InSight

Exit and Growth Strategies for Middle Market Businesses

Selling – A Rewarding Exit Strategy

By Eduardo Berdegué | Jul 22, 2011

As business owners approach retirement at a faster rate than ever, many are finding out that exiting has been the one strategic aspect of their business they have paid least attention to.  Exiting requires planning.  Will the business simply be shut down and the employees laid-off when the owner no longer wants to work?  Will it be passed on to a family member? Is there a clear succession plan in place?  Will the business be sold and if so, to whom: a relative, an employee, a competitor, or to a yet unknown buyer? Is the owner willing to finance? Is he/she counting on the equity built into the business for retirement? Is that a realistic expectation?

Plans

Selling is one of the most common exit strategies and it can be the most rewarding too. Planning for the sale of a business  involves making a number of decisions both on a personal as well as on a professional level early on.  Decisions regarding adopting more efficient business practices, more effective reporting, better organized record-keeping, and, yes, decisions regarding delegating authority and building a reliable “second layer” of management, among many others.

Timing is crucial. Contrary to what many business owners think, the right time to sell is not when the company is taking a dip.  Sure, these times may coincide with the owner feeling more burned-out and frustrated, but the business will not command the same price as when it is stable or, better yet, in a growing mode.  It is important to remember that buyers will not pay for what they can do with the business, but only for what the owner has been able to do with it, especially during the last three to five years.

Professional assistance is also an important factor that is often overlooked until late in the process.  The business’ CPA needs to be involved from the beginning in order to help produce reliable financial statements on a monthly basis (which is not as common a practice as one would think, especially among smaller businesses), and also to alert the owner about the tax consequences of the different selling options available.  Having an attorney at hand familiar with the business and with the owner’s decision to sell will prove to be useful.  Company documents of organization, contracts, and others may need to be updated or, altogether generated and it will help having those in place when needed, and needed they will be.  Determining the value of the business is another area where independent professional advice will be necessary.  Finally, seeking the assistance of a well established and experienced investment banking firm is key.

The job of an investment banker goes well beyond that of bringing buyers and sellers together.  An experienced investment banker will assist sellers to explore and define the exit strategy best suited for their specific circumstances; enhance the value of the business by positioning it in accordance to the selected strategy; prepare compelling marketing documents with which to approach a wide range of possible investors/buyers; screen buyers to sort out the “tire kickers” from those prospects with a sincere interest, financial ability, and authority to complete a transaction; recommend negotiating strategies and transaction structures; coordinate with the various players involved in the complex and delicate due diligence and closing stages while preserving the goodwill between parties.

Needless to say that the history and reputation, geographic reach, industry-specific expertise, independence, accessibility of the firm’s principals, and finally, its track record of completed transactions are among the most important aspects to consider when choosing the right representation.  Remember that your investment banker partner will most likely be the buyer’s first contact with, and first impression of your business.

Exiting a business is a strategic business decision surrounded by emotions.  Selling can be the most rewarding form to exit a business but it requires planning. It can take several months or even years to go from decision to sell to successful closing.  Seeking professional assistance early on will greatly reduce the risk of costly missteps while allowing the owner to maintain his/her focus on running the business.  Selecting the right representation to generate and manage a competitive sale process will greatly increase the seller’s chances of obtaining maximum value and optimum terms.  If you have any questions or comments about using selling as an exit strategy, post a comment below and I’ll be happy to respond.

Learn more about exit strategies and exit planning.

Posted by Eduardo Berdegué.

 

 


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