Morgan Jones, Principal in the Corporate Finance team at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions, outlines the imperative of exit strategy planning for owner-operators.
One of the biggest challenges for owner-operator companies is when and how to introduce some form of exit or succession planning.
Successful companies will first and foremost focus on their product and service offerings, expanding the customer base and managing operational issues to drive revenue and profitability growth. However, there are a few key disciplines that will not only assist with exit or succession planning but if done correctly, can also support delivery of these other business goals.
When considering the introduction of a financial or strategic partner, or an outright sale, the following areas should be contemplated to ensure the business attracts the right value, reflective of the true performance potential of the business:
• Key man risk
A business that relies heavily or solely on one person is inherently riskier. A business with clearly defined roles, systems, policies and an institutional knowledge base is a more stable organisation and will attract external investors.
• Reliable management information and Key Performance Indicators
External investors need reliable information in order to objectively assess the business. More than just the annual financial accounts are required. There should be an opportunity to obtain a deeper understanding of the business through key data points, the tracking of financial performance, the accuracy of budgeting and forecasting versus actual results and the ability to underpin the growth prospects of the business through a data-driven understanding of the business. In addition, the appropriate use of Management Information can often materially enhance the understanding of the business by the existing owners and offer opportunities for refinement and enhancement of strategy pre any investor dialogues.
• Strategy and market strategy
Whilst a very broad topic in and of itself, simplistically, growth opportunities and prospects as well as market conditions should be clearly understood. Being able to effectively define what the business can and should achieve will be critical. For example, a business with a diversified customer and supplier base in a deep and growing market mitigates concerns around concentration risk and enhances the perspective of growth opportunities being realistic.
• Record keeping and administration
An ability to demonstrate a proactive approach to record keeping and filing is always helpful. Critically, one should always seek to ensure that the business’ affairs (tax, legal etc.) are fully up to date and any issues or concerns must be clarified and adequately addressed.
• External profile
The company’s websites, brochures and marketing communications are updated so that they reflect the desired external image.
Contemplating an exit is in itself a complex conversation. Why would exit be relevant, why would a minority investor be relevant, am I looking to diversify, what is my role in the business going forward, is a sale or a listing on the stock exchange more appropriate?
These considerations require expert input and guidance as there is never a one size fits all answer to these questions. In addition, if an exit in the medium term is a genuine possibility, it is also worth considering the legal structure of the company itself as well as that of the shareholders’ ownership of the company.
By working with an expert adviser, all of the above can be factored into the thinking of the business and its owners. This ensures that even before any exit process is contemplated, the company’s preparedness has been enhanced, which will increase the likelihood that the price realisable for the business reflects the time and effort and resources that have been required to get the business to where it is today. Even when no exit is necessarily planned, preparation in respect of the above can be important in agreeing whether the timing is right if an unsolicited approach is made to the business.