InSight

Exit and Growth Strategies for Middle Market Businesses

Successfully Executing the Optimal Exit Strategy – The Challenge

By Peter Heydenrych | Nov 19, 2009
Part 1 of 7: The Challenge

In advising business owners during this past year, I have seen, firsthand, how unforgiving the market has become. In one case, rather than wait to sign an LOI, a seller invested in audited financial statements simply to increase the odds of being shortlisted. In another, a business owner accepted the buyer’s premise that a full-price deal required that he stand behind his projections in the form of a significant contingent payment.

Is the “unforgiving market” just the recession, or a reflection of a long term reality?

Boom-er Bust

I read daily about the challenges facing boomer business owners expecting to sell in the coming years. Frankly, it’s not just boomer business owners, it’s ALL business owners who are affected by this extraordinary situation. My clients are finding that it takes perfect planning and execution to reach the finals of the beauty contest. Good enough just doesn’t cut it any more … and won’t, for the foreseeable future!

According to an article published by Robert Avery of Cornell University in February 2006, “the majority of boomer wealth is held in 12 million privately owned businesses, of which more than 70% are expected to change hands in the next 10 to 15 years.” (Some European markets face somewhat similar circumstances.) Only 1 in 3 of these businesses will successfully “cash out”, we are told, because of a fundamental oversupply of opportunities and because of a relative undersupply of liquid capital.

If the fundamental laws of risk and reward prevail, only the least risky and profitable businesses will transfer successfully, and, most often, the least prepared will be the ones left out.

Exiting is not necessarily selling

Exit Planning is a key element of “Personal Strategic Planning”, an individual’s process of defining their strategy, or direction, and making decisions on allocating their resources of capital and time to pursue that strategy. (Wikipedia – “Strategic Planning”). An exit plan is not just a tool for the business owner. It is an insurance plan for family, employees and other affected parties.

In a series of articles, I will look at Exit Planning as a Process culminating in the selection and execution, from among multiple alternatives, of the optimal strategy. Absent this process, the business owner faces the very real risk of being one of those left out in the cold.

The Exit Strategy is a process involving the development and execution of a series of systematic steps taken to allow both the owner and the “invested wealth” to be extracted from the business, via one or more of the numerous available strategies, including:

  • Selling the business to Partners, Strategic Buyers, Investors, Competitors, International Buyers, or the Public
  • Recapitalizing the business for Partial Liquidity
  • Merging the business to achieve desired scale, value and/or marketability through Acquisition or Consolidation
  • Transferring the business to Family, Management or Employees
  • Gifting the business to meet personal and/or tax planning goals
  • Liquidating or Partially Liquidating the business

When the Whole exceeds the Sum of the Parts

The solution to the challenge posed by the boomer market, is, with the help of a team of experienced advisors, to position your business at a sufficient scale, with a strong market posture, and under a capable management, before you go to market.

Exiting is a complex subject with many moving parts. No single advisor is an expert in all aspects. Wealth Advisor, Insurance Advisor, Tax Consultant, Attorney, Business Consultant, M&A Advisor, Financial & Estate Planner, … the list goes on.

Not every business will (or should) sell to a 3rd party buyer. However, every business owner who understands what all the exit options are, plans an exit, and executes that plan with the help of a coordinated team of experienced professionals, will more likely extract themselves and their wealth from the business with optimal results.

Planning Precedes a Successful Execution

While the critical execution phase will not be a problem for most take-charge entrepreneur business owners, the planning for an exit will be foreign to them as “exiting” has never been their purpose. Their purpose has been to create and build, and to consider the exit (if at all) a “retreat”. But you can’t execute what you haven’t planned, and we will all eventually have to exit!

A Process, not an Event

The Optimal Exit will be achieved through the implementation of a managed process which includes:

  • Clarifying “Life-after-Business” Goals
  • Preparing a written Plan
  • Identifying and evaluating the available and applicable Alternative Strategies
  • Executing necessary Preparatory or Preliminary steps
  • Executing the Selected Exit Strategy

“Failing to Plan” is “Planning to Fail”, an oft-quoted phrase. You wouldn’t try to sell your house in a poor state of repair in a buyer’s (or any) market. You’d probably first upgrade to ensure that your property stood tall on the street. You also wouldn’t want to be forced to liquidate by some outside event. Sadly, many business owners, without a plan, will be unable to protect their or their family’s interests in the event of death, disability, divorce, a market crash or similar event.

Don’t expect to exit your business successfully in the next 10 years without figuring out how best to exit and what preparatory steps should be taken. … and don’t assume you can wait until you are “ready”. Instead, have a plan and work that plan, so that you are “ready when you are ready!”

Next: Part 2 of 7:  The Solution

posted by Peter Heydenrych


Leave a Comment