is the region’s foremost business-to-business membership networking group, enabling like-minded professionals to further their business interests in the UAE and wider region.