Planning A Business Exit Strategy

Copyright 2004
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Consider the recent fate of APB News whose value dropped from over $100 million to less than a $500,000 sales price within a matter of months. Best to sell when you're at the peak, not wait for an uncertain and possibly unkind future.

Even if you are 35 years old and in the peak of health, even if you plan to work and also climb tall mountains in the Himalayas until you're 80, if you are a small business owner or entrepreneur, you still need to start planning your exit strategy.

Why? There are many reasons. First, at some point, you will want to get your money out of your business. Yes, you may be making a good living out of your business and able to take an occasional vacation with your family, but there is generally a lot more tied up in your business than your revenue stream from it: hard assets like land, plant, factory or offices; heavy equipment, computers and software, inventory, office equipment.

For example, suppose you have a ranch or farm with land worth $3 million and an income stream of $150,000 per year, net, for yourself. Farm and ranch land is notorious for poor cash flow and even the largest operations in the United States struggle to make 1 % off their investment. The pay back usually comes in the appreciation of the underlying asset, the land, at the time it's sold. So, if you do not sell, or make plans to sell, and you, heaven forbid, should pass away and your widow or family had to depend on this revenue stream, it would leave them $150,000 out of which they would have to pay $100,000 or more for someone to manage their asset ( with an additional 50% or so going into overhead expenses for that employee). In other words, your family's anticipated revenue from that business would be someplace between nothing and, in a stretch, $50,000.

If your widow should try to sell the asset, the mere fact of her being a widow, no matter how many high priced lawyers or big, strapping sons she might have, would put her at a distinct disadvantage. It would be a buyer's market.

The same analogy would hold true, with some give and take on the numbers, for a dry cleaning establishment or a dot com company. In fact, for a dot com company, the outlook could be considerably bleaker since there are so few hard assets that can actually stand on their own, apart from the business, and since, if all the pizazz and firepower come from the owner, the share price or perceived value can drop like a rock. Consider the recent fate of APB News whose value dropped from over $100 million to less than a $500,000 sales price within a matter of months. This had nothing to do with the death of an owner, being primarily the result of running out of cash, the life blood of any business, and having a Venture Capital firm refuse to transfuse it or stop and render aid. Nonetheless, circumstances do change, and business values change. Best to sell when you're at the peak, not wait for an uncertain and possibly unkind future.

Plan for An Exit

Start early, at a minimum, 2 to 3 years out and have a goal in mind. Plan to clean up your books so you can give any potential buyer a true picture of what your company is worth. In other words, take that ski condo or beach bungalow off your assets. If your brother-in -law is leasing your company prime real estate at below market rates, better restate it at the market rate or your books won't make sense to a buyer and if you don't address it, he might question either your honesty or your intellligence or both.

One of your goals will be to try to bridge the gap between what you think your company is worth and what the buyer will think it's worth. Good documentation and clean financials are invaluable in this area. Be very clear on every key point and remember, for potential buyers, uncertainty about anything is worse than either bad or good. The essentials:

Set Clear Objectives

You will need to sit down and think through some questions only you can answer. Do you want to maximize the cash for your business or the overall price for your business? Is your main objective to see that the business continues and your former employees are retained? Only you can answer these questions.

Tax Considerations

Both you and the buyer will have a silent partner in your transaction and that is the IRS. You will need some high level, legal "hired guns" to protect your wallet and develop a solution which is palatable to both sides.

Curb Appeal

Just as realtors and home buyers discuss "curb appeal" in houses, you should be aware of it in your business. Before you're ready to offer your business for sale, you should spruce it up to the best of your ability. That includes the financials, the physical plant, the management. When someone walks in and sees you run a tight ship-- the place is clean, orderly, attractive -- it gives an impression of good management.

Once in Southern California, at one of the largest wineries in the country, a little 80 year old Italian gentleman was seen stooping to pick up a cigarette butt off an immaculate parking lot. The visitor guessed, correctly, he was one of the large brood of related owners. Everyone cared intensely about the most minute detail of that company, even though they'd wisely hired a MBA management guru -computer whiz type to run the business side of things. You could rest assured, everything from the parking lot to the financial systems to the wine itself was top quality and reached a standard of excellence expected by the family. That is how you want buyers to feel about your company.

Timing - Windows of Opportunity

Clearly, some moments are better than others to sell. Peaks are what you look for. If, for example, you had sold your dot com company before April 2000, you might have been in a situation like APB News was, momentarily, it turns out, where you could get the max value, when a few months later you could only get a fraction of that. For a good solid company producing a good profit, another window of opportunity will present itself. You just never know how long you may have to wait.

Another window of opportunity might be the appearance of a motivated buyer. Suppose for instance your potential buyer is a printer, and, for whatever reason, you are the only company, at the moment, which manufactures the print cartridge he needs. You have a motivated buyer. Or you have a neighboring business which wants to expand and you own the only property adjacent to him. You have a motivated buyer.

Getting the Deal Done

Depth of Management:
If you are a one man show, you won't get the kind of value you want. You have to demonstrate to the buyer "this company is not dependent on me"

Deal Structure
Generally speaking, the biggest price may not be an all cash deal. If you are prepared to take a note, work out a consulting arrangement or some other structure, you may wind up with a richer deal.

Types of Exits

There are many types of exits, from a sale to family members or employees to a strategic buyer who believes there is synergy between your business and his, either for reasons of geography, employee or customer base or for other reasons. You will definitely need some "wise men", in the form of lawyers, accountants, or investment bankers to help you sort through all this and capture the most value for your business.

As a final caveat, bear in mind that the IPO, or initial public offering, is not the panacea so many believe it to be. In fact, at a recent, exclusive, invitation-only meeting of the Presidents and Founders of companies, the heads of several multi-billion dollar companies cautioned, "If you don't have to take your company public, don't do it." Among the negatives mentioned were the costs involved, the constant regulatory oversight, with the investor and analyst focus on each quarter, instead of striving to reach long term goals. The most important drawback may be the fact that an IPO is not a clean break for management. You will retain an ongoing ownership interest which means you will still be subject to the vagaries of the market. You may close the transaction at your peak but by the time you sell your last share, you could be in the unfortunate position of APB News, as you are depending on other people to run your company. If you have sold but are still running the company, you not only have continuing financial exposure, but you're still putting in long hours as well.

When you do sell, you may want to do it in a way that you can actually enjoy and reap the benefits of your hard work: fly fishing in Scotland or the painting trip to Tahiti. You don't want to be carrying your Palm Pilot to keep tuned to every bump in the road in the market. You want to heave that sucker into the sea and sail away into your dreams, secure in the future your hard work has earned for you and your family.