By: Bob De Contreras
Every business plan should have an exit plan, but it is one of
the plan elements most often overlooked by CEOs and very difficult for our
clients to develop. In our suggested approach, creating the exit plan is a
three-step planning process that requires answering three basic questions:
Where are you now?
Where do you want to go?
How do you get from where you are now to where you
want to go?
Based on these fundamental questions, there is a three-step
process for creating a plan to exit your business:
1. Set goals.
Answering the first question involves setting goals for the CEO
and the shareholders. This requires addressing three more questions, the first
for the CEO; the second two for the shareholders:
When do you, the CEO, want to stop working here?
After selling the business, how much would you like
to have in the bank so you don't ever have to work again (or worry about it)?
When do you want to get liquid, stop "investing" in
this company and invest in something else?
Answering these questions identifies three very important goals:
the date the CEO will leave the business, a financial target and the date the
shareholders will leave the business.
The answers to questions one and three can be (and often are)
There's no compelling reason why “stop working” and “stop
investing in the company” have to occur at the same time. Sometimes those goals
coincide and sometimes they don't. But for planning purposes, you have to
understand that they might differ and, more important, why they might
For example, you may want to stop working and sell the business
at the same time. But if you haven't positioned the business properly, the buyer
will likely insist that you stay on for several years. You want to cash out and
do something else, but the buyer won't let you because you're too important to
the continued success of the business. By setting specific goals, you stand a
much better chance of realizing the outcomes you desire.
2. Conduct a current state analysis.
Step one identifies your goals. Step two asks the question,
"Where are we now? This involves a careful analysis of three key points:
The value of your business
The strengths and weaknesses of your business
Your company's strategic position in the
Start your analysis by understanding the value of your business.
This must involve a realistic value, not an answer to the statement, "I
won't sell my business for less than X dollars." After arriving at a reasonable
value, compare it to your answer to question #2 in step one. This identifies the
gap between how much your business is worth and how much you need to have in the
bank in order to finance your life after the business.
As an example, suppose your business is worth seven million
dollars and you have set a goal of having 10 million in the bank after you exit.
You would have to sell the business for about 14 million in order to pay taxes
and have 10 million left over. So the goal becomes increasing the value of your
business by seven million dollars. Armed with this knowledge, you can start
putting together strategic and operational plans to raise the value of your
business to the necessary level.
Next, identify your company's strengths and weaknesses so you can
fix any glaring defects. For example, suppose you have a great product line but
a weak distribution system. While you might place a high value on your business
based on the product line, a potential buyer will discount the value because of
the distribution problems. Or, you may have taken on a heavy debt load in order
to grow the business. Implementing a plan to pay down the debt will improve the
value and make the business more attractive to potential buyers.
Finally, understand your company's strategic position in the
marketplace. This involves asking questions like:
Which companies are buying other companies like
Which companies are being sought by strategic
buyers and why?
Does my company fit that profile?
Who is likely to be a strategic buyer for my
Businesses and industries run in cycles and buyers can run hot
and cold. Even if your business is doing great, there will be times when you
just can't get a nibble. The ideal time to sell is when all three points -- your
personal goals, the value of the business and market conditions -- are in sync.
That only happens when you plan in advance, allow yourself time to exit the
business and focus on what you need to do to get the highest price.
3. Identify your exit options.
For many business owners, the question of how to get liquid
represents the toughest decision of all. There are four basic ways to cash out:
Sell to an outside entity.
Transfer the business to the next generation.
Sell to the management team and employees (ESOP).
Initial public offering (IPO).
Each option comes with its own complex set of issues and
questions that need answering. For example, if you intend to transfer the
business to the next generation, which child is most qualified to run the
company and how do you deal equitably with all of the children? Do you transfer
the business while you're alive or upon your death? What estate planning tools
will enable you to maximize your assets, minimize estate taxes and cause the
least amount of disruption to the business?
Look at all the available options, compare them side by side and
identify which one will best help you accomplish your goals. Keep working on
your plan until the timing is right, and then execute. Most owners only compare
one option with doing nothing at all, and they generally choose doing nothing
because it is easier. Instead, select the two or three best options, determine
their financial impact on you and your company and choose the best one.
Once you have a working plan in place, revisit it once a year.
Build some flexibility into the plan because as things change, your plan has to
change with them. Exit planning takes a lot of work, but following these steps
will dramatically improve your chances of having a happy ending.
Timing plays a major role in landing the best deal. To get the
most for your business:
Don't sell when you're not having fun.
Because the value of privately held companies is more volatile than public
stock, it's harder to sell a private business when it isn't doing well. When you
sell in a down market, you always get less. Instead, time your exit to sell when
the business is doing well.
Don't wait too long to sell. Don't
assume the good times will last forever, because they don't. Think about selling
your business like any other stock. Pay attention to market cycles and plan to
sell it at a high point before the next downswing.
Be prepared to sell at any time. You
never know when a good opportunity will come along. A strategic buyer may
suddenly appear out of nowhere, or your industry could get hit by merger and
acquisition mania. It typically takes months or years to prepare a business
sale. Keeping your business in such good shape that you could sell it tomorrow,
advises Collins, will allow you to take advantage of any opportunities that
happen to come your way.
When you manage the company so that it is always ready for sale,
you end up with a healthier business. Too many CEOs focus just on the top line,
on growing revenues. To be ready for sale, you also have to focus on the balance
sheet, cash flow, profitability, market trends -- all the things that make
companies strong and buyers pay for. This doesn't mean to constantly seek out
buyers for the business. When buyers come knocking it pays to be ready.
Brought to you by:
Bob De Contreras
RTBA | Cary | Greensboro | Raleigh | Research Triangle Park | North Caroliina
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