Preparing your business for an exit – a 7 step plan

Optimize your financial performance

For anyone getting involved with your business, its financial performance will be a critical factor the assess when deciding for or against your business. 

Strong financial performance will seal the deal, poor financial performance will in most cases be a deal breaker.

Optimizing your performance therefore is key to any good exit preparation.

Profitability

Above all, a potential buyer or investor will look for profitability. It tells them how much return they can expect on their investment.

For most buyers, Earnings Before Interest, Taxes, Depreciation and Appreciation (EBITDA) will be the key metric they look at. 

It tells you how much profit your business makes before interest and taxes, as well as book value changes of your assets.

How to improve profitability

You have basically two levers to increase profits. Earn more, and spend less doing so.

Anything that helps increase revenues while keeping cost stable will help profitability. Likewise, anything that helps to decrease costs while keeping your revenue stable will do the same.

The art when preparing your business for an exit is to achieve better profitability, without harming the long-term earning or growth potential of your business.

Mere price increases or unfocused cost-cutting won’t work.

Cash-flow

For a potential buyer, it will be important that the business can finance its operations and future growth from its own cash-flow.

Otherwise, the buyer would have to either take up debt financing or add additional funding into the business out of their own pockets.

In simple terms, cash-flow describes the result of cash flowing into the business minus outgoing payments in any given period.

How to improve cash-flow

There are a few fundamental levers to cash-flow.

You can speed up your order-to-cash cycle, focusing on everything that brings in cash for any given order quicker. Examples include:

• Invoice quicker. Sending your invoices as soon as you can will cut the time it takes till you can collect cash.
• Agree on shorter payment terms with your clients
• Collect payments upfront

You can work to decrease the number of clients that don’t pay or pay late.

At the same time, you can work with keeping more cash longer in the company. Examples for this include:

• Agree on longer payment terms with your suppliers.
• Use supplier financing if the terms are favorable

Lastly, you can reduce the funds that are tied in your business. This will free up cash immediately. Here are some examples

• Manage your inventory well
• Lease items instead of buying them where it makes sense

Reporting

Lastly, a potential buyer will be looking for a business that has high transparency when it comes to the above and other financial metrics.

Specifically during the due diligence and negotiation process, having your financial metrics available instantly will create trust and allows you to get a deal. 

You should be able to report on the following without huge effort:

• Profitability of the past three years by month
• Cash-flow of the last three years by month
• Gross and net profit margins, broken down by product line, business unit, client, project or market segment
• Assets and liabilities in the company
• Different cost types (staff, rent, etc.)
• Inventory values where applicable
• Billable hours 

You should be able to report on any number that’s relevant to your type of business reliable, accurately and quickly.

If you don’t have this ability now, it’s worthwhile building out the structures as soon as you can, as getting reliable information requires you to have the data in the right format and attributed correctly for the time frame in question.

That means that if you want to sell or exit in three years, you should start building out a reporting system today.

Clean up legal and financial structures

I mentioned earlier that a potential buyer is looking for a good risk/reward ratio when selecting a business to buy.

Your business needs to be clearly structured and with regards to legal and financial structures and their formalization.

Legal structure

The legal structure of your business for the sake of this article includes your business’ legal entity and structure, any relationships your business has with third parties like vendors, employees and clients, as well as any open legal matters.

How to clean up your legal structure

Here’s a list of legal relationships you should look into. Please consult with your legal counsel or lawyer to do so and to add relevant aspects to the list:

• Contracts with clients: You should have clear terms and conditions in place. Any ongoing business relationship should be formlaized in a contract. Contractual agreements from clients, as well as past clients need to be documented.
• Contracts with employees
• Contracts with vendors
• Lease contracts
• Settle any ongoing legal matters.

All informal hand-shake agreements you have should be formalized and put into writing so a potential buyer has the assurance that they will continue in the same way and shape when you’re gone.

And lastly, of course any open legal disputes should be settled.

While not all of the above might be possible to accomplish, the more you can formalize and settle, the better.

Financial structure

Comparable to legal, a sound and documented financial structure will make your business a lower risk buying object.

In addition to the reporting optimization in the last section, there are some other financial aspects that need to be considered.

How to prepare your financial structure

Here are the items you should consider when cleaning up your financial structure.

• Are personal and business accounts clearly separated? Have all funds provided to the business, as well as all funds taken out of the business accounted for?
• Taxes: Are your tax records accurate? Have you filed all outstanding tax returns and paid all taxes? There should be no open matters with tax authorities.
• Your financing: Do you have open business loans you don’t need anymore? Pay them back if possible, as a debt free business in general is more attractive than one with debt.
• Back to contracts: Is there documentation of all payments? E.g., is there written documentation for all salaries, as current salaries will likely be higher than the ones you had agreed on initially in the contract with the employee.

Most of these things should be in place already, but it makes sense to tie up any loose ends.

Make yourself redundant

When someone buys the company, they know you’ll in most cases leave eventually. This raises the question: Can the company work without you.

While we will focus on operations in the next section, there are other even more important pieces to the puzzle: Your leadership team and management systems.

Strong leadership team

If you’re the only person in the company making decisions, owning client relationships and knowing the operational and commercial ins and outs of your business, chances are that your business is highly dependent on you.

Not a very attractive value proposition for a potential buyer.

Instead, they’ll be looking for other senior and experienced people inside the company that can:

• Make business decisions
• Can keep operations running smoothly and customers happy
• Can help a successor to understand and eventually develop a business further.

The core value generating functions in your business should have a person responsible for them, ideally with both operative and disciplinary oversight of the related teams.

This way, a potential buyer can be sure that your operations will run smoothly and without interruptions after you leave.

How to develop a strong leadership team

If you don’t have a leadership team in place, you should start by identifying the critical business functions that you want to delegate.

Consider the following factors:

• Which functions/departments require attention beyond what you’re able to provide
• Which functions are large enough to make it difficult for you to manage everyone directly
• What functions are strategically important for your business

With this list of functions, the next step is to identify candidates for the leadership position. The right candidate could come from internally or externally, depending on a variety of factors.

• The talent and seniority level you have in-house
• The need for outside expertise
• Your budget
• The cultural fit

Once you have selected a candidate, you need to transition them into the leadership position. For outsiders, this will mean onboarding. For internal promotions, this will include training, coaching and other measures to help them take over more responsibilities.

As a next step, it’s critical your leadership team has the tools and frameworks they need to operate autonomously and effectively. You need the right managerial tools.

The right managerial tools

Think about managerial tools as everything your leadership team uses to run their function, plus everything you use to run the business as a whole.

Strategy Execution

There needs to be a framework in place that translates your strategy into operational goals for your leadership team and the departments respectively.

These frameworks typically feature some form of goal setting or work breakdown structure, and reiterate on the same on a quarterly to yearly basis.

These tools have in common that they provide clarity to everyone involved in your business. Even more importantly, the align all activities in your organization.

Examples include OKRs or roadmapping.

Goal setting

Your strategy execution approach will determine your goal setting approach.

If you want your leadership team and ultimately your business function well, you will need to set the right goals for your organization, or facilitate the people in your business doing this themselves.

KPIs

Based on your strategy, you need to define long-term KPIs that tell you whether or not you’re successful.

While your short term goals change over time, your KPIs should be fairly stable.

Everyone in the business should have between 2 and 5 KPIs they optimize for. One KPI only might need to undesired consequences. An example: If you have your sales reps optimize for revenue only, the might “buy” that revenue with high discounts, harming your profitability.

You want to always balance KPIs, that’s why you should have two.

Make sure to align everyone’s KPIs with your company KPIs.

Decision-making authority

For your leadership team to operate effectively, the need a clearly defined set ot accountability and responsibility, alongside the authority to make decisions in their field of work.

We recommend setting up a list of topics that each member of your leadership team can decide autonomously. And couple that with a decision-making threshold as a Dollar value, beyond which they need to consult with your or get your approval.

Good communication

Your leadership team should have weekly, dedicated time together. These should include:

• Review of company level and departmental KPIs
• Update on strategy and initiatives
• Client / customer topics
• People topics

Having these things in place will ensure the buyer that he’s buying a mature organization, not a hero-based one-man show with some support.

Build robust operations

Beyond the leadership level, you need to streamline your operations. After all, a buyer is looking to buy an organization that can continuously deliver your products or services at a high quality.

The three dimensions to optimize are

• Processes
• People
• Tools

Processes, workflows and documentation

For your business to be ready for an exit, you want core processes to be running smoothly without your support.

To achieve this, there are a number of things that should be in place.

Optimized processes

Make sure you continuously optimize processes, so your business runs as effectively and efficiently as possible.

Focus on eliminating unnecessary steps like handovers, approvals, waiting time or over-processing. 

In addition, you need a continuous improvement process. Your team should have a central place (spreadsheet, a dedicated place in your project management or communication tool, etc.) where they collect improvement suggestions.

Lastly, make sure that every process has a dedicated process owner, that owns the process quality and can drive improvements.

These suggestions need to be discussed regularly. Prioritize them with your team, assign responsibilities and monitor implementation.

Documentation

Core processes should be documented. This serves a variety of purposes:

• Easier onboarding
• A place to implement improvements
• A common understanding of best practices, ensuring high and consistent quality

Workflows

Wherever you can, augment documentation with actual workflows, e.g. by using a template in your pm tool. The more work you can trigger (instead of relying on people to go read somewhere how the work is done), the more efficient you will be.

In the same way as you can improve documentation of processes, you can improve workflows, bringing an immediate improvement to the work and outputs.

Automation

Monitor your tasks for work that can be automated. It’s important to acknowledge that even with automation, there has to be someone in charge for the work performed. 

Automation is a tool, not a set-it-and-forget-it solution to all problems.

People

Once you have clarity on your processes, the next thing to tackle is your people management. Here are the things you should have.

An org structure supporting your strategic priorities

Define an org structure that reflects what’s important for your business. Find the right balance between flat hierarchies and manageable spans of control.

Clear operating model and job descriptions

The org structure alone won’t do much, unless you marry it with your processes.

Use a RACI matrix to define in detail, what role in your business is involved in what process in which way.

This will fundamentally define your operating model.

From that org structure, derive your job description. To bring them to live, discuss the specific job descriptions with your team and assess:

• What tasks of the target job description an employee is already doing
• What tasks they’re not yet doing but could start doing
• What tasks they’re not doing because they’re not equipped to do so.

Work on resolving the last point.

It’s important to sync your process improvement and updates with your RACI matrix, job descriptions and operating model.

Effective Recruiting and Onboarding

You want to showcase to a potential buyer, that not only your existing team is great, but also you’re able to find, attract and onboard new talent effectively.

Spell out and continuously improve your recruiting process as well as your onboarding process.

Organizational Development Infrastructure

In addition to the things already mentioned, your organization might benefit from implementing an organizational development framework. The scope of this framework will mostly depend on your size.

The components to consider are:

• A performance appraisal process, helping your team to understand how they’re doing and aligning compensation with performance
• A compensation and benefits package, helping to attract and retain the right talent.
• A learning and development framework, helping to close the gaps identified in job description discussions and performance appraisals.
• Career ladders and career progression planning, providing perspective of development to your employees, and thus increasing engagement and retention

The right tools and software

Your buyer will pay a premium if they see you’re operating on a robust tech stack that expedites work and secures high quality. 

Here are the tools you want to have in place.

PM or collaboration tool

Use some form of project management or collaboration tool to manage work and ensure that nothing falls through the cracks.

This will also be the place to set up workflows and automations in many cases.

Documentation tool

Sometimes part of the PM or collaboration tool, documentation software provides a central place to document, improve and share your process information.

Reporting tool

For both financial metrics as well as performance-oriented metrics, you’ll need a tool that you use for reporting.

For software, as a rule of thumb, try to have as few tools as possible and rather maximize the use and adoption for a smaller tech stack. Every new tool produces cost due to licencses, training needs, management and complexity.

Templates

Beyond software you want to templatize as much of your work as possible. Again, a natural place to incorporate continuous improvement, having templates for core business process deliverables of client deliverables will show a potential buyer that you’re not inventing the wheel with every new iteration.

Meetings

While meetings get a bad rep, in reality they are a vital part of every well-functioning business.

Make sure to have as few meetings as possible, but as many as necessary. At least, there need to be team meetings. 

In addition, your leadership team should have 1:1s with their direct reports. So should you with each member of your leadership team.

Lastly, you want to implement a smart set of functional meetings, to ensure communication flow between functions that need to communicate closely, e.g. between Customer Support and Product Management, or between Account Strategy and Project Management.

Define cultural and strategic fit

As a last step to be exit ready, you need to define what the cultural and strategic fit for a potential buyer, investor or CEO needs to be.

To do that, first work to understand your own culture. If you’re unsure, schedule a session with your team and collect values they think describe the way your business operates.

Synthesize these values into a short-list of five core values.

These are the values that you’re looking for in the buyer, investor or new CEO.

In addition, you should answer the question from the beginning regarding continuity, specifically: What would you like the company to look like 5 years after your exit.

If you have clarity about these two topics it will be much easier to determine whether a buyer, investor or CEO is a good fit.

Is your business exit-ready

This is a long list, and the degree to which the above items are relevant is individual for your business.

But working through this list, and either implementing or intentionally discarding items will help you have your business ready when the time for an exit comes. 

This will help you obtain a high valuation, finding the right buyer, make transitioning out easier and will leave you confident that your baby will be able to walk on its own.