A true and properly prepared exit plan offers the following five core tenets for an owner:
1. Aligning an owner’s personal, business, and individual long-term financial goalsDetermining the success or failure of an owner's exit is defined and measured differently by every business owner. Accordingly, the first step of any exit or succession plan should always be the articulation and alignment of an owner's goals. This exercise creates the necessary foundation of the plan and equips the owner and his or her advisors with a compass to proficiently navigate a successful exit.
To begin, an owner needs to answer the following goal questions:
- Business goals - What do you want your business to accomplish prior to your exit?
- Personal goals - When do you want to exit? How do you want to exit - over time or in one event? Who do you want to exit to? What do you want to accomplish as part of your eventual exit?
- Financial goals - What are your long-term personal financial needs and what is the amount you need from your business to accomplish?
2. Empowering an owner with an in depth knowledge of all their succession or exit optionsIn order to satisfy an owner’s business, personal and financial goals, a sound exit plan evaluates all the options and alternatives and vets each to determine the optimal solution for the owner. This process is normally completed in conjunction with the reconciliation of an owner’s goals process as just explained above. As presented below, there are typically six major exit channels available to middle market business owners with the timing on how an owner exits (in one event or over time) available for each option with advance planning. Determining the availability of the different exit channels for an owner is dependent upon the motivations and goals of the owner and on the underlying company's profile (size, profitability, maturity, outlook, etc.). Thus, the breadth or narrowness of options will vary by owner.
|External Exit Channels
||Internal Exit Channels|
3. Maximizing the fundamental or underlying value of the businessBuyers look at numerous aspects of a company to determine value. To maximize value, owners must be able to view their company from a buyer’s perspective…what would you expect or look for if you were doing an acquisition? Often times, discovering the value differences occurs too late, reducing the company’s sellable value with a lack of ample time to correct.
Thus, a sound exit plan should evaluate the company from a buyer’s perspective and identify opportunities to increase the underlying company’s value and implement action plans to capture the full value prior to going to market. Assessing the opportunities is often hard to do from an insider’s perspective and especially so if an owner doesn’t have experience with buying or selling companies. Thus, owners should seek outside perspectives that have merger and acquisition experience. Owners can also supplement this with a workbook I have created titled "How To Assess and Influence The 53 Critical Factors Buyers Consider When Determining Your Company’s Value" with a scoring framework that helps owners efficiently assess, prioritize, and implement value building changes to their company. (Contact me if you would like a copy of the workbook.)
In line with maximizing the fundamental value of a business is an equal if not greater opportunity to maximize the value by identifying strategic value drivers. Strategic value drivers are elements that both reduce risk and improve returns for buyers. In practical terms, value is in the proverbial eye of the beholder and greater value is available over normal industry standards if an owner can position their company to make it the most attractive to likely buyers. This is accomplished as part of a sound exit plan by identifying the value drivers that buyers are seeking and ensure the goals of the company are focused on growing these drives.
Examples of strategic value drivers (partial list):
- Specific market presence
- Specific customer base
- Geographic footprint
- Market share
- Technology or licenses
- Trademarks or patents
- Niche products or services
- Advantageous systems or processes
- Sales distribution network
- Vendor channels and relationships
- Strategic relationships
- Reputation or brands
- Scalability of your products or services
- Management team or skilled workforce
4. Eliminating, minimizing or deferring income and estate taxesThe actual value realized by an owner is always less than the company’s selling price; it is the culmination of the price, deal structure, terms and the corresponding tax consequences of the sale. The amount of the tax component continues to shock owners. Without advanced planning prior to exiting, owners will leave significant wealth on the table.
There are multiple tax saving opportunities a good exit plan addresses.
- Company entity level
- Personal level
- Estate level
- Transaction level
5. Maximize what the market is willing to pay for the business.The last core tenet of a good exit plan is for those owners that have elected an external transfer channel (which is typically 80% to 90% of all owners) and it consists of three components.
Sell Side Due DiligenceThis is a process of conducting the same intensive review as a buyer would and compiling and organizing the associated documentation so it is ready for the buyer (typically in an online data room). Sell side due diligence provides owners two benefits. First it expedites the actual due diligence a buyer will conduct which helps prevent confidentiality issues, minimizes operating distractions, helps assure the deal will close, and just gets the deal closed sooner. Secondly, and more importantly, it prevents the deal from going sideways or getting cancelled all together. Too often the skeletons come out of the closet during due diligence and if the seller isn’t aware or hasn’t made the buyer aware of these skeletons then it positions the buyer with instant negotiating leverage. By conducting due diligence prior to going to market, issues that would otherwise slow or kill the sale are identified upfront so that corrective measures can be implemented.
Market timingAs all business owners know, timing is everything. In order to realize and maximize ownership value, all of the critical market, company, personal, and tax elements must be aligned. This is a dynamic process with the critical market elements outside an owner’s control. The windows of sale opportunities open and close based on economic conditions and the cycles of industries and market segments. For that reason, the goal of a good exit plan is to complete all the value enhancements, tax planning, individual wealth planning, preparedness, etc. so the owner is in a state of readiness and agility - equipped to capitalize on the market windows of opportunities as they present themselves.
Competing buyersAs experienced merger and acquisition professionals always say, one buyer is no buyer. Accordingly as part of an exit plan, owners should create an ideal buyer profile and begin compiling a list of potential buyers that match the profile. The list should contain both financial and strategic buyers with candidates typically pre-indentified as part of the strategic value drivers process explained earlier.
The chosen sale/marketing approach can also create a competitive market for a company. There are two basic approaches available to middle market companies; a negotiated sale and a controlled auction.
In simplified terms, the negotiated sale is where the seller performs limited marketing of the company and directly solicits interest from a few known potential buyers. The seller talks with each interested buyer on a first come, first served basis and attempts to negotiate the best deal.
The controlled auction process casts a much wider net in its marketing process and follows a much more formal and structured process. The process begins with sending a Teaser to a large list of potential interested buyers followed by an Offering Memorandum detailing the company for those interested with a deadline to submit bids. Based on the qualifying bids, the seller invites a handful of buyers for face-to-face meetings touring the company and providing an opportunity to vet each other. After the visit, buyers have a deadline to submit final offers to purchase and the best purchase offer is chosen by the seller. The controlled auction is the preferred method to create the competing buyers environment but it is an intensive and costly process and isn’t appropriate for all companies. It works best for companies with at least $1MM in EBITDA or certain sought out intellectual property or other synergies.