Background

With the exception of the start up phase, exit planning is perhaps the most difficult period of SME evolution. Research shows that many owner managers fail to successfully achieve the transition – and do not receive the "value" – however that may be measured – that they expect for the time, effort and money that they have invested over the years.

The reasons for this have been analysed both at the micro and at the macro level – as they have a substantial impact on national employment. Each individual enterprise will be different, but overall the key failure points have been identified as:

Unreasonable expectations of the objective value of the enterprise;

An unwillingness to deal effectively with the new set of problems that exit plans involve;

Increasing demotivation of senior staff as the time demands of the exit plan interferes with their normal routine;

Unhappiness about the resources that are ultimately required to achieve the desired end result.

Research and anecdotal experience suggests that a structured approach can significantly improve the chances of exit success. The main components are:

  • Think long term
  • Get early commitment of major shareholders
  • Agree on authority and responsibility
  • Gather expertise and information
  • Review information and decide on best option
  • Plan including detailed implementation
  • Present to shareholders
  • Monitor and review

Pages that are also useful background material for exit planning include: investment case summary, business plan outline, contingency planning, corporate governance, KPI.

Think long term

It must be accepted that in the majority of cases, the time scale of an effective exit will be lengthy and protracted. The complexity of a business and its internal and external relationships mean that it has few similarities to selling a car – a far better analogy would be a large country house, built to an eccentric design, miles from any amenities, and often lacking in basic comforts. Even in this example, the additional time often demanded in a business handover for senior management involvement is not included. Typically, senior management need to consider at least a two to three year time scale to extract the best returns, plus whatever time will be required during the handover period.

Get early commitment of major shareholders

There is no point in starting a lengthy and expensive exit plan without a clear agreement of the major shareholders, and a clear understanding as to their expectations. This may involve a review of the Articles of Association and/ or shareholders agreement to create a transparent framework of the various steps that an exit will involve – such as how the company will be valued and what is the minimal acceptable valuation. This is often part of a broader review and implementation of corporate governance requirements (see below). Remember that exits will be delayed or destroyed if there is significant shareholder resistance. Whoever is appointed to deal with the exit plan must be clear about the requirements of the shareholders. What do they in broad terms want? These tend to be the factors that are considered important (though there may be others):

  • What is required speed of exit?
  • What commitments do they feel necessary to make to staff/ stakeholders in any exit plan?
  • What is the level of expected financial return?
  • How do they expect to be paid – in single sum or over period?
  • How much post exit involvement do the shareholders expect or accept?

The question of other stakeholders is more difficult. Resistance to change will tend to be widespread, especially where the exact direction of the enterprise is uncertain. But it may be that other key stakeholders will have to be consulted – especially financial stakeholders, key suppliers and key customers on which much of the value of the enterprise may depend. There are advantages and disadvantages in consulting widely, and each case will be different.

Agree on authority and responsibility

The complexity of the exit plan will naturally vary from company to company. Complex exit plans will require the creation of a team, simpler propositions can be handled by the individual. Clarification of authority and responsibility is important at an early stage – how far can the individual/ team go before consultation with others? How will progress be reported? What are the milestones? Again it is important that where there are a variety of shareholders that transparency is emphasised – otherwise resistance to the final deal will be considerable.

The enterprise must be prepared to allocate the necessary time and resources to the exit plan – and this means that individuals with considerable day to day responsibilities are not the ideal choice – as the individual must be able to concentrate on making the exit plan work, and not see it as a part time chore.

Gather expertise and information

The transfer of value from one set of owners to another is an area of considerable specialisation. The current management will often need specific support in key areas such as:

  • Legal;
  • Accounting (often especially in taxation planning);
  • Valuation expertise (especially where there is complex IPR);
  • Personal financial planning;
  • Corporate finance;
  • Business transfer agents;

and, we would suggest, business planning (but then we would).

At this initial stage it is vital that senior management find individuals and teams with whom they can work, and whose advice that they will accept. Such a search will be time consuming, but will provide valuable information which management can use to refine their thinking and produce a more coherent and realistic route to a successful exit. Such experts will expect the potential user to pose the following questions:

  • Have you handled this type of problem before?
  • What sort of valuation can we hope to achieve?
  • What are the major problems that we should try to avoid?
  • How long will it take?

There are also additional sources of information on achieving success and avoiding failure. Among these may be:

  • Suppliers,
  • Trade associations (including chambers of commerce and local business groups),
  • Specialist magazines,
  • How to literature,
  • Internet,
  • Business advisers (small business support services),
  • Customers.

All of these sources of information and advice will do much to clarify which of the alternative options is likely to yield the best results based on the objectives of the key stakeholders/ shareholders. The clearer the objectives, the better the information that will be received.

Agree with key shareholders/ stakeholders on best route

An exit plan will generally involve one of four options (though there are five – the worst case being the closing down of the operation). Each of them will be appropriate to particular companies in specific circumstances. In most cases, the emphasis for the SME is likely to be in the top three – trade sale, MBO and MBI. The Ibis preference is for an MBO as it can provide a substantial level of control over the exit plan, but it has a longer time scale.

It is useful to summarise the initial findings in a chart such as the one below to focus management on the route that has the best balance between the probability of success and value.

Option

Value

Probability of success

Time scale

Cost

Trade sale

       

MBO

       

MBI

       

Flotation

       

Close down

       

Put the plan together

Each plan will differ in detail, but each will need to include important components which can summarised under the following headings:

Expert costs and timing. The plan should include the development of a detailed brief to the expert group and the inclusion of their costs/ timing in response to this detailed brief.

Corporate governance. Research is clear that good corporate governance improves valuation. Improving all the elements of corporate governance – such as clearly identifying assets and liabilities – should be part of the project plan.

Improving key performance indicators. Prospective purchasers (and providers of finance) will look at how the company stands in relation to the competition in its sector. Better KPI will lead to higher valuations. In most cases this involves a line by line and item by item inspection of current operational performance, and the implementation of specific programmes aimed at achieving the required result, such as cost cutting, new product development.

Marketing material. Research supports the typical sales management view that attention must be achieved within a short time of the value of investing in the enterprise. Key elements in the development of marketing material will include an effective plan summary which immediately grabs the attention of the reader, an improved and updated web site which supports the claims within the plan and a supporting DVD which provides graphic illustrations of the position of the enterprise and its key benefits.

Identify contingencies. Exit planning is full of unknowns, and uncertainties. The management team should ensure that the majority of likely contingencies are analysed and policies developed to deal with them – most of these will be apparent from the discussions with the expert group and other information sources.

Resource the plan. Exit planning demands investment. Management must be prepared to resource the plan as with any other project – with the returns in the higher price that the shareholders will be able to achieve.

It is sensible to use project management software to keep track of the programme and for reporting purposes – this will also identify key tasks, resource requirements, timelines and milestones.

Present to shareholders

It is sensible to present the plan to the key shareholders, both to ensure their continued support (and formal approval which is most important), and secondly to improve the quality of the plan – those with knowledge of specific areas of the enterprise will be able to make suggestions to further improve the operational efficiency and hence the valuation.

Implement and monitor

In common with all planning, the plan must be implemented and monitored against the original targets. The Ibis monitoring system suggests that this should be incorporated into the management control system on at least a monthly basis, or perhaps more frequently.

Using the planning platform to maximise value

The Ibis planning platform concept is an ideal mechanism to maximise exit values as it breaks the organisation down into knowledge centres, each of which have responsibility to analyse and optimise their operations. The creation of knowledge centres also improves the management ability of the relevant teams, which assists in a management buy out option.

More information on the way in which Ibis can contribute to your business plan development is provided at Advantage Ibis 

More information on the Ibis approach is also available on the FAQ page..