It’s an unfortunate fact the most SMEs do not have an exit strategy and because of this they are often sold well below their potential value.

I understand why this is the case – it’s simple, most SME owners think about exiting when they are considering retirement or when they realise the family is not interested in taking up the mantle.

However basing an exit strategy on retirement is possibly the worst thing you can do as this will rarely correlate with the value of your business.

Talking about exit strategies if often very difficult for SME owners as they see the business as their “child” and ask the question “what will I do next”? This is perfectly understandable but in my opinion it’s an important psychological hurdle which most SME owners must overcome in order to stimulate investment, growth and maximise the value of a potential exit.

When is the best time to exit?

For most SMEs, as shown in the above chart, the best time to exit is usually when the business can demonstrate the following 3 criteria:

  1. It has recent and sustained growth.
  2. It is projecting further sustained growth.
  3. The overall growth period can be linked to a “growth story”.

Unless both the owners and the Head of Finance are aligned in this fashion, then it is unlikely that the business will achieve its maximum potential value on exit.

Recent and sustained growth

Sounds obvious? Well yes it is, but if you do not have a growth strategy and a potential exit strategy then it is highly possible that you will not have recent and sustained growth at the point of exit. There are no hard and fast rules as to level of recent and sustained growth as it’s ultimately linked to the “growth story” – that being said I would always recommend 2 to 3 years of growth in both revenues and profitability as a basis point for maximising value.

Projecting further sustained growth

Potential buyers will heavily scrutinise projected growth so it is absolutely imperative that projected growth is linked and based on a growth story which is preferably supported by recent growth. The projection period need not be long as investors will simply adjust it based on unknowns, projected market trends, etc. The story behind the projected growth is much more important.

The growth story

I can’t stress how important the “growth story” is to maximise value. A strong story interlinked with past and projected growth will:

It important that the growth story is a continuation/ culmination of recent events and can be supported by other factors such as:

How does this work in practice?

Without a strong Head of Finance and a strong finance department it often doesn’t!

For every SME owner I have worked with, I have ensured that they are always thinking about the growth cycle and “what comes next”. A good Head of Finance must work closely with both the owners and the directors and must be fully cognisant of the growth cycle, potential buyers and market conditions – and much more criteria!

Many SMEs do not have this level of Financial expertise which is why transitional financial management and senior finance mentoring is so important.

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