Getting the maximum price and not leaving money on the table is the primary benefit of a sound exit strategy. A good strategy also makes the transaction proceed as smoothly as possible. Start thinking about your exit strategy two to four years before the event. Consider your markets strategically. When is the best time to sell? Who might be the best buyers? How can you improve the value of your company? Thinking about your exit strategy can improve management’s clarity about long-term goals and strategic alternatives.

View Your Markets Strategically

The smart company will understand the nuances and the movements in the market and have a sense of where the market might be going over the longer term. For example, if the top firms are making more acquisitions it might signal a move toward consolidation. Viewing the market strategically means understanding who the best buyers might be and why. How will a buyer perceive your company? How might a buyer assess your strategic value? Strategic value will vary depending on the degree to which a buyer can capitalize on the strategic assets of the selling company.

The Best Time to Sell

The best time to sell a company is when the market is willing to pay the highest price. To achieve the top price, market awareness and timing are critical.  The optimum time may be sooner than you think. The market may be on a different time schedule than your company’s growth curve. If your competitors are being acquired, your firm may face tougher competitive battles going forward.

Improve Your Value

An effective exit strategy will include steps to improve your company’s value. For example, increasing the portion of your revenues that are recurring will increase your value because these revenues have less risk.

Track and manage the profitability of each product. You would be surprised how many companies don’t do this. Track the profitability of each customer too. Perhaps you should fire a few customers. Pay attention to your customer mix; should you attempt to attract more of one type of customer and reduce the number of low profitability customers?

Reducing Risk

Risk has a significant impact on value. Companies with lower risks are worth more than higher risk companies, even with similar profits. CEOs typically think about ways to improve growth and profits, but less attention is paid to reducing areas of risk. Reducing a company’s risk will have a positive impact on value.

Customer concentration can increase risk. If a large portion of revenues derives from a few customers, this makes the business riskier and is a concern for buyers. Revenues could take a hit if the customer leaves. Consider giving customers a discounted price if they sign multi-year agreements. This reduces the risk of customers leaving. Don’t forget management risk. Are the right people in the right jobs?

Alignment

Alignment is another topic that a sound exit strategy will address. Misalignment can occur between different shareholder groups or between management and shareholders. Shareholders may have different preferences about investment horizons, the timing of an exit or how aggressively the company should pursue growth. Liquidity preferences can also cause misalignment. In my experience, quite a few companies have problems with alignment and I have seen transactions fall apart because of alignment issues. It pays to address these issues before they become a problem.

Unsolicited offers are more common than you might think. In the technology and software sectors, unsolicited offers happen on a regular basis. You should be in a position to respond intelligently and with a realistic plan of action in case you receive an unsolicited offer.  

Conclusion

Business owners should begin thinking about their exit strategy sooner rather than later. The prepared company will have increased its value, reduced its risks and will not be scrambling at the last minute to get things in order. It will have a keen understanding of the movements in its market and have an idea about who the best buyers are likely to be. In addition, it will be prepared in case a buyer makes an unsolicited offer.