Dr. Tom McKaskill is the Academic Director of the Master of Entrepreneurship and Innovation program at the Australian Graduate School of Entrepreneurship. He has started, built and sold numerous businesses and has written 30 books for entrepreneurs, covering such topics as new venture growth, raising venture capital, selling a business, acquisitions strategy and angel investing.
In this Q&A interview with Alex Pirouz, Dr Tom Mckaskill discusses how to exit your business, how to best prepare for an exit and the different ways to exit.
Q: What are all the different ways to exit a business? How important is it to know the most suitable approach for your business in advance?
A: There are a variety of ways to exit: trade sale (strategic or financial), liquidation, IPO, MBO, MBI. Each exit requires a very different strategy to prepare the business for the optimal valuation.
Q: Can you briefly describe each of them?
- A: Initial Public Offering (IPO): The first sales of stock by a company to the public. Chances of doing an IPO as a startup is around about 4000-10,000; it is very rare.
- Management Buy-Out: The purchase of a firm by the existing management, usually with outside financing. I would only recommend a management buy-out when every other avenue is completely out of your reach, because effectively you’re giving away your company.
- Management Buy-In: New management team buys into the business, acquiring the shares of the business assets. This is usually very rare; it’s when someone else is putting in the money and bringing on board the management team so it is the classic private equity-type play. This typically works for very large SMEs.
- Liquidation: Liquidation is when you have given up on everything and you’re in a fire sale. The business owner has either left it too late, hasn’t got enough money to keep going, is facing insolvency, is calling in the receiver or has no other option.
- Strategic Exit: This is when you have an asset, process, trademark, patent, brand, right or something that a very large corporation can exploit on a large scale. It does not happen that often, but is usually the case when you have a good patent, strong competitive advantage, high scalability in a high-growth potential market.
- Financial Exit: This is a classic trade sale where a business owner does not have competitive advantage, no patents or anything like that, but has a nice business. The exit will be based on profitability and typically you’re selling on the basis of an even multiple. This type of sale accounts for 95% of all exits.
Q: How does an entrepreneur choose which is the best exit strategy?
A: Either which one provides the best outcome, or which ones he/she can execute on; or if it is an MBO then it comes down to what the business owner wants to do for his/her employees.
Q: How do you know when it’s the right time to exit your business?
A: You don’t, because no one can predict the market for any length of time, as we have seen in the GFC. Selling out when the market is high and holding on when the market is low is absolutely nonsense, because if you look at the proper preparation for sale it’s about 18 months to 2 years, and no-one can predict the market for that long.
However, if you look at the acquisition literature, the good acquirers buy all the time, regardless of the market, so if you have strategic value you will always find a market.
Q: How can an entrepreneur best prepare their business for sale?
A: Well, there are three elements required: 1) Understanding the potential of the business in the hands of the buyer and being able to clearly articulate that and prepare the business so it can be exploited by the buyer; 2) Mitigating the risks to the buyer inside the business, in the transition of the business and in the exploitation of the business; 3) Ensuring you have a competitive bid going.
A good preparation can take 18 months to 2 years, depending on your starting point.
Q: At what stage in a business does an entrepreneur know when it’s the right time to exit?
A: It is a balance between what creates the best exit value and their own motivation. An entrepreneur might want to exit even if it is not the right situation. They may be tired, worn out, over it, wish to move on, better opportunity, etc. Otherwise it might be a very good offer or the circumstances might be right.
Q: What does an entrepreneur need to do to be ready for exit?
A: First decide to do it, than get all the managers, shareholders, directors involved and to agree to the exit, and when that is done you start getting the preparation work ready.
Q: Why is it important for an entrepreneur to understand and know about exit?
I encourage entrepreneurs to simply ask themselves the following question: Why are you in business? Ultimately there has to be an end, what is the end? What is your endgame? As soon as they answer the endgame questions they will know how important it is.
Q: What are the benefits of getting into business with a clear understanding of your exit strategy?
A: You will absolutely capture much higher exit value than otherwise. You will have much better focus, know exactly what you’re doing and where you’re heading, your strategy of growing the business is completely informed, not doing things that are irrelevant or a distraction that is going to decrease your value. Once the exit is figured out, everything else become clear.
Q: What are the dangers of not having an exit strategy?
A: One, you will get into trouble and end up giving your business away. Two, you will get an offer which you can’t execute on because you are not ready. Three, you don’t know why you are there. You will be running around all over the map without having a clear strategy as to why you are there. By understanding the exit, every decision you make will be informed by the exit.
Q: What are the top three lessons you have learnt about exit throughout your time in business?
A: Always work out who the buyers are. Build a business which they can exploit rapidly. Take risks out of the business for the buyer.
Q: What tips do you have for entrepreneurs who are looking to build an exit strategy for their business?
A: It is not about you, only about the buyer; and most importantly, have a process for exit because then you don’t need to rely on instinct more on method.
Q: As an entrepreneur how do you manage the transitional period of exiting your business with staff within your company?
A: You inform them; incentivise them, prepare the business for the buyer and work with the buyer to ensure it is a successful transition. Some people will have to leave and those people will need to be adequately compensated.
Alex Pirouz is the founder of RIDC Advisory Pty Ltd. A Business and Sales Advisory firm partnering with Australia’s largest and fastest growing companies to further increase their revenue. Visit http://www.ridcadvisory.com.au/ for more details.