The Entrepreneurial Exit Strategy — Prepare Yourself
Candace SjogrenCandace Sjogren – VIP CONTRIBUTOR
When you started your businesses early on, you were not likely planning to sell it. You had a big idea, a skill that no one else could quite match, a passion for changing the world in some way. And if any investor asked you about your exit strategy, you would placate them by noting the three giants in your industry, but would likely be clear to state, “but I intend to execute against my business plan. As long as my business is making money, there is no need to exit.”
I wholeheartedly believe that nearly every founder feels this way in the beginning. But running a business is hard work. It requires untold hours of blood, sweat and tears and has no sympathy for its founder’s illnesses, family needs or mental stress.
It is inevitable that you, founder, will one day retire or pass (let’s hope you have some easy days before you go). Knowing that you cannot run your business forever, and assuming that your company will be wildly successful, it is good to begin planning for succession earlier rather than later in your company’s life cycle.
Follow these four tips for building good habits early on so you have an easy exit when you are ready to pass the reigns:
1. Form a board of directors or advisors from Day 1.
It may seem a bit harrowing to set up a board in the early days when you are launching. Once you take on investor dollars, this will be required, but if you are bootstrapping, you likely want to maintain complete control for as long as possible. Inviting directors prior to a fundraise would unnecessarily create a reporting and decision-making structure that you and future investors do not want.
However, setting up a board of advisors and treating it as if it were a board of directors can be quite useful in later years. Structure your board so that your advisors do not have voting power, but offer them small compensation or equity instead, and treat them seriously. Schedule monthly board meetings and come to your board with a meaningful agenda around key inflection points your company will need to meet in order to succeed.
Organizing a board will help build accountability into your business model and will organize your business according to goals that can be tracked in the future.
2. Send monthly investor/board updates and take meeting minutes.
Writing down your meaningful milestones is just as important as making yourself accountable to a board of peers. If you don’t write down your goals and accomplishments, it is hard to prove, at a later point in time, that you accomplished them in the first place.
Consider sending a monthly investor and/or board update, outlining your successes from the previous month, upcoming inflection points and key hires and needs from your board. Not only will this garner favor with investors and show openness and responsibility; it will also give you a written report card to include in any potential acquisition package down the road.
3. Make friends with your competitors.
If you are in a cutting-edge new industry, you are likely not alone. And if you are spinning off from a previous employer, you know exactly who else serves your customer. You should not only do your research to know exactly who your competitors are and how you differentiate. You should also take the time to get to know each of the founders in your industry. Attend industry events and shows. Seek out opportunities to joint venture or create industry trade groups.
Should your company take a turn for the worse in the future, your competitors are most likely to seek out your assets. And should you succeed, you may want theirs. Either way, building strength in your industry through openness and communication can help you significantly at the time of exit.
4. Train your staff to seek out upward mobility and offer employee ownership.
When we craft our exit strategy in our business plan or add the exit slide to our investor deck, we often look outward for a potential acquirer. However, companies are purchased by their employees quite often, and employee-acquired businesses are growing by 10% each year.
Offering stock to your employees builds loyalty within the company and helps you to diversify potential future buyers over time. Whether you plan on selling your business or not, you will want to build trust and investment with your team, and offering some form of an employee stock ownership program (ESOP) and internal promotion structure are two ways to build this opportunity for yourself.
In the end, you will want to follow the tips suggested above whether you ultimately sell your company or not. Building good habits now will only help you to succeed later, whether that success comes while sitting at the helm of your business or sending it off under new control.
Do you want to get a high business sale price when selling your company? Of course you do! Your business most likely represents the bulk of your life’s hard work, you deserve to get the most that you possibly can. We noted in a previous blog post that there are two broad answers to this question. The first answer concerns the business itself, and the second one concerns the sales process. The sales process focuses on the “when”, “who”, and “why” parts of selling a business, which I will address in this article. The sale process cannot transform an average business into a high multiple business. However, by following a few guidelines outlined below, it can result in a higher enterprise value at the closing date.
Takeaway: Attract a much higher business sale price for your private company by learning how the sales process impacts a company’s valuation.
They Say Timing is Everything
In real estate the mantra is Location, Location, Location. In selling a business or M&A it’s Timing, Timing, Timing! The timing of the sales process is perhaps the most important factor in the entire process. Not only is timing important in the context of the economy in general, but also with respect to the company’s performance and the owner’s objectives.
If you only take one nugget away from this article, take this away:
The ideal time to sell and achieve a high business sale price is when there is an consistent “year over year” upward trend in revenue and earnings, and there is an expectation of more to come.
** Unfortunately, this is when Most seller’s decide not to sell because it’s just to good to walk away from when business is going great.
The prospect of growth is very influential in attaining a strong business sale price multiple. However, while a valuation is determined by a company’s future prospects, buyers often use historical performance to assess future prospects. When I say “historical performance,” I mean at least two years of consistent growth. Many businesses grow in steps. A pattern of revenues at $10 million for several years, which then jumps to $20 million for one year, does not present a convincing growth trend. Another jump to $25 million the next year will go a long way to realizing a growth multiple (now we’re talking). Ultimately, convincing a buyer to pay a premium depends on how the growth was achieved, the quality of earnings and what the current prospects are.
The selling process is one that can take seven to ten months to complete if things go well. Therefore, inevitably you will run in the single most important question that a buyer wants answered while the sales process is ongoing…..
“Are you on track?”
or its very close cousin:
“Can we have a look at the latest financial month or quarter end?”
Under performing at this stage to what you originally told the buyer is definitely the worst case scenario. If you are four to six months into the process, you will have already received a number of expressions of interest and are likely working with a small group of seriously interested parties. An earnings number below expectations may open up the possibility for a value revision or structure change in a Letter of Intent. This may cause serious delays in the process, since an alternate buyer may need to be found. The moral of this story is….don’t miss.
Any Buyer is Good Right?
The second most important consideration in the sales process is who to sell to? Last year, I wrote a detailed article on how to identify the best buyer. I won’t go into the details here, but I will say state one key point. The most important step when identifying the right buyer is to ensure your M&A adviser runs through a complete, thorough, and diligent buyer selection process. The four phases of a business sale or divestiture are: plan, prepare, market, and complete. A critical factor in achieving a successful sale is to keep as many options open as long as possible. The seller has power when there are many choices. If there is only one interested party, then guess what, you have no leverage and chances are you either a) don’t sell your business, or b) end up selling it a multiple far below your expectations.
Why Am I selling Again?
The “why” of selling may not be a key driver in realizing the most value in a transaction, but it is a factor in the form of consideration received, and how long the process will take. Remember, if the business is dependent on the owner operator, he/she will not be able to leave the business upon its sale. If the owner operator has spent 20 years in the business, is nearing retirement, has made him/herself redundant, then he/she is in a position to structure the transaction to include as much cash as possible and a short transition period. However, if the reason to sell the business is to take advantage of an opportunity to accelerate growth, then partnering with a well capitalized financial sponsor or private equity group may be a better solution. This buyer may bring the investment and/or sales or distribution resources to the table that you need, but you should expect to spend more years with the business. Past experience has taught us that, If your only reason for selling is for money with hopes of getting a “pie in the sky” business sale price, then chances are you are not fully ready to sell.
Ultimately, the best time to sell and get the highest business sale price is when the owner is still interested in the business. This is when this interest will translate into a solid sales process, which will resonate with the buyer and is likely to drive the multiple higher. The best time to sell has passed when the owner is no longer interested in the business (i.e. if he/she is spending more time on other interests), or if the owner is compelled to sell for health reasons, or as a result of changing competitive/technology dynamics that are substantially reducing the economic prospects for the business. The sales process, from consideration to closing, can take many years. With future economic uncertainty as it is, it is best to start the planning from a position of strength.
By Cody Weaver July 24, 2017
Tinton Falls, NJ 07701
BAE Top-Producing Business Brokers
Call Business Acquisition Experts at (646) 737-5273 for a Free consultation. Or you can reach us by submitting an inquiry here: Contact Us
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For your business, there are many questions you need to ask yourself when deciding whether or not you are ready to sell and undertake an M&A transaction. The obvious questions will run through your mind. Am I ready to retire? What does my future hold after the sale of my business? How will my employees react to new ownership? This list goes on and on, your mind will be racing with so many important questions, all valid and important to consider. With that being said there are higher priority questions that will need to be answered in order to determine if you are truly prepared to start the process of marketing your business for sale.
Preparation is key to ensure a smooth business sale process. Lack of preparation can and in most cases will result in costly last minute “haircuts” to the value of your company and the purchase price. “Those who fail to plan, plan to fail”. – Warren Buffet
Below are some check points to consider when measuring how primed and ready your business is for sale:
How does your financial record keeping stack up against other
What best describes your accounting practices? ( Do you hand your accountant a stack or receipts? Do you use a program like Quickbooks or Simply Accounting? Or do you have your CPA conduct a review engagement every year?)
The cleaner and more transparent your books and records are, the more corporate value it will add and the easier it will be to sell your company to a strategic of financial buyer. We highly recommend an annual review be completed by your accounting firm.
Do I have the right management team in place?
One of a company’s biggest assets is it’s people, buyers want to know that your staff is committed to maximizing the wealth of the new or pre existing shareholders. Another staff related consideration is structure of your management team. If you don’t already have one put together, an organizational flow chart showing the chain of command will boost value as well. If there are any gaps that prevent your organization chart from flowing properly you may want to consider filling that gap. Over reliance of day to day operations by the President/Owner is not at all conducive to your success in selling your company for the best price and terms. Buyers want a business that is self-sufficient with strong management that is capable of operating efficiently with or without the owner present.
How strong is my brand?
Image is everything and for a reasonable investment can be polished if it is outdated or just simply not appealing according to today’s digital internet standards. Start with your website. Was it built 10 years ago when the internet first started gaining traction? Web developers have come a long way and a newly updated website is absolutely necessary. Social media accounts are a must, don’t just develop them but task someone on your team with managing the content. Remember that prospective buyers are going to “Google” your company name, make sure that your company shows up and that the content is positive.
Are the company financials in order?
We cant stress this value driver enough! The most painful (doesn’t have to be) portion of the acquisition process can be reviewing financials. Buyers are going to want to go back 5 years in order to determine the valuation you have placed on the business is fair and reasonable. If you don’t have a CPA on staff seek help from an outside source to review or audit your records and ensure they are in line with generally accepted accounting practices. Transparency will be key when reaching this part of due diligence with the buyer, but you must be forthcoming with information to gain trust. Strong financials help us (Business Brokers and M&A Advisers) to recast or adjust your income statements and “paint the most profitable picture” for your business.
Is now the right time to sell?
If you have owned your business for a long period of time no one knows the trends better than you. With the average business sale taking 9 months to consummate, try to plan accordingly. You will want your business to be thriving during the negotiation period and when buyers are in your offices. Nothing gets a buyer more excited than to see a business in motion with profits pouring in. If your business is cyclical they will know by reviewing your financials, but booming sales during the acquisition process is always a plus.
Depending on the size of your business the preparation for maximizing your valuation can take months if not years, there are many elements associated with this process. The points above are things that you as an owner can immediately seek out and improve. Just remember, this is your baby and most likely your largest asset. You owe it to yourself to make one last hard push and walk away knowing that you did everything within your power to maximize its value. We at BAE are only a phone call away from guiding you unobligingly through the business exit planning process.
New York/New Jersey Office- (646) 737-5273
South Florida Office- (772) 323-8525
Business Acquisition Experts Top-Producing Business Brokers
Written by Shane Mullan: Senior Vice President-BAE of South Florida
Many companies can benefit substantially from a property sale leaseback. Some companies have capital inefficiently tied up in ownership of real estate assets (warehouses, office buildings, manufacturing facilities, retail stores, etc.) that may be accreting at rates below what could be earned if the capital were freed up and put to an alternative use. Entering into a sale leaseback on some or all of those assets is an attractive way to unlock this illiquid capital.
In a sale leaseback, a company sells some or all of its real estate to a passive financial buyer (often a real estate investment trust, or REIT) that simultaneously leases the property back to the company under a long-term triple-net lease. This structure allows a company to retain full operating and financial control of the property as though it were still the owner.
Sale leasebacks are also capable of attracting excellent values for sellers, often higher than what could be realized in an outright sale. This is because the buyers are passive financial organizations that will compete aggressively to lock-in fixed returns for a lengthy term (generally 15 – 20 years plus renewals) without the worry, risk, or cost of having to re-tenant the property during that period.
Unless a company believes its properties are going to accrete at unusually high compound rates or that the sale will generate excessive tax consequences, sale leasebacks serve as a valuable financing tool.
The proceeds from sale leasebacks can be re-deployed in a variety of attractive ways:
- Paying dividends to shareholders
- Funding internal growth opportunities
- Funding capital expenditures or M&A opportunities
- Paying down debt and strengthening the balance sheet
In addition to unlocking precious capital, sale leasebacks offer the following benefits:
- They monetize 100% (or possibly more) of a property’s value as compared to a typical mortgage, where only 75% of an appraised value is generally provided
- The lease payments are fully deductible and reflect 100% of a property’s value (land and building), as compared to depreciating just the building
- They effectively represent a long-term, interest-only financing at competitive fixed rates
- They afford protection against potential downward price movements in property
- They protect against the risk of rising interest rates and their impact on property values
- For companies whose shareholders own the real estate in a separate entity and lease it to the company, they can use a sale leaseback to transition those assets to corporate property in anticipation of a future sale of the business.
Sale leasebacks can be arranged for a wide variety of assets, such as:
Office/Medical Buildings Warehouses Restaurants
Continuing Care Facilities Manufacturing Facilities Supermarkets
Health/Fitness Centers Retail/Convenience Stores Pharmacies
Call Centers Gas Stations Gov’t Buildings
Education Facilities Hotels Banks
Car Dealerships Theaters Arenas/Sports Facilities
Lastly, sale leasebacks are straightforward to arrange. Transactions can be arranged in as little as 60-90 days, depending on the availability of due diligence materials. Overall due diligence requirements are not unlike those of obtaining a term-loan, with the addition of providing property-specific details.
By: Cody Weaver 9/7/2016 Business Acquisition Experts
Each quarter the IBBA and M&A Source present the Market Pulse Survey with the support of Pepperdine Private Capital Markets Project and Pepperdine Graziadio School of Business & Management. The report measures the current market conditions for businesses sold within the United States. Q2 2016 had some interesting insights for the manufacturing sector that every business owner should be aware of. The report revealed 4 things you need to know about the current Manufacturing M & A Market
- Manufacturing Businesses Sold More Than Any Other Type Of Business
During the second quarter of 2016 more manufacturing companies were sold in the US than any other type of business within the $1-$5 million AND the $5-$50 million revenue category.
- 2. Multiples Are Trending Upward & Sellers Are Getting Close To Their Asking Prices
For lower middle market transactions multiples for Q2 ranged from 4.75-5.75X EBITDA. Businesses with revenues between $2-$50 million sold on average at 98% of their asking price.
For businesses with revenues between $2-$5 million, Sellers received 81% cash at closing, with 10% of the deal being financed by the Seller and the balance in an earn-out. Businesses with revenues between $5-$50 million sold with 76% cash at closing, 14% Seller financing and the balance in an earn-out.
- Who Is Buying And Where Do They Come From?
For deals under $5 million, 42% are first-time buyers and 40% are repeat owners. At Business Acquisition Experts, Inc., we found this percentage of first time buyers to be substantially higher for the second quarter. In fact, this is the largest category of buyer for us in all transactions between $2-$15 million.
For deals between $5-$50 million, the Market Pulse report showed 39% were sold to private equity firms and 30% to existing companies seeking expansion through acquisition.
For lower middle market deals, 41% of buyers come from more than 100 miles and an additional 39% come from more than 50, but less than 100 miles away. This statistic should be of paramount concern to those business owners seeking to engage an M&A or business brokerage firm. The company you hire needs to have more than a local audience to successfully sell your manufacturing company.
- How Long Does It Take To Sell A Manufacturing Business?
For companies with revenues between $1-$50 million, the average time to close was 9 months with 4 months from acceptance of the Letter of Intent to closing. At Business Acquisition Experts, Inc., we’re experiencing a slightly lower average.
Mergers & Acquisition professionals dealing in lower middle market businesses generally believe that we are currently in a Seller’s Market. Manufacturing continues to dominate and are the most sought after businesses in the lower middle market. Clearly the current Manufacturing M & A Market is good news for retiring business owners.
Business Acquisition Experts , August 15, 2016
Takeaway: Three areas to consider when deciding if now is the right time to sell your business.
If you are a business owner, then you will have unquestionably asked yourself at some point or other whether it is time to sell your business. There are a number of key factors that are attached to your decision and it is only natural that something with potentially huge repercussions will be agonized over for a long period of time: weeks and even months in some cases.
To make the process simpler, you could break down your decision into three different areas. However, all should be considered equally, before making a final decision whether it is time to move on.
How Do You Feel?
Are you reaching a stage in life where you are beginning to think of retiring to the golf course or a foreign country? Perhaps your decision isn’t anything to do with age. You may be an entrepreneurial type who is brimming with fresh new ideas and just want to sell your current business so you can move on and do something else.
Think about these and any other factors in your personal life that could be influencing your business. Ultimately, only you will know whether you feel now is the time to sell your business; whether it is due to age and health reasons, financial matters, or simply the opportunity to explore fresh and exciting endeavors.
Where Is Your Business At?
This is probably the toughest bit, as no matter what stage you are at in life, your business might not feel totally prepared for a sale. Ensuring that your business is an attractive purchase for a potential buyer is not an easy task, but maintaining what has already made you successful is a good place to start. Here are some things to look at in your business before deciding to sell:
Financial accounts will probably be the first thing that any potential buyer will want to look at; and their findings during their own due diligence processes could seal or break any deal that has been agreed in principle. Ensure that all of your payments are up-to-date and that all incoming payments have been cleared with documentation provided that shows how often these are received, if necessary. If you are unable to provide even these basic documents, then any buyer will have grave doubts about the financial stability of the business you are looking to sell.
While your financial accounts will ensure the here and now of your business is visible and transparent, you will also need to demonstrate a sustainable future to any buyer. Writing a business plan when you are looking to sell a business might not be the first thing you want to do, but it will demonstrate the potential within the business and offer a potential critical path to any new owner. Your plan may relate to growing sales, reducing business expenditures, moving into new markets, or any other aspect that could serve the business well into the future. If a potential buyer can see the opportunity in front of them, you will have a much easier time selling your business.
One thing that many business owners fail to consider is their own exit strategy from the company. While it is understandable that you may want to sell and get out as quickly as possible, you still have a duty of care to your management team and employees to ensure that they are impacted on as little as possible by your departure. Setting up a timeline for handing over the business so that there is a smooth transition from yourself to the new owner, will ensure that the day-to-day operations continue to run as smoothly as possible.
What’s Happening in the Global Markets?
What’s happening in the global markets could hold the key to a large portion of your decision. How attractive your business is to any potential buyer could depend as much on the global markets as it does your business performance.
Do the financial markets mean that a potential buyer is unlikely to be able to secure financing, for example, is one aspect that may need exploring. If your business requires a certain product or commodity, the price of acquiring this may also come into the equation, as well as how your industry is performing in general around the world. Your clothes production business may be booming, but if manufacturing is under-performing, will it be a risk worth taking?
At the same time, you should also consider whether you could potentially sell your business to a larger company or global organization. For example, say that you are a local business specializing in a particular product or service and have done very well due to the fact that your large competitor across town doesn’t offer it, or you’re the only business in the country that can offer them. Perhaps the easiest way to secure your business legacy and ensure the ongoing success of your business would be to invite a large company to buy your business.
How would you go about doing this? It actually wouldn’t be as difficult as you might think. So long as you can prove that your business is in a strong position both now and for the future, as explored earlier, a large company would certainly consider the opportunity to take your business off your hands in the name of adding value to their own operation.
The Final Decision
Deciding to sell your business, having put so much into it over a period of many years, is never an easy decision. However, by considering your personal, business and market situation, you can make a sensible decision, both for you and your business.
Business Acquisition Experts
“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.”
From: Selling Your Business by Russ Robb, published by Adams Media Corporation
Whether you plan to sell out in one year, five years, or never, you need an exit strategy. As the term suggests, an exit strategy is a plan for leaving your business, and every business should have one, if not two. The first is useful as a guide to a smooth exit from your business. The second is for emergencies that could come about due to poor health or partnership problems. You may never plan to sell, but you never know!
The first step in creating an exit plan is to develop what is basically an exit policy and procedure manual. It may end up being only on a few sheets of paper, but it should outline your thoughts on how to exit the business when the time comes. There are some important questions to wrestle with in creating a basic plan and procedures.
The plan should start with outlining the circumstances under which a sale or merger might occur, other than the obvious financial difficulties or other economic pressures. The reason for selling or merging might then be the obvious one – retirement – or another non-emergency situation. Competition issues might be a reason – or perhaps there is a merger under consideration to grow the company. No matter what the circumstance, an exit plan or procedure is something that should be developed even if a reason is not immediately on the horizon.
Next, any existing agreements with other partners or shareholders that could influence any exit plans should be reviewed. If there are partners or shareholders, there should be buy-sell agreements in place. If not, these should be prepared. Any subsequent acquisition of the company will most likely be for the entire business. Everyone involved in the decision to sell, legally or otherwise, should be involved in the exit procedures. This group can then determine under what circumstances the company might be offered for sale.
The next step to consider is which, if any, of the partners, shareholders or key managers will play an actual part in any exit strategy and who will handle what. A legal advisor can be called upon to answer any of the legal issues, and the company’s financial officer or outside accounting firm can develop and resolve any financial issues. Obviously, no one can predict the future, but basic legal and accounting “what-ifs” can be anticipated and answered in advance.
A similar issue to consider is who will be responsible for representing the company in negotiations. It is generally best if one key manager or owner represents the company in the sale process and is accountable for the execution of the procedures in place in the exit plan. This might also be a good time to talk to an M&A intermediary firm for advice about the process itself. Your M&A advisor can provide samples of the documents that will most likely be executed as part of the sale process; e.g., confidentiality agreements, term sheets, letters of intent, and typical closing documents. The M&A advisor can also answer questions relating to fees and charges.
One of the most important tasks is determining how to value the company. Certainly, an appraisal done today will not reflect the value of the company in the future. However, a plan of how the company will be valued for sale purposes should be outlined. For example, tax implications can be considered: Who should do the valuation? Are any synergistic benefits outlined that might impact the value? How would a potential buyer look at the value of the company?
An integral part of the plan is to address the due diligence issues that will be a critical part of any sale. The time to address the due diligence process and possible contentious issues is before a sale plan is formalized. The best way to address the potential “skeletons in the closet” is to shake them at this point and resolve the problems. What are the key problems or issues that could cause concern to a potential acquirer? Are agreements with large customers and suppliers in writing? Are there contracts with key employees? Are the leases, if any, on equipment and real estate current and long enough to meet an acquirer’s requirements?
The time to address selling the company is now. Creating the basic procedures that will be followed makes good business sense and, although they may not be put into action for a long time, they should be in place and updated periodically.