Many entrepreneurs reach a point when they need to step away from their businesses. Perhaps other opportunities have arisen. Perhaps they’d like to support the business as a consultant or employee, rather than as the owner. Perhaps they need a different work-life balance. Or perhaps it’s simply time to retire.
Whatever the reason for stepping back, exiting your company immediately is rarely the best way forward. According to the divisional and group CFO Gary McGaghey, there’s usually a strategic time to exit your business and secure the best possible deal.
Carefully planning your exit can help you sell your business for the best price, a price that reflects the efforts and time you’ve dedicated to your business so far. But before you reach this point, you need to answer two important questions:
- Who might buy your business and why?
- When is the best time to sell your business for the best possible return?
Gary McGaghey’s Advice on Identifying Good-Fit Buyers
You’re unlikely to close a deal with an ideal buyer if you simply announce that your business is for sale and hope for the best. If you take this approach, you can expect random buyers to use their valuation methods to decide the value of your business.
But no one knows the value of your business better than you, which is why it’s important to define your own value proposition.
To define your value proposition, consider the features of your company that should pique the interest of a buyer. These features might differ for internal buyers and external buyers, so you may need to highlight different features for different buyers or decide which kind of buyer to specifically target.
Gary McGaghey explains that prospective buyers may include:
- Sophisticated buyers, who seek businesses with strong management teams and solid cash flow. Sophisticated buyers are often private investors or come from private equity groups.
- Strategic buyers, who look for businesses they can acquire to develop their base of skilled employees, technical expertise, and products/services. They’re especially likely to show interest in businesses whose offerings align with those already in the buyer’s portfolio.
- Industry buyers, who usually come to you unsolicited. Industry buyers often approach businesses that they consider vulnerable in the hope they can secure a distress sale and buy your assets at a low price.
With the buyer(s) you’d like to attract in mind, you can undertake a detailed assessment of your business to develop a value proposition. This assessment should answer the following questions.
- Which features of your business should attract buyers?
- What are your business’ strengths?
- What are your business’ weaknesses?
- How does your business compare with other businesses in your sector?
- What opportunities does your business present to prospective acquirers?
- What value drivers, such as stable cash flow, customer diversity, and growth potential, does your company offer?
With the answers to these questions, you can create a clear, targeted value proposition.
Timing the Sale of Your Business
Businesses that go straight to market typically only sell for a discount to the original asking price unless you are able to create a competitive auction environment which can elicit higher prices if well coordinated. So, selling when the business is in a prime position is generally ideal.
Whatever type of buyer(s) you attract, they’ll examine the numbers and your business’ weaknesses to make their offer strategically. You need to know your numbers and business weaknesses too. Keep a close eye on your liquidity, asset turnover, profitability, and financial leverage ratios so you can monitor company activity and decide when to sell based on this.
You can also expect prospective buyers to examine the sources of your sustainable profit growth, so make sure you’ve brushed up on these, too.
What’s more, you’ll need to complete a thorough, up-to-date SWOT analysis to keep track of your business’ current strengths, weaknesses, opportunities, and threats. From here, it can be helpful to use the Ansoff Matrix framework to explore the safest growth routes. (Many management teams and analysts use this two-by-two framework to plan and evaluate growth initiatives.)
While you’ll likely have all sorts of data to analyse so you can decide when to exit your company, at the basic level, Gary McGaghey encourages business owners to sell when the business is as profitable as possible. If you aim to sell when your audited profit and loss statement and balance sheet demonstrate that your business is growing, buyers will see the potential the business has for the future and see the benefits they can reap by buying your business at a higher price.
About Gary McGaghey
Gary McGaghey has made it possible for private equity, privately owned, and listed companies in international markets to achieve transformational growth, both organically and through mergers and acquisitions. Having held several high-profile finance roles for companies like Nelsons, Unilever, and Robertsons, in 2020, he became the CFO of Williams Lea Tag, Advent International’s €1.3 billion end-to-end marketing production and business services group. He is also the non-executive director of the award-winning children’s physical assessment company Fitmedia UK.
Gary McGaghey is a chartered management accountant in the UK and a chartered accountant in South Africa. He holds a postgraduate Bachelor of Commerce degree with honours from the University of South Africa, a Bachelor of Commerce degree from the University of Natal, and a Financial Times’ Non-Director Executive Diploma.
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