Key Issues with Exit Strategies Need to be Addressed
Key Issues with Exit Strategies Need to be Addressed
In 2005, I moved to Canada from South Africa, to look for a new chapter in my life. Things were very different from the African way and I had to learn to do business from a different perspective. On a property buying adventure, I came across the staggering concept of staging the property to make it more sellable.
This extreme process required the hiring of a consultant property stager. The owner’s entire home contents were removed, placed into storage and replaced by new items from the stager’s own warehouse. The cupboards, rooms and all accessible storage areas were replaced with new household items and carefully positioned with immaculate arrangements.
The staging was always successful and often increased the price by a further $50,000 above the asking! (The Vancouver, North Shore property market was exceptionally hot at the time). It is obvious that you should position your sale potential to the best of your ability. The item for sale needs attention and cleaning.
Photographs need to be professional and show the item’s best view. However, is there a stage where this is actually cheating?
These memories were stirred by the new staging trend elevated to the term exit strategy, that has gained momentum in the sale of businesses. The terminology is firm, confident and suggestive of a potential lack in your position as a vendor. Normally, a business broker will establish the saleability of a business by considering many factors. However, we know that a sale of some businesses are actually premature, precipitated by factors such as health issues, divorce and dramatic changes or interrupters in the business that might necessitate a quick sale.
All people will agree, that business have several phases in their life and that they are reasonably easy to identify or to measure. Each phase builds on the previous phase and gradually gives way to the next one. Although there might be intersections in each phase, they each have different dynamics. Inception, for example, is very different to the ultimate shut-down due the ceasing of business operations, bankruptcy or a clear sale. The cycles can be short or extend over many years.
A business owner should be aware of these phases and adequately plan for them. The one that is most neglected is how will the business end? That is the full context to planning a Strategic Exit. The decision to sell the business is normally addressed too late and the seller finds the experience counter intuitive to the habit of growing a business.
The measure of profit when growing a business is understood and a focal point. Whereas, different applications and exercises are needed in the conclusion of the business. The process is specialised and only happens once in that vendor’s experience in that business. Hence the need, in my opinion, for an accomplished business broker.
My concern is that the broker, is moving from his/her core objectives and not calling on their experience, talents and abilities, when they get involved in the long term Exit Strategy process. The trend as I see it that there are brokers doubling up as business Exit strategists as a marking ploy. They are suddenly subscribing to a superficial trend which loosely is applied.
In reality, a professional broker will establish the preparedness of a business from a sale perspective. He/she has that responsibility. There is the need for market research, financial analysis, drawing up information memorandums, advertising and separating the wheat from the chaff in order to find the buyer with the credentials needed to purchase the business.
Unfortunately, the latest trend that is gaining traction is the tendency to apply business broking principles to that of the Exit Strategy arena. However, their understanding is based on a superficial understanding or application of Exit Strategies that gives them a false advantage and impresses their clients and colleagues. The practice is not a sharp and cutting edge but rather a dilution of their true purpose.
I reiterate that anybody who has any sense as a broker understands that an Exit Strategy is vitally important. But it also depends on what they mean by an Exit Strategy. So, they should formulate some form of definition. It will say in a basic manner, what they mean by the term and essentially state that it is a preparation of the business so that when it is ready for sale, it gets put on the market.
The process brings various essentials together and when they have a buyer, all of the information, all of the systems, in place; that's the whole idea of an Exit Strategy. So, in essence a broker’s Exit Strategy definition will be that it is a planned route towards making the sale.
This crystallisation is different from the philosophy that as you start the business, so you should start the preparation for the sale. It is that preparation that should become the DNA of the of the business. This means that you are starting this business with the express purpose of ultimately selling it and getting the best price for it.
However, what is actually happening is that a lot of the business brokers are hooking up on this. It is a fad and even the clients are approaching brokers on the basis of them selling their business using an Exit Strategy. Business sales is saturated with talk about an Exit Strategy.
It occupies whole departments in the brokerages and there are whole companies based on Exit Strategies. In fact, many supporters think that this is the holy grail. But the reality is that it is not being done properly, because fundamentally, the idea of an exit strategy is that it is part of your systematic planning, and everyday business.
So, for example, when you are in the dangerous position of being the key person in your business, it is going to be exceptionally hard to sell that business. In this scenario, what you are addressing in an Exit Strategy is that you will immediately or as quickly as you can, remove yourself from that position in the business. You will no longer be the key person.
In other words, the business can effectively carry on without you. It is a long process. It is not in my opinion, up to the broker, to go beyond stating the reality that the business needs to address certain issues such as setting up systems and their implementation in their quest to make the business more marketable.
A broker by definition should perhaps be called in towards the end of the process. They are the people that initiate and engage in the actual sales process.
There is a risk that brokers are being sucked out of their core responsibility.
Client’s expectations are increased due to the improper use of the terminology. It follows that brokers are increasingly calling themselves Exit Strategists. This potentially perpetrates a sham and the broker’s duty of care is compromised. You cannot prepare Exit Strategies if you are not obeying the regular rules or have a complete understanding of what an Exit Strategy is all about.
This loose application is amounting to a poor application and compels the broker into staging the business rather than building on a foundation of sound professionalism. It, therefore, is being used as a marketing ploy.
It amounts to making “superficial or cosmetic changes to a [business] in a futile effort to disguise its fundamental failings” or better said Lipstick On A Pig.
Tags: exit strategy business owner small business tips
About the author
Ray Dye
As a previous multiple business owner in South Africa, Canada and Australia, Ray has an exceptionally high level of expertise when it comes to knowing ...
