InSight

Exit and Growth Strategies for Middle Market Businesses

Successfully Executing the Optimal Exit Strategy – The Solution

By Peter Heydenrych | Dec 07, 2009
Part 2 of 7: The Solution – Know the Endgame

The Issue is how to Extract yourself and your Wealth

We’re looking at how business owners can most successfully extract themselves and their wealth from the company they own and, typically, run, recognizing that the success of this critical process will have a direct and significant impact on their family, associates, employees and, of course, themselves. Business owners want to know that their legacy is assured and that a wealth transfer can be effected to assure their life-after-business goals, including the protection of their loved ones.

In Part 1 I noted that my Business Owner clients are encountering a challenging and demanding market, partly because credit has been tight, and partly because buyers are already anticipating the boomer exit era which will give them multiple acquisition options and the ability to be selective, pursuing only quality opportunities. I also noted that this “oversupply” does not appear to have an end in sight, which means that business owners expecting to exit in the next decade need to be systematic, employ a professional team, plan, prepare and execute a selected “optimal” exit strategy.

It will take a Military Campaign to engage and overcome this Market Condition

Not a single day goes by without someone in the media asking how it is that we’re engaged in Iraq or Afghanistan without an Exit Strategy. i.e. without knowing when, why and how we will ensure an endgame.

Don’t be reactive or opportunistic about selling your business! Be proactive, methodical and in control!

  • Be clear about your goals
  • Pick the best team
  • Develop a written game plan
  • Consider all of the alternatives
  • Prepare thoroughly
  • Execute your chosen strategy

Ask your M&A Advisor to assemble and coordinate a Team, including existing advisors where applicable, that will ensure that you:

  • Have access to all appropriate options and opportunities
  • Are fully informed as to the merits and demerits of proposed strategies
  • Have expert counsel & representation

The Team must include the necessary knowledge, skills and experience in Mergers & Acquisitions, Corporate Law, Taxation and Financial Planning / Wealth Management. It may also include specialists in ESOPs, insurance, personnel and business consulting disciplines.

Have the M&A Advisor prepare a written plan incorporating (1) a valuation of your business, (2) a statement of goals and objectives, (3) a review of alternative strategies (options), (4) an analysis of the gap between the goals and the options, and (4) strategies for closing the gap.

The Value of a Business is inversely Proportionate to the Time taken to sell it

Business owners make a mistake when they allow too little time to complete a sale of their business. If the goal is to sell “no matter the price”, then, by all means, look for a quicker exit, but, if not, be thorough, purposeful and patient.

Another mistake owners make is focusing on the “price” while disregarding the terms and structure of a sale. If the goal is simply a “Price”, without concern for terms and structure, the lesson learned may be that “more” can sometimes mean “less”.

Other key mistakes business owners make in selling their companies are:

  • selling to the (only) competitor who approaches them
  • not using experienced advisors in the hope of saving transaction costs
  • setting expectations without reference to the market
  • failing to explore legitimate Positioning strategies

Buyers of middle market companies don’t “buy jobs” for themselves in the way that small business buyers do, they “invest” with the expectation of a return commensurate with the risk. Nothing enhances a buyer’s perception of “value” more than:

  • evidence of sustainable growth
  • a capable management

The Business owner who engages professional advisors, plans thoroughly, and negotiates to ensure that the wealth transfer mechanism chosen most closely delivers on his goals, is the business owner who will have executed the optimal exit strategy.

Don’t Pick a Play until you know the Endgame

The oldest wisdom in the world is to start with knowing where you are and where you want to go. The Exit Strategy begins with the M&A Advisor providing a likely range of the pricing, terms and structure expected from a sale in the current market. The Financial Planner or Wealth Manager then develops a plan to invest the after-tax wealth extracted from the business to meet lifestyle and life-after-business goals.

For the majority of business owners, this newly liquidated “business wealth” will constitute a meaningful portion of the total wealth driving the financial, tax and estate plans. The key, then, to beginning the exit planning process, is to clarify the endgame, taking into account the likely value of extracted business wealth.

  • Legacy Goals – what will have been your contribution?
  • Lifestyle & “Life-after-Business” Goals – what do you want from the next phase of your life?
  • Estate Planning Goals – how will you ensure that your estate passes to your heirs in the most tax efficient way?
  • Exit Strategy Goals – based on all of the above, what are the priorities to be met by your selected exit strategy as to time, wealth, risk, and cash flow?

Closing the Gap

For business owners, the years of building the business have clearly demonstrated the underlying reality of the “Risk – Reward” paradigm. Planning an exit does not seem like the time to indulge in risk-taking, but rather to be “cashing-in”. Certainly the levels of risk associated with starting a new business would seem to be out of the question, but other moderate risk strategies may deserve consideration if they serve to better ensure that the business wealth will be delivered in the context, amount, time and certainty needed to meet the goals.

“Closing the Gap” is an iterative process of evaluating combinations of strategies that will yield a release of wealth compatible, as to quality, time, value and certainty, with achieving the specified goals. It may also involve modification of the goals. These gap-closing strategies may include:

  • Enhancing the value of your business
  • Increasing the marketability of the business
  • Reducing the risk profile of the business and the associated cash flow
  • Structuring the sale/transfer of the business for a different after-tax and timing outcome
  • Evaluating “Multi-Step” liquidation options to first “take some chips off the table”

Have your M&A Advisor walk you through this process with a view to evaluating the options before selecting both “Positioning Strategies” (see Part 3) and an “Exit Strategy” (see Parts 4, 5 & 6).

Next: Part 3 of 7:  Positioning Strategies

posted by Peter Heydenrych


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