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Paul Dallibar

How Not to Prepare an Exit Strategy

One of my first exit strat­e­gy assign­ments, after start­ing my own busi­ness advi­so­ry ser­vice, was work­ing with an SME print­ing busi­ness, based on the south coast of Eng­land. The direc­tors had request­ed a strate­gic review of their oper­a­tions, a sort of busi­ness health check report, to be used in sell­ing their busi­ness. They were con­fi­dent that there were no issues to be addressed, but want­ed some reas­sur­ance that any due dili­gence would sail through.

With­in a very short time of start­ing the review, about twen­ty min­utes into stat­ing a struc­tured ques­tion­naire, we had dis­cov­ered that Pareto’s Law was alive and well in this busi­ness. There were about 25 siz­able cus­tomers, but five of them (20%) sup­plied over 80% of the turnover! I asked if writ­ten con­tracts being in place with those cus­tomers, but there were none. 

It appeared the rela­tion­ships with those five cus­tomers were based sole­ly on per­son­al rela­tion­ships, devel­oped over the years, between the Man­ag­ing Direc­tor and his Finance Direc­tor and key indi­vid­u­als from the cus­tomers. Every­thing was done on a hand­shake and a promise. To make mat­ters worse, there was no evi­dence that any oth­er mem­bers of the busi­ness had ever met with these key accounts and any deci­sions were always deferred to the directors. 

A val­u­a­tion for the busi­ness had been made by their accoun­tants and was based on cur­rent prof­itabil­i­ty and the direc­tors were look­ing for­ward to receiv­ing this sum and enjoy­ing a retire­ment in warmer climes. 

The way key clients were dealt with was only an exam­ple. There was no suc­ces­sion plan, no clear process­es and no prop­er deci­sion mak­ing out­side of the main board direc­tors. At the end of my review, the main con­clu­sion was the busi­ness had a high degree of risk and, in my opin­ion, there was no real pos­si­bil­i­ty of attract­ing mul­ti­ple offers or sell­ing it for the cur­rent val­u­a­tion. Who would buy the com­pa­ny when there was no secure pipeline of new busi­ness or replace­ments for the direc­tors from with­in the busi­ness? Remove the Prin­ci­pals and there was no business! 

There might have been some­one might be pre­pared to buy, but sure­ly they would need to tie down the man­age­ment with some form of gold­en hand­cuffs” and none of the direc­tors want­ed to stay on after a sale. 

Unsur­pris­ing­ly the review was not includ­ed in the sale doc­u­men­ta­tion. How­ev­er, it was a sur­prise to me that the busi­ness was sold with­in a year and with the key play­ers exit­ing the business. 

Two years lat­er the busi­ness ceased to exist and fif­teen peo­ple lost their jobs.