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Escape Options - Buy... Sell... Exit?

Trading after retirement, number crunching, selling your business. Robert Craven investigates the escape options available.

There’s a big secret that’s spreading nervously amongst business experts and advisers and it’s time to blow the whistle!

The secret is that nearly every business owner who expects to reap the rewards of their hard work with a big pay-out will probably get next-to-nothing.  I repeat, next-to-nothing.

There is a growing body of research (Barclays, DTI, ACCA) reporting some terrifying statistics.  Over two-thirds of owners say that it is important that their business continues trading after their retirement yet most have made no plans at all.

It is estimated that 100,000 businesses close every year with the owner getting nothing to keep apart from some fond memories and a couple of staplers they’ve kept aside for themselves. 

DEAL OR NO DEAL?

So, how will you extract the maximum money from your enterprise? Have you started to prepare your business for some kind of deal that will generate some money for you?  After all, hope is not a method.

THE CHOICES

Several options appear in a rough order of ease: Here are your options:

• Bleed the business dry
• Liquidate
• Friendly sale
• Trade sale
• Merger
• Management buy-out/buy-in
• Business angels
• Venture capital
• Go to market/IPO
• Organic growth or ‘buy and build’… then any of the options above.

The first few options are pretty straightforward.

Option 1: Bleed The Business Dry

Take as much as you can out of the business in the form of pay, dividends, and perks irrespective of the performance of the business – not the sensible option and often the option people follow unconsciously...

Option 2: Liquidate

This option may come at the end of Option 1… - quite simply, you just close the doors, shut up shop and wait for the liquidator or insolvency practitioner or bankruptcy courts to catch up with you.  Not the cleverest option and one that, again, some people do without any clear conscious decision to do so.

Option 3: Friendly Sale

Someone nearby, employees (MBO), friends or family take it over rather than see it sold.  This is a great option but not predictable, often these sales do not see the highest valuation for the business.

Option 4: Trade Sale

Selling the business to the open market requires there being one buyer out there who wants to buy a business like yours.  Trade sales tend to get you a better price but each deal is different! 

Option 5: Merger

Merger is a variation on the trade sale, one tends to take the dominant role.  Evaluation is always an issue as well as how the teams work post-merger.  Despite the corporate hype, most mergers fail!

Option 6: Management Buy-out/buy-in

Your management or another management might wish to buy your business.  MBOs are attractive to the existing management because they know the business already, warts and all.

Option 7: Business Angels – a funding option

Business angels bring funding (£50,000-£1m) and their own experience to your business to help you grow it. They usually wish to join the board and can give you the experience and the money that you need to take the business to the next stage of growth.

Option 8: Venture Capital – another funding option

Deals normally start at about £1m and the VC looks to see higher than average returns on their investment, say 30+% pa.  VCs are professional business growers and only invest in businesses that can generate the returns that they seek.

Option 9: Go To Market/IPO – another funding option

Going to market is sometimes referred to as IPO (the Initial Public Offering, in effect a prospectus offering shares in a business for sale). In essence there are three markets to consider, in order of ascendancy: Ofex, AIM/NASDAQ and the full Stock Market quotation. 

Option 10: Organic Growth Or ‘Buy And Build’... Then any of the options above

Rather than get money to grow, you can try to grow organically.  The problem here is that business growth means that you are haemorrhaging cash and you need something to supply the cash.  ‘Buy And Build’ is an excellent fast-track route to growth but needs even more cash to fund it. 

The ‘sensible options’ above (ie not options one or two) require a special business – otherwise it will hold no attraction to a potential buyer or funder. Whatever your direction, it seems sensible to run a business that adheres to some core principles.

CREATING AN ATTRACTIVE  BUSINESS FOR FUNDERS/BUYERS

Fundamental attributes that a business must exhibit to be attractive to a buyer or funder should include:

• Underlying, repeatable, sustainable profits
• Reference and trophy clients
• Distinctive capabilities – things that make you unique
• Core competences or strategic assets – what you are really good at
• A senior team to take it to the next stage.

THE CRUNCH QUESTION - HOW MUCH IS YOUR BUSINESS WORTH?

Valuation of businesses can be done by a number of methods:

• Price/Earnings Ratio
• Return On Investment
• True Net Asset Value
• Adjusted Sustainable Net Profit.

At the end of the day, it is only worth what someone else will pay!

A WORD OF WARNING

All I will say is that your business is almost certainly worth much less than anyone has told you.  By the time you get a realistic valuation and start to strip out professional costs, tax, and so forth, I am willing to bet that you’ll get a fraction of what you imagined you would be getting.  Be prepared to be under-whelmed!

THE TOUGH QUESTIONS

Ask yourself:

• How much do you think the business is worth right now?
• How much would someone realistically pay you for it right now?
• How much do you want it to be worth in x years?
• What do you need to do create the business that someone will pay that amount for?
• Who do you need to talk to in order to make sure that your sums really will stack up (banker, accountant, lawyer, business transfer agent)?

If you don’t start planning your exit right now then you may well have a very impoverished retirement!

 

About the author

Robert Craven is author of the business best-sellers 'Kick-Start Your Business' and 'Customer Is King'. He has recently been described as 'one of the UK’s leading marketing specialists' and the 'entrepreneurship guru'.

©2006 Robert Craven

publication details

Start Your Business magazine, December 2006