Several months ago, I wrote about various types of business exits and promised a follow-up on what makes for a viable exit. Like last time, I mentioned that books have been written on the subject and my pieces are meant to hit some of the highlights and provide food for thought. With that, here is some, but not necessarily all, of what it takes to have a successful exit.
Accurate financial statements. Whenever I start a new engagement, I first assess the accuracy of historical information. Too often, I find it lacking in clarity and accuracy. If your financial statements are just plain wrong, it throws everything else you might say into doubt. You’ll need several (at least three) years of good data, so you need to start well in advance (years not months) before your actual exit.
Diversified customer base. While there are always exceptions, a business with a diversified customer base is worth more than one with a handful of highly concentrated customers. With few customers, buyers worry about the effect on the business of losing a major source of revenue and will price the business accordingly.
Management team. Does the business have a management team or is it solely dependent upon the one person who wants to take their chips off the table and retire? A business where the primary owner has already downshifted into partial retirement and depends upon their team for much of the day to day operations is worth more than one that is highly dependent on a sole individual.
Earnings and cash flow. Although there are exceptions that I won’t discuss today, most businesses trade on the basis of profits. In addition to financial statements being accurate, they need to show a history of profits with there being reasonable explanations for any significant variations both at the bottom line and for each major expense category. Last year I was working on an acquisition when the target company posted unbelievably good December profits to finish out their year. They were literally unbelievable. While we didn’t walk immediately (my recommendation) the deal fizzled.
Operational excellence. Are you selling a well-oiled machine or something stuck together with duct tape and chewing gum? While businesses with either profile may sell, they will fetch drastically different prices.
Compelling value proposition. In short, why do your customers buy from you? A business that has customers that stick for a compelling reason is more valuable than those that are there only for low price. While price leadership is a valid strategy, the business had better have a cost structure to go along with it otherwise it’s going to show below market return on investment.
Barriers to entry. Is there something of significance that keeps others from entering your market and competing with you? That could be intellectual property, capital requirements, geography, being at the forefront of industry changes or a variety of other reasons.
There you have it, a handful of items (by no means an exhaustive list) of items to begin to contemplate as you begin your exit planning.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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your cash is flowing. know where.®
Ken Homza
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