“Begin with the end in mind,” says Stephen Covey in his book, “The Seven Habits of Successful Living.” Steven is often quoted but his advice is seldom taken to heart.
Most businesses address the subject of an exit strategy when some event creates an urgency to do so. Health issues, unexpectedly strong competition, death of an owner, divorce, unexpected departure of a key employee and other events often create an urgent need to dispose of the business and prompt a call to a business broker, who sometimes advertises they are also exit strategy consultants. The consulting they do is primarily focused on checklists of what to do after the business has been sold.
Let me emphasize that at this point it is too late.
An exit strategy has a good chance of working when the owner of the company puts him or herself in the mind frame of the person who may buy the organization. What does this person want to see and what do they want to know in order to love this company as much as you do and want to own the company? Also, keep in mind that buyers, or their advisors, are generally financial people who truly believe that the numbers tell all. They will not know all the nuances that you do that create value in your mind.
Generally, the structure of an exit strategy begins with a clear vision of what the owner wants out of the business. For example, I have dealt with an owner who wanted to fund an educational foundation with the proceeds of his sale of the business. Another wanted the business to continue to grow and prosper under the ownership of his children. Some want time off or to live a leisure lifestyle. Whatever the goals, the best strategy is to set up a documented process where you can truly show that the business is under control and can be understood by a buyer. I discuss sales to buyers because, except in the case of a liquidation, the company will be sold, even if it is to one’s own family.
This means that the company should put together a realistic business plan and measure progress against that plan, whether you are financing the company or not. It also involves maintaining books on a GAAP (Generally Accepted Accounting Principals) basis. Many smaller companies maintain their books on a cash basis, using a bookkeeper, or doing them themselves. While the owner can understand what is being done, an outside buyer or independent valuation expert will generally underestimate the value of the company because there will be assets that are not being tracked. Additionally, the results should at least be reviewed every one or two years to provide outside credibility of the results.
Once a company knows where it is going and can document how it is done, it needs to justify the value to an outside purchaser. I worked closely with the owner of a company who had a clear goal in the sale of his business, a track record of realistic budgets, quality financial statements, steady growth and a profitable market niche. He had one thing missing; he had an unacceptably high business risk. 95% of his sales were of one simple product and 85% of his sales were to two companies. Despite my strong recommendation that he greatly diversify his product line and customer base before selling, he chose to market the company without disclosing these conditions. As one can predict, he failed in the sale of the company after due diligence of two potential buyers. He also rejected two feasible alternatives and took a course of action that, to date, has not produced a sale.
If you think you have all the bases covered, you should decide on the best exit alternative. That alternative may change depending on the stage the business is in. If it is in the early stage, a sale to support the owner’s family or partners may be the goal. Later, a sale to an up and coming family member may be the goal or some charitable or outside organization funding may be the objective. In these stages, different strategies may be developed concurrently. In any event, having a good documented plan, quality financial reporting and strong management practices will show value to a potential purchaser, or to a financier of an employee or family member and produce less stress at a critical time for the business and owner’s family.
Make it a great week!