Do You Have an Exit Plan?
“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.
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: dhester via morgueFile
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The Devil May Be in the Details
When the sale of a business falls apart, everyone involved in the transaction is disappointed – usually. Sometimes the reasons are insurmountable, and other times they are minuscule – even personal. Some intermediaries report a closure rate of 80 percent; others say it is even lower. Still other intermediaries claim to close 80 percent or higher. When asked how, this last group responded that they require a three-year exclusive engagement period to sell the company. The theory is that the longer an intermediary has to work on selling the company, the better the chance they will sell it. No one can argue with this theory. However, most sellers would find this unacceptable.
In many cases, prior to placing anything in a written document, the parties have to agree on price and some basic terms. However, once these important issues are agreed upon, the devil may be in the details. For example, the Reps and Warranties may kill the deal. Other areas such as employment contracts, non-compete agreements and the ensuing penalties for breach of any of these can quash the deal. Personality conflicts between the outside advisers, especially during the
due diligence process, can also prevent the deal from closing.
One expert in the deal-making (and closing) process has suggested that some of the following items can kill the deal even before it gets to the Letter of Intent stage:
- Buyers who lose patience and give up the acquisition search prematurely, maybe under a year’s time period.
- Buyers who are not highly focused on their target companies and who have not thought through the real reasons for doing a deal.
- Buyers who are not willing to “pay up” for a near perfect fit, failing to realize that such circumstances justify a premium price.
- Buyers who are not well financed or capable of accessing the necessary equity and debt to do the deal.
- Inexperienced buyers who are unwilling to lean heavily on their experienced advisers for proper advice.
- Sellers who have unrealistic expectations for the sale price.
- Sellers who have second thoughts about selling, commonly known as seller’s remorse and most frequently found in family businesses.
- Sellers who insist on all cash at closing and/or who are inflexible with other terms of the deal including stringent reps and warranties.
- Sellers who fail to give their professional intermediaries their undivided attention and cooperation.
- Sellers who allow their company’s performance in sales and earnings to deteriorate during the selling process.
Deals obviously fall apart for many other reasons. The reasons above cover just a few of the concerns that can often be prevented or dealt with prior to any documents being signed.
If the deal doesn’t look like it is going to work – it probably isn’t. It may be time to move on.
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: jppi via morgueFile
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Family Businesses
How to Successfully Sell a Family Business
Introduction
Selling a family business can be a complex and emotional process. Whether you’re planning to retire, pursue other ventures, or simply feel it’s time to move on, understanding the steps involved is crucial for a successful sale. This guide will walk you through the essential aspects of selling a family business, ensuring you get the best value and transition smoothly.
Why Sell a Family Business?
Personal Reasons
- Retirement
- Pursuing new opportunities
- Health issues
Business Reasons
- Market conditions
- Financial struggles
- Lack of succession planning
Preparing Your Family Business for Sale
Financial Preparation
- Audit Financial Statements: Ensure your financial records are accurate and up-to-date.
- Valuation: Obtain a professional business valuation to understand your business’s worth.
Operational Preparation
- Streamline Operations: Make your business as efficient as possible.
- Document Processes: Ensure all business processes are well-documented.
Emotional Preparation
- Family Consensus: Ensure all family members are on the same page.
- Professional Counseling: Consider seeking advice from a business counselor.
Finding the Right Buyer
Types of Buyers
- Strategic Buyers: Companies looking to expand their market share.
- Financial Buyers: Investors looking for profitable businesses.
- Individual Buyers: Entrepreneurs looking for new opportunities.
Marketing Your Business
- Confidentiality Agreements: Protect sensitive information.
- Professional Brokers: Utilize business brokers to find potential buyers.
Negotiating the Sale
Key Considerations
- Price: Ensure the price reflects the business’s true value.
- Terms: Understand the terms of the sale, including payment structure and transition period.
Legal Aspects
- Contracts: Have a lawyer review all contracts.
- Compliance: Ensure the sale complies with all legal requirements.
Closing the Deal
Final Steps
- Due Diligence: Allow the buyer to conduct due diligence.
- Transition Plan: Develop a plan for transitioning the business to the new owner.
Celebrating the Sale
- Family Celebration: Mark the occasion with a family celebration.
- Future Plans: Discuss future plans and opportunities.
Common Mistakes to Avoid
Lack of Preparation
- Financial Discrepancies: Ensure all financial records are accurate.
- Operational Inefficiencies: Streamline operations before the sale.
Emotional Decisions
- Family Disagreements: Resolve any family disputes before the sale.
- Unrealistic Expectations: Have realistic expectations about the sale price and process.
Conclusion
Selling a family business is a significant decision that requires careful planning and execution. By following these steps, you can ensure a smooth and successful sale, securing the best possible outcome for your family and your business.
Call to Action
Ready to sell your family business? Contact our experienced brokers today for a free consultation and take the first step towards a successful sale!
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Two Similar Companies ~ Big Difference in Value
Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?
One can look at the usual checklist for the answer, such as:
- The Market
- Management/Employees
- Uniqueness/Proprietary
- Systems/Controls
- Revenue Size
- Profitability
- Regional/Global Distribution
- Capital Equipment Requirements
- Intangibles (brand/patents/etc.)
- Growth Rate
There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:
- Are the company’s projections believable?
- Where is the growth coming from?
- What services/products are creating the growth?
- Where are the customers coming from to support the projected growth – and why?
- Are there long-term contracts in place?
- How reliable are the contracts/orders?
The difference in value usually lies somewhere in the company’s growth rate!
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: jeltovski via morgueFile
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What Are Buyers Looking for in a Company?
It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.
Quality of the Earnings
Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be:
- meeting some new governmental guidelines,
- paying for a major lawsuit, or
- adding a new roof on the factory.
The argument is made that a non-recurring expense is a one-time drain on the “real” earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expense (or expenses) that come up almost every year. These add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.
Sustainability of Earnings
The new owner is concerned that the business will sustain the earnings after the acquisition. In other words, the acquirer doesn’t want to buy the business if it is at the height of its earning power; or if the last few years of earnings have reflected a one-time contract, etc. Will the business continue to grow at the same rate it has in the past?
Verification of Information
Is the information provided by the selling company accurate, timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet. How about potential litigation, environmental issues, product returns or uncollectible receivables? The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression. In addition, they may also lead to a higher price and a quicker closing.
© Copyright 2015 Business Brokerage Press, Inc.
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