Preparing for Tomorrow’s Graceful Exit Today

What a dilemma. After years of low numbers and much debating, the owner of Sturm and Drang Consultants finally decided to sell the business — and once N. A. Stupor finally decides something, he expects it to happen yesterday. Why should the sale of his business be any different? So he called a quick meeting of his management team and gave them a two-week timeline.

Fortunately for Sturm and Drang, owners don’t work in a vacuum. Stupor’s management team explained that transition experts must be brought in, to maximize not only the company’s potential, but his as well.

Know the Ways Out

Specifically, an exit is a sale to a strategic or financial buyer. A strategic buyer purchases another firm because it can, for instance, save money on purchases, consolidate operations or enter new geographic markets. A financial buyer believes it can run a targeted business successfully, perhaps even better than the seller can. Financial buyers also use leverage to maximize their returns.

And occasionally an exit involves a recapitalization with management participation, which is the case with fictional Sturm and Drang. Whatever motivates you toward the door, five steps can help you and your company avoid obstacles along the way.

Step I : Clarify Owners’ Vision

This isn’t the time to address specifics. First you must look at the current big picture and produce a plan or strategic report that:

  • Analyzes the business and its prospects, focusing on the business’ strengths, weaknesses, opportunities and threats,
  • Projects future performance (an “over-the-horizon” analysis),
  • Identifies shareholders’ priorities and goals, concentrating on both qualitative and quantitative factors,
  • Evaluates the potential exit options (for instance, sale or management buyout) and their tax implications,
  • Identifies obstacles that stand between you and the exit options,
  • Selects the preferred exit, and
  • Specifies key value drivers that will affect the selected exit.

Avoid extreme time pressure as exit day approaches by considering these issues early — at least two years before actually initiating the exit process.

Step II : Prepare an Action Plan

Now that you’ve clarified where you want to go, you can design how best to get there. Analyze characteristics that potential purchasers will value. Then make necessary adjustments accordingly. If a strategic buyer seems likely, concentrate on making the business more valuable. If a financial buyer seems likely, perhaps beef up management and reduce debt.

Given cash and time limitations, some changes will spur quicker or more direct value increases than others. At all times, owners and shareholders should stay laser-focused on changes likely to reap the greatest value returns.

Step III : Hammer Out the Details

Notwithstanding tax implications, well-seasoned advisors learn a business’ structure and keep its profitability and attractiveness clear to potential acquirers. Experienced tax or estate advisors know the objective is to make the deal happen, but keep in mind that overly creative tax and estate planning can create serious obstacles, such as a delay in closing the deal.

As we alluded to earlier, timing is also important. For instance, it’s usually inappropriate for a company to make major changes (such as in legal structure, IT and large capital expenditures) if it’s close to being sold.

Step IV : Share Knowledge

Many owners of private companies wrestle with making the business less dependent on themselves. After all, spreading knowledge across the management team can only strengthen it, and the stronger the management team, the stronger the company. If a company’s foundation is solid, the buyer will be more comfortable with the owner’s exit. A strong management team also increases an owner’s exit options.

One caveat: Transferring responsibilities to key management must be real, not window dressing. If management isn’t on board, the chance of exiting gracefully grows more remote.

Step V — Work Every Day To Build Value

Not caring for a business is like owning a prize racehorse and feeding and brushing it only once a week because it’s more convenient for the owner. The horse will probably die from such neglect, and even if it lives, it certainly won’t finish any races. Thus, grooming is not a one-time fix, but should be a continual improvement effort.

The Curtain Call

The time and resources each step demands can differ according to the business’ size, sophistication and ownership team. So find a process appropriate for your company and its unique circumstances.

Even if your exit seems a long time hence, it’s never too early to start grooming the business. Although there’s no one-size-fits-all way to do it, a well-structured process reaps the highest reward.

The sale of a business in the current economy takes six to nine months from inception to completion, so the time to consider a plan may be now. Certainly, it can never be too soon to prepare, but it can definitely be too late. Don’t wait until the last minute; please call us for help today.