The first work can usually be split across three areas: current financial performance, buyer risks and the specific improvements which can strengthen the business before going to market.<
Exit planning starts with understanding how a buyer would assess the business today and which areas could materially improve before a sale.
The first work can usually be split across three areas: current financial performance, buyer risks and the specific improvements which can strengthen the business before going to market.
1. Build the financial picture a buyer will use
A useful starting point is to think about how you would market the business if you were approaching buyers today.
Start by writing down the main reasons someone would want to acquire it. This could include strong growth, a high proportion of recurring revenue, attractive margins, exposure to a growing market, proprietary technology, a particularly valuable customer base or a strong management team.
You should then support those points with the financial and operational information behind them. If growth is part of the story, understand where it comes from. If recurring revenue is a strength, calculate it properly. If the company has unusually strong margins, understand how they compare across customers, products or business units.
Preparing these highlights also starts exposing areas where the story becomes harder to support. A business may initially appear to have highly recurring revenue, for example, before a buyer realises that a large percentage of customers can cancel monthly. Strong overall growth may turn out to depend heavily on one new customer. Attractive EBITDA margins may include several costs which will increase once the founder leaves.
Thinking about the business from a buyer’s perspective therefore gives you an initial view of both the strengths you will eventually market and the weaknesses which may need work beforehand.
2. Investigate the risks a buyer will focus on
Once the business has been mapped out from a buyer’s perspective, the next step is to focus on the weaknesses which could affect their interest, valuation or willingness to complete a transaction.
For example, where revenue depends heavily on one customer, management might focus on extending the contract or reducing the relative concentration through growth elsewhere. Where a particular employee holds critical technical knowledge, the priority might be documenting that knowledge and building more redundancy in the team. Where monthly reporting is weak, the work may involve producing reliable management accounts and KPIs consistently before buyers begin asking for them.
The priority should go to issues which are both material to buyers and realistically capable of being improved before the sale.
Some changes need time to become credible. A newly hired management team has more value after it has operated independently for a year. An improvement in customer retention becomes more convincing once several cohorts show the same pattern. New reporting processes become more useful once there is enough historical information for buyers to analyse.
Identifying these issues early therefore gives management time to produce evidence of improvement rather than simply explaining what it intends to change.
3. Work backwards from the business you want to sell
Start with an approximate sale date and describe what the business should look like at that point. Once the current strengths and weaknesses are clear, the path to that target will be easier to draw, and the target itself will be easier to define.
Defining targets could mean reaching a particular level of revenue or EBITDA, reducing the largest customer below a certain percentage of sales, building a management team capable of running the company independently or reaching a specific level of recurring revenue. The work completed in the first two steps should then determine the actions required to reach that position.
If the company currently generates $1m of EBITDA and the target is $1.5m, management should understand precisely where the additional $500k is expected to come from and when it will become visible in the accounts. If founder dependency is one of the main risks, responsibility should be transferred early enough for buyers to see that the new structure already works.
This creates a practical exit plan with measurable milestones rather than a general intention to improve the business before selling.
A third-party view can also be useful at this stage. Founders naturally understand their businesses from the inside, while buyers will assess them comparatively against other acquisition opportunities. An advisor who sees transactions regularly may identify risks which management considers normal or highlight strengths which the company has historically taken for granted.
To conclude…
Exit planning starts by looking at the business through the eyes of a potential buyer.
Identify the strengths which will form the acquisition story, and use that exercise to expose the areas which could weaken it. Finally, work backwards from the position you want the company to reach before going to market.
This gives management a clear set of priorities for the period before a sale rather than an all-too-common desire to ‘grow a bit more’ before a sale.