Exiting Stage Left? Just make sure you’re financially fit before you do

A deep understanding of the market place, knowing your value and being organised are essential when succession planning, writes Emma Cadden, RSM Ireland’s Transaction Advisory Services Director.

Abraham Lincoln once said, “If I had eight hours to chop down a tree, I’d spend six sharpening my axe.”

In the context of your business, the skill of making plans well in advance of seeking investment or departing a business is imperative to a successful outcome.  Extensive preparation is part of the process of negotiation.

How does one prepare to get exit a business? The trick is to know your value and put planning into practice.

For the company planning to sell or set in motion a succession plan, timing is everything. What we are seeing now is a lot of people in business in the aftermath of the recession consolidating where they are and finding they are now in a better position for a hand over. This could be a parent passing the company to their children or what we are seeing is a notable increase in management buy-outs, where the current management team within a company wants to take either full or part ownership of a business.

This is particularly relevant in the property and construction industry where there has been a significant increase in activity and the requirement to now plan to secure the future of businesses.  Whether this is through succession planning or investment, the value of the business and its impact on these issues are foremost in the minds of business owners.

To assist in this process, proper planning arms the exiting shareholders with a level of confidence necessary for handling any unexpected bumps along the way.

When you sit down to do your initial evaluation and preparation, ask yourself the following: What are the reasons for the sale or transition of the company? How strong is the company’s historic and projected financial performance? Do you know the operating metrics and sustainable profits and growth? What is your market position or customer base? What contracts are in place or in the pipeline? How formal are relationships with customers and contractors?

Due diligence is one of the steps that will expose any cracks when the perspective buyer probes more deeply into the company. Every business owner exiting the market should pay heed to every nook and cranny within the company to include issues impacting quality of earnings, such as revenue recognition, margin analysis, EBITDA adjustments and operating risk analysis.

As well as quality of earnings, a business should consider potential balance sheet implications. This includes understanding the company’s working capital cycle, identifying under recorded and unrecorded liabilities, and ensuring there are up-to-date valuations. You must be tax compliant and maintain a quality of information including IT systems that are effective and accurate. The link between the financial and operation metrics should be robust and therefore the strength of the management team is key in driving the business. Essentially, it’s about leaving no stone unturned.

This approach will ensure any areas in need of improvement ahead of an exit will be identified in good time and remedied in advance. The deeper the understanding of the make up of your business and what makes it tick, the better the transition when it comes to selling.

The greater the planning, the easier the exit. Identify the areas where you can improve upon, set about making things right and present your business with confidence you can stand over to any prospective buyer.

RSM Ireland specialises in providing advice to mid-market businesses on audit, tax and consulting matters.

Emma Cadden, Transaction Advisory Services Director, RSM Ireland

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