The Cerius Successful Exit Strategy Guide: What You Cannot Afford NOT to Know – Part 2

This is Part 2 of a three part series.  Click here for Part 1.

What You Don’t Know Can Hurt You

There are several risky “sandtraps” to play through when planning an exit strategy. Here we are going to consider six areas of business risk that can imperil a financially and personally successful sale — and look at what skills you need around you to successfully navigate the business challenge implied by each. The six sandtraps are:

• Lack of a plan for your own future role in the company,
• Lack of accounting and operational excellence,
• Improper understanding of market and market dynamics,
• Unstable or poorly balanced revenue flow,
• Under — or over — valuation of your business, and
• Poor tax planning.

Fortunately, business owners do not need to try to figure this out alone. At each step, a pro can provide the necessary guidance with the specific skills required.

Below we will review the first two in detail. You can click here for Part 1 and stay tuned for part 3 in our series

Lack of Planning for Your Own Future Role in the Company

Too often, all the attention is paid solely to the business consequences of the exit strategy. It is also important to think about your future role, either with your existing company or with another as you plan your personal next steps. As a founder or CEO, you may be planning retirement, but perhaps want to remain as a board member, or maintain partial involvement managerially or financially in the business. Perhaps you want to give equity to your family members, partners or employees to motivate them to continue to make the company successful as you back out. And more than one deal has been soured by a late realization that the founder wants to remain involved and works to convince the acquirer that the company can’t succeed “without me”.

Frequently, the transition to new ownership is far rockier than it would have to be, only because the future role of the current business owner is not given any thought. Be sure you know what you want, and what you will accept. If you do expect a continuing role in the company, be ready to negotiate it as part of the deal, and get the terms — including termination options — in writing. Perhaps a retention bonus is appropriate to ensure smooth transition. But don’t let your ego get in front of your business head.

A professional personal career or retirement planning consultant can help you understand the ramifications of different choices and the consequences of the path you choose. Not just focused on youthful career-climbers or job searchers, these professionals can help the exiting business person consider not only how and when to give up the reins, but suggest other interesting aspects of post-sale life than may not have been contemplated — including entire new careers, rewarding volunteer work, serving on boards, mentoring, college teaching, travel — or improving a golf game.                                                      

Lack of Accounting and Operational Excellence

Equally important to proving predictable future revenue is providing evidence that your financial history, accounting practices, and your business operations are accurately represented, transparent, repeatable, and consistent. You need to not only represent the current value accurately, but you also need to show that the current operating infrastructure will scale to accommodate growth, or reliably migrate into the acquirer’s environment. If you are planning an initial public offering as part of your exit strategy, seeking an acquirer who is public, or wishing to assure your acquirers that your operations will support their ultimate IPO, your SEC reporting must be in place with a history of professional audits. And today even private companies strive for the governance represented though compliance with Sarbanes-Oxley.