Why you need to plan your exit to maximise your valuation

Finish as you started. It’s a well-known quote on social media, but when it comes to exiting a business, seldom put into practice. In the heady days of a new business, owners understand the importance of good planning to ensure their future success. Business plans are devised, consulted upon, revised and executed, but all too often that same energy and focus is lacking as the finish line approaches, even though it should require the same level of attention. Afterall, it’s called exit planning for a reason, because the emphasis is on the planning not the exiting.

Presentation matters

The process of valuing a business can be confronting. Just as any prospective homebuyer is unlikely to openly rave about your designer kitchen or well-appointed outdoor deck but instead leverage every crack and maintenance flaw, so too will a savvy investor. For them, the valuation does not represent your years of sacrifice, the leap of faith required to take a risk or the investment in your employees, it’s about cashflow, and the business’ financial or strategic value.

So, like any smart homeowner about to put their property on the market, it’s important to pinpoint the areas which needs sprucing-up to maximise your valuation. For some business owners, it may be a relatively painless spring clean, but for others it may require correcting the foundations. Whatever the case may be, for every business owner this work will involve revisiting how your financials are presented.

How to add value

Planning your exit to maximise your valuation should begin two to three years before the desired leave date, and the first step is to enlist a trusted advisor. A strategic financial advisor will help you find the quick wins to make sure your financials are looking their best and will also navigate the complexities of determining the true valuation of your business.

An initial course of action will include increasing earnings by reducing excessive overheads and limiting normalisations for the sake of a tax deduction. However, real value is maximised beyond Profit and Loss statements and correctly priced products, by lowering risk and making sure your working capital is in order.

Working capital represents your operating liquidity and is calculated by determining the worth of your current assets against your current liabilities. Keeping your debtors, creditors and inventory low means there’s less cash tied-up in the business and in turn, increases the amount of cash back in your pocket at the point of sale.

To maximise you’ll valuation you’ll also need a plan for growth. Buyers like to see your revenue is predictable. They want to be assured that in five years’ time your sales pipeline can generate leads and that your marketing activity achieves cut-through.  It’s also essential that you know your customer and product profitability so you can talk with authority about why you serve the various customers that you do.

The importance of culture

Generally, there’s two types of buyers – financial and strategic. Financial buyers will be motivated by the past performance of the company whereas a strategic buyer is looking for unlocked potential.

In either scenario, your business’ culture will be integral to the valuation. It’s not uncommon for potential purchasers to hold-back from a bid until they’ve met and interviewed the executive team or managing director.  To increase your valuation, you must be sure your business can run productively in your absence. A high-performing leadership team and a motivated workforce who are rewarded for driving innovation can be just as valuable as a sought-after product or service.

If your business suffers from a toxic culture, you’ll need to acknowledge this is not a quick fix. Remedying it appropriately will require effective people management and strategic recruitment, which at best, can take several years to turnaround.

Your external influence can also help boost your valuation. While your business may not have the largest share of your market, it may be an industry thought leader or enjoys the ‘halo effect’, meaning your peers and customers have an overwhelmingly positive belief in your reputation. These non-financial assets can’t be manufactured overnight but are cultivated over time and through considered effort.

Be prepared

Building a business can be a deeply personal experience, and so the act of selling can be emotionally challenging. To help reduce this burden, your advisor should be proactive in vendor due diligence. Rather than just advertising the sale of a business, an effective advisor will curate a competitive environment and will have an inherent understanding of the motivations of those handpicked buyers.

This works in your favour when those buyers attempt to chip away at your business’ value, because your advisor will have not only equipped you with a valid retort, they will have made sure your financials can withstand any scrutiny.  Putting in the years of preparation mean you can remain confidently steadfast in your asking price, having done the work to know your business’ true worth.