How to Prepare a Target Business for Exit │ Canada

Whether you are a founder looking to sell your company – or your share of a company – a manager, a private equity firm seeking to divest a portfolio company, or a strategic buyer looking to acquire a target company, planning for an eventual exit from an organisation or business can provide a number of significant benefits for you, the business and the people you work with.

Preparing a business for exit can be an extremely complex and time-consuming process, but is crucial for ensuring a successful transition and maximising value for all parties involved.

While it might not be on your immediate horizon, making an exit plan today can provide numerous advantages tomorrow.

Coming up with an exit strategy is sometimes seen as the end of the road for a business. However, planning to exit should be an important step for business owners, at any stage of their business’ lifecycle. Developing a plan for exiting a business can be more constructively seen as planning for change, and hopefully the culmination of a journey that you have carefully planned well in advance.

A solid exit strategy is one that not only ends your involvement in a business or enterprise, but which also moves it in the direction of well-defined long-term goals, and which enables a smooth transition to its next phase – be it under new ownership or leadership, in a fresh direction, or in a new form.

However, developing an exit strategy is unfortunately something that is often overlooked or ignored until significant changes happen or an exit is forced – resulting in less time and fewer options when the moment arrives. An exit plan can also help identify potential issues or areas of improvement early on, and give you enough time and space to address them.

While it can take months, or even years, to form a sound exit plan, by taking the initiative and planning well in advance, you can maximise the time and options available to you and be well prepared when the time comes.

Ask yourself the following questions: What risk will a buyer of this business need to mitigate against, and what can I do today to maximise the mitigation?

When preparing for an exit, it is particularly important that a comprehensive review of the business is conducted to identify any potential risks, bumps in the road, and areas of concern.

This can include a review of the business’ finances, tenancy agreements, employment contracts, compliance, client and supplier relationships, and operational structure. Special attention should also be paid to legacy issues when conducting a review. Are any of these aspects of the business reliant on one point of contact and will that contact still be with the business after exit? Does the business have any assets or equipment that will need replacing? How many employees will need new contracts? Many questions will need to be asked if all pitfalls are to be avoided.

A thorough and detailed review not only prepares a target business for an eventual exit, but also helps develop a holistic picture of a business’ health and structure, and brings into view things that may not have been on anyone’s radar in both the short-term and long-term.

In addition, legacy relationships with suppliers, vendors, customers and landlords that are not long-term can be problematic. People change roles, companies get sold; so make sure you begin today to memorialise these important relationships to optimise the strength of your business.

Communicating with those in your business – and those with interests in it – should be a crucial part of any successful exit plan. Depending on the nature of the exit, you may wish to let your business’ stakeholders and investors know what lies ahead and how their interests and investments will be protected or repaid.

It can also be extremely helpful to communicate your exit strategy with any employees. Any degree of change in the ownership or operational structure of the business is obviously going to be of great concern to its employees, and an open and transparent approach to an exit is always going to be appreciated.

Another critical part of any exit strategy should involve planning for the transferral of responsibilities to new leadership. Who will take over after you? Do they have all the information they need? Ensuring that you have detailed and clear documentation and best-practice guidance in place is extremely helpful for a smooth transition of responsibilities.

Much will also depend on whether your business is being sold and who the buyers are. There are many factors to consider when selling to a well-established buyer, versus a current board member or relative, for instance. Will passing the business on to someone close to you mean that you will need to comprise on price? Does an external buyer share the same passion and values as you, and will they protect your legacy?

As you get a business ready for exit, it is important to ensure that all the necessary documentation is in order and readily accessible for those following in your footsteps. This can include financial statements, legal and regulatory documents, customer and supplier agreements, and other key information that new parties may need to evaluate the business.

It should come as no surprise that developing a strong exit strategy also requires an in-depth analysis of a business’ financial performance. To prepare a company for exit and maximise its value and attractiveness to prospective buyers, it is particularly important to optimise the business’ financial performance, including by improving revenue growth, reducing costs, and maximising profitability. Buyers are much more likely to strike a deal if it is clear that the sellers have taken the time to make their business more cost-effective and profitable.

Developing clear short-and long-term growth strategies can also make the business much more attractive to prospective buyers and help to demonstrate a potential for future growth and value creation. This can include identifying new markets, expanding the business’ offerings, defining financial benchmarks, or pursuing potential partnerships or acquisitions.  Potential buyers place much more value in businesses with well-defined exit strategies and a demonstrable commitment to its vision and goals. After all, a goal-oriented business is an attractive business.

While there are an inordinate number of complexities and factors to consider when putting together an exit plan, the aforementioned points will hopefully help in giving you a broad sense of the most important to bear in mind. By taking these into consideration and asking the right questions as you evaluate the business or company being exited, a challenging transition can be made much smoother and your business’ future success further ensured.

The sooner this plan begins in advance of the exit, the more likely the exit will be seamless and maximise the benefits for the parties involved.