The Exit Planning Myth

The Exit Planning Myth

It is extraordinary how often we hear business owners telling us they have been paying consultants and accountants to help them prepare their business for sale, and how long they have been engaging these “experts”. Almost every business consultant, coach, or mentor has screeds of information, manuals and guides that they will happily take a business owner through, on an hourly rate, to prepare them for the sale of their business. The more complex and esoteric the advisor can make the process, the better. Often these advisors have never sold a business or indeed owned one, but nevertheless confidently march their clients through various business plans, strategic plans, checklists and milestones on the way to a moment presumably where they say….”you are now ready”. But was all this money and time and distraction really necessary? And does it really add any value at the end of the day? The truthful answer is; only occasionally. More often than not the whole “Exit Planning” nonsense is no more than fee generation by well-meaning but ultimately misguided advisors. Seminars are held, texts are written and plans are enacted,
and the invoices are sent. This may seem a touch strong, and perhaps it is, but it is frustrating to see business owners focus on unnecessary complications and delay their plans when often it is totally unwarranted.

If you haven’t been on the Exit Planning bandwagon yet, here is what you will be told and my comments about each:

You Need To Be Planning To Sell Your Business From Day One.

No you don’t. If you just bought a business, why would you be immediately planning its sale? It’s an incongruous concept. You need to run the business from day one to achieve the objective you set out to achieve; make a return, have a great lifestyle, travel, have a change of environment, or whatever the case may be. The point is actually to run your business successfully from day one, which most owners try desperately hard to do in any event.

You Need To Work Towards Making More Profit.

Seriously, this is on virtually every Exit Planning list. It is often couched in very professional sounding language like this explanation from a UK website on Exit Planning; “Step 6. Maximising value – in its simplest form, purchasers will most often value businesses based on Earnings Before Interest, Tax and Depreciation/Amortisation (EBITDA), to which they will apply a multiple e.g. 3x, 4x, 5x. During the planning period, it is worth focusing on the key drivers to identify how they might be improved.” In other words; make more pro t. Gee thanks, here’s my cheque. I don’t know many business owners who are not trying to increase their earnings, lifestyle or portability, and as I will explain shortly why it doesn’t matter in what form this comes.

You Need To Pay Yourself the Correct Salary.

No you don’t. You can pay yourself whatever you like. Too much, too little, it doesn’t matter a jot. (Again, I’ll explain shortly).

You Need To Make Sure That the Business Is Not Overly Reliant On You For Its Success or Even Viability.

This is a good point. But often in small businesses, there simply isn’t the capacity to have a full management team in place. If there is anything to be planned, this is often the biggest issue.

You Need To Make Sure That Your Lease Is Renewed and Well Documented.

Good idea. That takes one meeting with your Landlord – they are normally bending over backwards to have tenants renew or extend leases.

You Need To Make Sure You Have Supplier Agreements In Place.

Yes you do. So if you don’t, get them in place.

You Need To Reduce Non-Business or Non-Recurring Expenses, and Operate the Business “Cleanly” For At Least A Year.

No you don’t. This is entirely unnecessary in most cases.

If there is a need for preparation before selling a business, it can often be achieved within two or three months, and the reason we say this is because we don’t theorise about what buyers will and won’t do, we work with them every day and have sold over a NZ$1 Billion of businesses – we know.

What most owners need to do is simply “normalise” the accounts. In other words explain to the potential buyer, how you have decided to apply the income to the business and what the actual “discretionary income” really is. It is simple mathematics and can be completed by any accountant, or a competent business broker. Why would you need to wait a year to add $15,000 to your bottom line because you had a $15,000 “business” holiday last year? We would simply explain to the buyer that you spent $15,000 on travel but it wouldn’t need to be repeated for future earnings. This amount is added to the net profit and takes about five minutes for each item that is either non-recurring or non-business related, like the “business” trip we described earlier. Similarly, whether you are under or overpaying yourself or others, adjustments can be made to show the correct discretionary income.  The key point is to ensure that any of these “add-backs” or adjustments are bonafide and will withstand scrutiny under due diligence, and clearly separated and highlighted below the line.  It is important to be entirely honest, as any buyer will require sufficient evidence to satisfy themselves.

The effect of completing the “normalisation” correctly can be very powerful.

A simple example will highlight the concept.

Let’s assume we value a fully managed business and ascertain the multiple of EBITD to be 3.75. In other words, we would multiply the Net Profit (before we deduct interest or depreciation) by 3.75 times. And let’s assume our business is showing an EBITD of $235,000 – that gives us a value $881,250.

Now we discover the business has legitimate add-backs identified of say $55,000 in total (let’s say this is made up of; personal motor car costs, a marketing plan that didn’t work and won’t be repeated, and some overpayment to the manager who is also your wife. We add this total amount to the Net Profit which is now correctly stated at $290,000. The business is now worth 1,087,500. And you didn’t have to wait two years.

There are legitimate reasons for taking longer to prepare a business for sale; you may be bringing on new product lines or expanding operations and want to have these generating income before selling. You may be dealing with management infrastructure and personally withdrawing from the limelight. In larger businesses with more complexity, there is sometimes a need to separate multiple business interests and have clear accounts around each, but for most businesses valued between $250,000 and $5 million, exit planning is no more than snake oil for fee-seeking consultants.

Article by  Aaron  Toresen,  Managing  Director for LINK – Ellerslie. Level 1, 401 Great South Road, Ellerslie, Auckland

P: 09 579 9226      E: [email protected]