Exit Planning

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:

1.      Where are you now?

2.      Where do you want to go?

3.      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:

1.      When do you, the CEO, want to stop working here?

2.      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)?

3.      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) very different.

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 differ.

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:

1.      The value of your business

2.      The strengths and weaknesses of your business

3.      Your company's strategic position in the marketplace

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:

1.      Which companies are buying other companies like mine?

2.      Which companies are being sought by strategic buyers and why?

3.      Does my company fit that profile?

4.      Who is likely to be a strategic buyer for my business?

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:

1.      Sell to an outside entity.

2.      Transfer the business to the next generation.

3.      Sell to the management team and employees (ESOP).

4.      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 Tips

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:                                                         [BACK]

            Bob De Contreras                                                  
            Rich Kramarik