The Cerius Guide to a Successful Exit Strategy: What You Cannot Afford NOT to Know
The Cerius Guide to a Successful Exit Strategy: What You Cannot Afford NOT to Know – Part 1
Planning Your Business Exit Strategy
You have worked hard to build a company. But now what? The “next steps” for your company can vary greatly — possibly an initial public offering, approaching private equity groups for a cash infusion, or perhaps selling the company, maybe to a partner or key employee through a buy-out or cash out.
There is a direct correlation between preparedness and maximizing the value of your company. You want to get the reward from your efforts that you deserve and you certainly want to avoid leaving money on the table. In addition there are personal considerations — you want to avoid partner or family conflicts, keep employees happy, and leave a legacy you can justifiably be proud of. To be prepared, are the top sand traps to avoid:
- Improper understanding of market and market dynamics,
- Under — or over — valuation of your business,
- Unstable or poorly balanced revenue flow,
- Lack of accounting and operational excellence,
- Poor tax planning, and
- Lack of a plan for your own future role in the company.
Below we will review the first two in detail. Stay tuned for part 2 and part 3 in our series.
Improper Understanding of Market and Market Dynamics
Like the punch line of a joke gone bad, poor timing can make your business transition utterly flop. John Brown, a professional exit planner, reports that the market for mergers, acquisitions and high venture capitalist activity moves in five year cycles. Business owners need to do their homework early to make the changes that will make their enterprises more attractive to the market at the right time
You need to know your potential buyers: who are they, what drives them, when they are ready to move, and what they seek. Are they looking to simply generate more sales, to expand their geography, to adopt new offerings or technologies, to enter new markets, or to augment their management and technical staff? With that direction, you can take steps to position your company for maximum value to several potential acquirers — enhancing your sale price through compelling value and, often, competitive bidding.
This is not the time to hold a finger up to test the wind —plan ahead and engage a professional in Market Analysis to give you advice on the timing of your next move. You will only get one chance and you cannot afford to get the timing wrong.
Under — or Over — Valuation of Your Business
Business owners all think their company has value. Typically, they begin the process of considering a sale by thinking “I want to sell my company for $X,” rather than carefully considering and ascertaining the true market value of the business. The correct step at this point is rather like reverse due diligence — not what can I make, but what is the value of my company to the market. Here the sustainability of the value proposition must be carefully evaluated: is value solely in the intellectual property represented by the employees — who might leave? What property, assets, inventory, patents, etc., hold real and sustaining value? What unique propositions does the company offer the market? What methods and technologies are inherent in the business and how do I protect them? Business owners run the risk of overvaluing the company based on emotion, or undervaluing it, based on lack of knowledge of current market value and a true understanding of asset worth.
The value of your business only partly reflects the value of your offerings. Your business may provide a key added ingredient to your acquirer, in terms of cash, geography, capabilities, market penetration, or even in terms of reducing competition. While the initial valuation is usually based on revenues and pre-tax profit calculations, other factors can dramatically alter the initial “financial” valuation.
Required in this step is the expertise of experienced professionals to help you gauge value — without emotion — and help you prepare wisely for entering the market with a realistic company valuation.
Why Preparation Matters in Maximizing Your Business Value
Three privately-held hardware reseller corporations with $30 million annual revenue decided to sell in a two year timeframe. Here are the results:
Company A — Did not prepare for sale, and is still on the market
The $2 million Joe is offered is ridiculous,— only 2x EBITDA. He turns it down. His broker recommends that Joe involve a business consulting firm specializing in company sale preparation to help make changes, and then try again in a few years.
Company B — Did not prepare for sale, sells for $7 Million
Fortunately, a slight up-tick in a product line brings revenue up. The owner, John thinks he should get a lot more than $7 million for his 25 years of hard work, but is having some health issues, and takes the
$7 million. Sells for 4x EBITDA.
Company C — Plans, makes changes, sells for $38 Million
Using a business consulting firm to plan 2 years in advance of sale and make the needed changes, Jane productized services into multi-year contracts, formalized four secondary distribution channels, documented and routinized sales and delivery operations, implemented five key process financial controls. In the process, Jane increased gross margins from 13% to 20%, and sales by 7% then 12% annually. Sells for 9x EBITDA.
You’ve invested blood, sweat and tears in managing and growing a successful company. Your company took planning — perhaps years of planning — and investment, to get where it is today. At the point of considering your exit, plan ahead: invest in the team of professional advisors you need to ensure you receive the maximum value for your efforts. The expertise required to orchestrate a successful exit is different from the expertise you used to build the company. Get experts to help you understand the market and articulate your company’s value within that market.