The Exit Strategy

A Good Exit Strategy ---  Is Worth A Fortune

Selling your business can be an organized process where each step maximizes profit and your advanced preparation expedites the sale, or it can be a dismal failure full of gut wrenching interactions and tremendous amounts of your money left on the table at the close.  Fortunately the choice is yours.  A good Exit Strategy starts with simple awareness of the process of selling and can be implemented in advance in your day to day activities with little additional effort.

Your Exit Strategy begins with awareness that one day you will sell your business. Reasons vary with each business owner and can be as simple as boredom with your own company that you have built, to complex issues such as health or divorce.   Only you know when it is time for you to sell. Having said that, there are very important and valuable pieces of an Exit Plan which relate to the timing of the business sale which relate directly to maximizing the wealth which you extract from your business.  

Once the decision to sell is made, contact an M&A Advisor to discuss the approach to selling your business is imperative.  Most businesses are sold to other individuals through an advisor who facilitates the transaction, working in your best interest.  Buyers tend to be entrepreneurs that have the same zeal you had when you started your business or industry players that will purchase your business to expand or enhance their own.   Stonebridge can be instrumental in helping you write a good Exit Strategy that encompasses the sale scenario viewed from every angle. 

Do your P&L’s match your Balance Sheets and Tax Returns?  Imagine the lack of confidence you would have to move forward as a buyer of your business if discrepancies arose in your financial documents at the due diligence stage of the sale.  What about the physical state of your facility ? If you were the buyer would you want to walk in to a facility that needed immediate attention or a facility that was clearly neat, clean, and organized, allowing you to transition easily into the pertinent matters at hand and not worry about disorganization and safety issues?  How is the attitude of employees and what would clients of yours say about you if they were randomly called?   Are your sales and profits on the increase and expenses on the decrease?  The purpose of the Exit Strategy is to apply a tiny amount of effort in the right direction each day to achieve maximum profit for minimum effort when you do sell.  Working on these issues a little bit each day brings huge profit and joy tomorrow.

Tax consequences and what you will do with both money and time after the sale is finalized need to be considered.  Many times to close a deal you will be asked to help in some capacity with the transition.  You want to decide in advance with the help of your tax attorney or CPA how the proceeds of the sale will be best distributed and conserved.  The financing arrangements and or cash at closing will greatly affect your tax position and all options should be considered.  Can you get more for your business by offering terms on a carry-back note and still protect your interests and save on taxes?  Being proactive at this stage will greatly enhance profits at the sale.

Generally speaking, Buyers are better prepared than Sellers.

Stonebridge Perspective: The following is our perspective with respect to the importance of properly preparing your company BEFORE simply jumping directly into placing the For-Sale-Sign out-front.

REFERENCE POINT: Institutional investors focus their energy and resources on investing into larger companies (with $20M or more in revenue) primarily because they have professional management with the infrastructure in place to drive growth and earnings plans for the company.

SMALLER BUSINESSES:  Due to the entrepreneurial nature, cash-flow sensitivity, and personal risk related issues of owning a smaller business, often times, smaller businesses have not implemented the type of management systems and infrastructure which is required in order to realize their ideal vision of the company. This is very normal and fully understandable. They often have a very clear view regarding the opportunities for the business including both top line growth and overall bottom line potential associated with taking the company to the next level; however, there is simply too much personal risk associated with moving forward with many of these action plans. After sweating and toiling for years in running their day to day businesses; unfortunately, when it comes time to sell their company, many small business owners do not properly package and communicate the value associated with the potential for the buyer to  actually implement those action plans and to take the company to the next level. Simply telling the buyer that these opportunities exist, is typically not sufficient to cause the buyer to PAY for these future opportunities upfront when they buy the business. Examples of typical short-falls of smaller businesses at the time of sale include:

• Limited management staffing and capabilities to scale the company
• Limited systems in place to control processes & institutionalize the operation
• Under-funded capital equipment and or sales and marketing programs
• Knowledge and value of the business trapped in the minds of individuals
• Limited scope of information, finance, performance metrics, and reporting
• Unreliable accounting data and systems
• High risk operating profiles, such as major customer of supplier concentration
• Risky & complicated family relationships during a transition period

FORTUNATELY:  Stonebridge can help the small business owner to create credibility in the mind of the Buyer with regard to the growth opportunities being real and valuable. We accomplish this by working closely with the Seller to properly prepare, package, and strategically position the company to successfully exit the business in a way that helps them to extract maximum value when selling the business.

The process begins with conducting what Stonebridge refers to as a VALUATION+.

VALUATION+:   This is simply a valuation of the business in its “as is” status PLUS incremental value which could be created ONLY IF “2 or 3 critical actions” were to be implemented. This fundamental approach to preparing your business for sale will help you to clearly define what the targeted Buyer Profile looks like and who to begin strategically preparing and posturing the company towards.

AFTER defining the VALUATION+, there are broadly eight EXIT STRATEGIES, including:

• Going public – via IPO or reverse merger with a public shell company.
• Sale to a strategic acquirer – usually a well established company.
• Sale to a strategic individual – with baseline financial ability plus earn-in formula
• Sale to high value employees – using an ESOP and/or earn-in formula 
• Interfamily transfer - requires careful transitional management
• Sale to a strategic management group – using a carried interest & earn-in formula
• Sale to a financial buyer  - generally complex leveraged transaction structure
• Liquidation on an orderly basis – after carving-out sustainable going-concern

The greatest Seller gain is likely to come from a strategic acquirer that has a real purpose in buying the target company and one which is in position to implement the “2 or 3 critical actions” as required to enhance the value of the business from its “as is” status to a higher level of performance.  This also provides the greatest liquidity and security for the Seller. Stonebridge also works with the Seller to carefully determine which of the “2 or 3 critical actions” are better done by the Seller prior to marketing the business for sale because timing and sequence of certain action plans will have a direct relationship to whether the Seller or Buyer will gain the majority of benefit from such actions.

Strategic buyers seek:

• Intellectual property assets, licenses, regulatory approvals, etc.
• Market advantages
• Integration of upstream and downstream processes
• Immediate access to customers
• Geographic penetration
• Economies of scale and scope from consolidation
• Technology
• Brands
• Management talent

What is my business worth ?

It depends upon who is buying it and WHY.   This is our primary focus of helping small business owners to maximize the value which they extract upon selling their business.

The value that an accountant places on a business can vary significantly from it's value in an M&A transaction. One deals strictly with financial statements, while the other considers the many realities that determine strategic or transaction value - what buyers will ultimately pay. One focuses on past performance and the other looks to the future. One relies on tangibles, while the other examines off balance sheet assets such as customer lists, proprietary technology, brand value, organizational strength and other intangible or unique concepts and reasons for value. Business owners are often concerned that their business will be valued based upon a single accounting formula or a multiple of past revenue or profits without capturing the true value or potential value of their company. They believe that these informal and oversimplified valuations simply apply averages and disregard the vast differences among individual companies often resulting in gross distortions of value.

Our approach is to work closely with our clients to understand and maximize the true value of the company. It is important for Seller to:

• Identify the unique value proposition that the company possesses.
• Make that value proposition the focus of the proposed investment to Buyers.
• Go to the area where enterprise value can be most quickly increased, and invest your effort, resources, and professional marketing of the business there.
• Valuation is based on Discounted Projected Cash Flows supported by reliably derived industry valuation multiples & other intangible factors.
• Understand how your activities affect your multiples – as you employ family members, perks, lifestyle spending such as travel, the existence of non-operating assets and related depreciation.
• Use of adjusted or add-back valuation is not without risk.
• The business may be worth more or less to a given group of buyers based on their definition of value.
• The business is worth significantly more if it is properly packaged and professionally managed with a strong set of business process solutions which control and drive the organization; rather than, knowledge being captured and retained in the sellers’ mind and effectively leaving the company upon the sale of the business.