What it means
An exit strategy is a plan, not a date. Owners who write one early tend to run the business differently, because the things that make a company saleable, such as clean accounts and reduced dependence on the founder, also make it easier to run day to day.
The main routes have very different profiles. A trade sale to a competitor or a larger group usually pays the highest headline price, a management buyout offers continuity and a friendlier process at a lower price, family succession preserves the business but rarely provides much cash, and a solvent wind-down realises only asset value.
Preparation typically takes two to three years. Buyers pay for predictable, transferable profit, which means recurring revenue, documented processes, contracts in the company's name rather than the founder's, a management team that can operate without the owner and at least three years of consistent, well-presented accounts.
Value is normally expressed as a multiple of earnings, most often earnings before interest, tax, depreciation and amortisation, with the multiple driven by sector, growth rate, customer concentration and how much of the profit survives the owner's departure. Two businesses with identical profit can be worth very different sums for exactly these reasons.
The nuance that catches owners out is the gap between headline price and money in the bank. Deferred consideration, earn-outs tied to future performance, working capital adjustments, warranties, transaction fees and tax can all sit between the number announced and the amount that finally arrives.
In practice
Real-world examples.
Example
A veterinary practice owner decides five years ahead that she wants a trade sale. She hires a practice manager, moves the largest client contracts into the company's name and stops taking irregular drawings, and the eventual buyer pays a higher multiple because the practice runs without her.
Example
Two founders of a data consultancy sell to their four senior staff through a management buyout funded partly by bank debt and partly by deferred payments from future profits. They receive less than a competitor offered, but the team and the client relationships stay intact.
Example
A third-generation family printing business finds no buyer as digital demand falls. The owner runs an orderly wind-down over 18 months, selling presses and the freehold, settling supplier accounts and closing with the property proceeds rather than a goodwill payment.
Formula
Calculation
A common valuation chain runs: enterprise value = EBITDA x multiple; equity value = enterprise value - debt + cash; net proceeds = equity value - transaction costs.
Take a specialist maintenance company with EBITDA of $1,800,000 and a sector multiple of 5.5 times. Enterprise value is $1,800,000 x 5.5 = $9,900,000.
The company owes $1,400,000 on loans and holds $300,000 of surplus cash. Equity value is $9,900,000 - $1,400,000 + $300,000 = $8,800,000.
Transaction costs, covering corporate finance advisers, legal fees and due diligence, come to 4% of equity value, which is $8,800,000 x 0.04 = $352,000. Net proceeds before tax are $8,800,000 - $352,000 = $8,448,000. If 30% of the price were structured as an earn-out, only $8,448,000 - (0.30 x $8,800,000) = $8,448,000 - $2,640,000 = $5,808,000 would be received at completion.Case study
Seen in the real world.
This case is illustrative and the business is fictional. Kestrel Lane Bakery is an invented wholesale bakery whose founder wanted to retire in three years and assumed the business was worth about six times its $900,000 profit.
An adviser's review found three problems: 62% of revenue came from a single supermarket customer, the founder personally held the recipes and the key supplier relationships, and the accounts mixed personal vehicles and property costs into trading results. Buyers would have discounted heavily for all three.
Over the following two years Kestrel Lane won two new national accounts to bring the largest customer down to 38% of sales, documented its recipes and processes, promoted a production director and separated the property into a different entity. The fictional outcome was a sale at 5.8 times a cleaner and higher profit figure, comfortably more than the founder would have achieved by simply putting the business on the market.
Watch out
Common mistakes.
- Starting to think about an exit only once an approach arrives, leaving no time to fix customer concentration or owner dependence.
- Confusing the headline price with the cash received, and overlooking earn-outs, deferred payments, fees and tax.
- Running personal costs through the business for years, which reduces reported profit and therefore the multiple applied at sale.
Questions
People also ask.
How long before an exit should planning start?
Two to three years is a sensible minimum, since buyers usually want to see at least three consistent years of accounts.
What is an earn-out?
It is part of the price paid later, conditional on the business hitting agreed performance targets after completion.
Does an exit strategy mean I have to sell?
No, it is simply a plan for how ownership eventually changes hands, and succession or a wind-down are valid outcomes.
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